June 4, 2019/Cordros Report
Q4-18 revenue declined by 6.1% y/y to NGN5.1 billion, on account of lower refined crude palm oil (CPO) prices which offset the slight volume growth in the period. For evidence, FEWSNET reported that domestic refined crude palm oil (CPO) prices declined by c. 6.7%, which, in our view, mirrored the continued weakness in global CPO prices (c. -23% y/y). Meanwhile, cost of sales growth (-18% y/y to NGN809 billion) tracked behind revenue, leading to a 2,389 bps expansion in gross margin to 84% (gross profit: -3.4% y/y to NGN4.3 billion).
A similar pattern emerged in Q1-19, where PRESCO recorded a 16.4% y/y moderation in revenue to NGN5.5 billion, driven by the combination of lower local refined CPO price, which declined by 11% y/y together with moderate volume growth. However, since cost of sales (-44% y/y) tapered faster than revenue growth, gross margin improved to 85% from 78% in the preceding year (gross profit: -9% y/y to NGN4.68 billion).
Also in Q4-18, total OPEX declined by 53% y/y to NGN2.17 billion, on account of material moderation in selling, general and administrative expenses (-54% y/y) which masked the expansion in distribution expenses (+5% y/y to NGN87 million). Consequently, EBIT printed NGN2.20 billion (vs. loss of NGN221 million in Q4-17), with related margin at 43%. Meanwhile, pressured SG&A expenses (+15% y/y) in Q1-19, acted to drive a 16.3% y/y decline in EBIT. However, since EBIT declined slower relative to revenue growth, EBIT margin improved slightly by 11 bps to 57%.
Further down, despite the improved EBIT in Q4-18, the company reported a loss after tax of NGN1.15 billion, on account of loss on biological asset revaluation (-NGN2.26 billion vs. NGN623 million gain in Q4-17). Meanwhile, we note that in the absence of loss on biological asset revaluation in Q1-19, the company returned to profit, with PBT printing NGN2.58 billion (-25% y/y).
Overall, despite gross margin expansion and improved EBIT in Q4-18, the company reported a loss after tax of NGN998 million – first time since Q3 17 –, driven by the combination of the revaluation loss on biological assets and higher finance charges. However, Q1-19 PAT declined by 18% y/y to NGN2.14 billion, driven by gross margin expansion, lower effective tax, and absence of loss on biological asset revaluation.
Comment: We note that the company’s Q4-18 and Q1-19 performances are unimpressive, and reflect the challenging operating environment. We foresee a negative reaction. NOT RATED. Ongoing initiation.