June 11, 2020
By FBNQuest Research
Presco’s Q1 2020 earnings fell -16% y/y to N1.8bn, driven by a mild decline in sales and a -146bp y/y contraction in gross margin to 78.1%. Q1 earnings missed our forecast by around -7.5%. Therefore, we have cut our EPS outlook over the 2020-21E period by around 2.5%. Our price target of N55.1 is down by around 17% because of a 150bp increase to our equity risk premium assumption to 7.5%. From current levels, our price target implies a potential upside of 21.8%. As such, we retain our Outperform rating on the stock.
Presco shares have gained 24% over the last month vs the NSE ASI’s +5%. Looking ahead, we anticipate a subdued Q2 (on a q/q basis) as a result of the forced lockdown in Lagos as both the federal and state authorities worked to slow the spread of covid-19 infections. Presco’s product portfolio – heavy in refined oils â€“ has a large proportion of its industrial customers in Lagos. We therefore expect a sales decline of c.15% q/q. Nonetheless, we believe demand will pick up in subsequent quarters. Presco’s strategy to increase production capacity and lower energy costs remains on track. Last year, Presco completed the construction of a 350 tonnes (te)/day palm kernel crushing plant and a new 30te palm kernel shell boiler.
Additionally, the firm expanded its palm oil mill by 30te of fresh fruit bunches (FFB)/hour to 90 FFB/hr and management expects to commission a new 500te/day vegetable oil refinery in Q2. As such, we project a moderation in capex in 2020. We also expect to see the positive impact from capital investments come through in sales from 2021 onwards. For 2020, we forecast flattish y/y sales and PBT growth of around 8% y/y.
Difficult start to the year as earnings fell -16% y/y in Q1 2020
In Q1, sales came in flattish y/y at N5.4bn. However, both PBT and PAT of N2.4bn and N1.8bn declined by -9% y/y and -16% y/y respectively, driven by a gross margin contraction of -146bps y/y to 78.1%. The contraction on the gross margin line offset any positives which may have resulted from a flattish opex and a moderate decline (-7.5% y/y) in net finance charges. Compared with our estimates, sales and PAT both missed by around 4% and 8% respectively.
In Q4, however, sales of N4.3bn declined by -15% y/y. PBT and PAT of N1.3bn and N191m compared with losses of -N1.2bn and -N996m respectively in Q4 2018. The driver of the y/y variance was a gain of N1.8bn resulting from the revaluation of biological assets which compares with a loss of -N3.0bn in Q4 2018. Management proposed a dividend of N2.00 (vs. our N1.00 forecast) which works out to a yield of 4.4% at current levels.