Presco Q4 2016 and Q1 2017 Results Review – Upgrading to Outperform

Culled—Proshare

May 22, 2017/FBNQuest Research

Earnings and price target revised upwards
Presco reported better-than-expected Q4 2016 and Q1 2017 results, with double-digit sales growth in Q4 and triple-digit sales growth in Q1.

The company is still benefitting from favourable government policy as well as its over 50% increase to prices last year.

Except the CBN shifts ground on its policy restriction on access to fx for CPO imports, 2017 will be another good year for Presco.

It targets CPO production volumes of 14,000 metric tones (mt) this year with an average yield of 16mt (vs 14mt in 2016) per fresh fruit brunch. Presco also plans to increase refining capacity to 100% from a 2016 average of 80%.

Estimated 2017 capex spend of N13bn will be funded through internally generated funds as well as bank borrowings. In the long run, the company expects additional 10,000ha for oil palm and 12,000ha for rubber from its new plantation.

We expect sales to grow by 48% y/y in 2017E. As such, we have increased our 2017-18E EPS estimates by 58.2% on average and our price target by 31.6% to N63.8 (implying a potential upside of 30.3%).

Presco shares, currently trading on a 2017E P/E multiple of 6.6x for a 13.8% EPS growth in 2018E, have gained 22.2% year-to-date (vs. NSEASI’s 4.6%).

We therefore upgrade our rating to Outperform.

Recent results and earnings
Presco’s Q4 2016 results showed sales growth of 57.2% y/y to N3.8bn. PBT and PAT of N21.5bn and N15.0bn compare with pre-tax and post-tax losses of –N610m and –N1.1bn respectively recorded in Q4 2015.

The strong earnings were driven by a biological asset revaluation gain of N20.5bn recorded in Q4 2016. However, the underlying PBT was around N1.0bn.

A gross margin contraction of -1,873bps y/y to 61.4% and opex growth of 48.2% y/y both weighed on the bottom line.

For full year 2016, sales of N15.7bn increased by 50.4% y/y; PBT and PAT of N31.2bn and N21.7bn were up by 641% y/y and 767% y/y respectively.

Despite a 15.0% y/y opex growth and a N1.4bn fx loss, earnings were supported by a gross margin expansion of 847bps y/y to 72.0% and a N24.9bn biological asset revaluation gain. Presco declared a dividend of N1.50.

In Q1 2017, sales grew strongly, by 125.4% y/y to N7.2bn. Likewise, PBT grew markedly by 180.0% y/y to N5.0bn.

The strong PBT growth was as a result of gross margin expansion of 1,685bps y/y to 79.8%, a 150.5% y/y rise in biological asset revaluation gains and a -43.7% y/y decline in net interest expense.

The three factors offset the impact of a 120.1% y/y increase in opex and an fx related loss of N191m. PAT grew by 178.9% y/y to N3.9bn despite a 184.1% y/y rise in tax expense.

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