Topline Analysis: Impressive topline
The performance of PRESCO 9M-2020 result was quite an impressive one as the macro economic environment bolstered by (Border closure, FX scarcity and favourable government policy) continue to support the business growth. Hence, revenue increased by 24.5%y/y to N18.9bn.
We understand that the bulk of firm’s revenue comes from the sales of refinsed CPO. The company does not really concentrate on the sales of CPO. Going forward we expect to see continued improvement in the topline of PRESCO has the company recently concluded plans to diversify the business in a bid to play in the rubber and cocoa markets. We see this move as a positive development for revenue, considering as we believe that it will helps the broader base for revenue. The move also presents an opportunity for forex earnings. According to the management, the rubber production will be 100% exported.
Operating Margin: Resilient amid cost increase
Cost of sales increased by 19.9% to N7.0bn. However, a faster increase in revenue was able to compensate for the cost of sales increase. Hence, the gross profit jumped 27.3% to N11.9bn. Also, finance cost declined by 7.6% to N1.2bn. Hence, the profit before and after tax improved by 51.0% and 56.4% to N6.6bn and N5.0bn, respectively.
Balance sheet analysis: Anything to cheer?
PRESCO continues to invest heavily in long-term assets as evident by the over 100% increase in borrowing to N26.3bn. Some of the investment include expansion of its existing Palm Oil mill from 60 ton/ hour to a 90 ton/hour milling plant by year-end 2020, Construction of a new 60 ton/hour Palm Oil mill in Sakponba Estate to be completed in 2023, expansion of the company’s palm kernel oil plant to 350 ton/ day PKO plant (current capacity: 60 ton/day). Notably, Cash and cash equivalents fell 40.5%y/y to N3.5bn, following a N6.5bn loan repayment made during the year.
However, Borrowing via overdraft (OD) rose from N7.1bn to N8.0bn, accounting for 36% of all interest-bearing liabilities. Further analysis indicated that average cost of OD in the books of the firm is estimated at c.12.0%. For balance sheet optimization purpose, we think PRESCO should consider taking advantage of the low yield environment in the debt market by registering a commercial paper to refinance and average down it’s cost of capital. For context, PRESCO would have saved close to 50% of its finance expense attributable to OD if the said N8.0bn was raised in the debt capital market.
Outlook: HOLD rating maintained
The future looks bright as the company continue to invest aggressively in CAPEX. Apart from some of the planned capacity expansion project on-going for 2020, management also guided on the plan to invest c. N34.0bn in CAPEX for the next five years. This is expected to be financed via internally generated funds and external borrowings. In addition, we expect the recent diversification into rubber and cocoa to support the opline coupled with favorable government policy towards the sector. Accordingly, we have estimated a Revenue growth of 23.7%y/y to N24.6bn in FY-2020E.
We expect a mild decline in Cost of Sales growth; hence, gross margin is expected to be strengthened. Also, we have estimated a mild decline in OPEX as the company is expected to improves effort to drive cost efficiency.
In all, we expect the surge in PBT and PAT to be sustained, fueled by lower base effect of the 2019 performance. PRESCO currently trades at a forward EV/ EBITDA of 5,7x, which is below both the local and EM peers average of 6.14x and 9.7x, respectively; implying that the ticker is currently undervalued. Putting the above together and factoring the current market volatilities, we update our risk free rate and equity risk premium to reflect the current realities. Hence, we revised our TP to N81.5.0/share with a potential upside of 2.2%.