2020: PRESCO Bounces Back Strong As Burgeoning Local Demand Drives Topline Growth

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Presco - Another impressive quarter expected in Q3

…Burgeoning Local Demand Drives Topline Growth

PRESCO, in its 2020FY financial scorecard, posted strong double-digit growth in revenue (+21.13% YoY) to NGN23.89bn (vs. 2019FY: NGN19.72bn) – recovering from a 7.59% YoY decline in the prior year.

Despite supply chain disruption and other logistic challenges thrown up by the pandemic, revenue climbed to its highest level in six years as the firm benefited from an improvement in sales; a consequence of the restriction placed by the CBN on access to foreign exchange for Crude Palm Oil (CPO) imports.

Another policy directive with unintended benefits for the palm oil producer was the Federal Government’s decision to close the land borders, which effectively shut out smuggled alternatives and encouraged patronage of locally made products. This provided local players with the latitude to increase product prices. Both directives, coupled with the company’s prior capital investments (including the construction of a 350 tons per day palm kernel crushing plant and 30 tons palm kernel shell boiler in 2019) supported the improvement in sales over 2020FY.

For 2021FY, we envisage robust local demand for CPO and its derivatives against the backdrop of a gradual pick-up in economic activities. We also see support coming from the CBN’s decision to discourage CPO imports by withholding FX, as well as expectations of a much higher crude oil price environment in the year. On risks to our outlook, we do not consider the reopening of the land borders a significant downside risk, given that the FG’s protection on local palm oil producers remains firmly in place.

Thus, we project a 11.91% growth in 2021FY revenue to NGN26.74bn (vs. 2020FY: NGN23.89bn).

Profitability Metrics Remain Promising

The company’s profitability metrics (ROE: 17.86%, net margin: 22.02%) remain quite attractive despite moderate increases in both direct (2020FY: NGN7.80bn vs. 2019FY: NGN7.00bn) and net operating expenses (2020FY: NGN7.38bn vs. 2019FY: NGN6.43bn) during the year.

Total interest-bearing liabilities declined to NGN20.76bn from NGN25.37bn in the prior year as the firm paid down a portion of its debt. As a result, finance expenses fell by c. 10% to NGN1.92bn while interest coverage ratio expanded to 5.50x (from 3.81x as at 2019FY). Also noteworthy is the CBN’s decision to reduce interest rates on its loans to 5% per annum effective March 2021. This is expected to last for a year. We believe this would serve to moderate the company’s finance costs as these loans represent c. 37.11% of PRESCO’s total borrowings in 2020FY.

Finally, the company recognized an NGN1.85bn gain on biological asset revaluation, further strengthening its bottom line. Both PBT and PAT eventually settled higher – up by 43.41% and 37.07% YoY to NGN8.69bn and NGN5.26bn respectively.

Return on Equity Lags its Major Peer Company

While an improvement from last year, PRESCO’s annualized ROE (17.86%) lags that of its peer (OKOMUOIL: 23.17%) – mainly as a result of a weaker net margin (22.02% vs. OKOMUOIL: 33.23%) and asset turnover (0.33x vs. OKOMUOIL: 0.47x). PRESCO’s liquidity metrics also pose a serious concern, with a current ratio of 0.79x, which is way below the industry average of 2.94x.

Outlook and Recommendation

For 2021FY, based on positive industry outlook as well as modest improvement in macroeconomic conditions, we project an EPS of NGN6.21 applied a P/E ratio of 11.30x