Earnings Outlook: Presco Looks Good for Analysts Buy Recommendation

Earnings Outlook: Presco Looks Good for Analysts Buy Recommendation

Presco Plc, a fully integrated player in the Nigerian oil palm industry, is set for a good ride in financial year 2020.

In recognition of the crude palm oil (CPO) producer’s performance, analysts have raised their expectations.

In its forecast, Vetiva Capital projected price target of ₦59.94 per share on account of lower interest rate environment that support the company net debt position.

In its equity estimates, Vetiva projected the company’s revenue to come strong at about N28 billion, coming at the time when Presco is enjoying high margin.

While gross profit margin with analysts’ estimate close knitted in the first half, the firm’s maintained a quite higher profit after margin.

Coming from 25% margin in the comparable period in 2019, PRESCO did 33% just a year after due to cost containment.Earnings Outlook: Presco Looks Good for Analysts Buy Recommendation

Then, with lower cost of funds, but high price level in the economy, this is double barrel advantages for the company as estimate show profit could rise 230% year on year.

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In its first half 2020 financial statement, Presco delivered an impressive jump in earnings as the company profit swelled.

Beyond the numbers, there is a strong demand projection for the company’s output given its partial inelastic demand.

This raised company’s earnings capability considering uptrend in inflationary move, as there is expected to be cut off point between cost and demand.

Specifically, Presco reported an impressive 71% year on year jump in profit after tax (PAT) to ₦4.4 billion in the first half of 2020.

This was significantly ahead of Vetiva Capital earnings forecast of ₦2.5 billion in the period.

Vetiva Analyst Onyeka Ijeoma in an equity note explained that the earnings beat was driven by a stronger topline and effective cost containment in the recently concluded quarter.

Demand for Presco was strong, thus revenue surged 63% year on year to N8.1 billion in the second quarter of 2020.

This quarter sterling performance took first half 2020 revenue up by 29% year on year to ₦13.5 billion, outperformed Vetiva’s ₦12.1 billion estimate.

As expected, Vetiva thinks the second quarter topline benefitted from a surge in domestic CPO prices.

The impressive demand was however brought on by the government drastic decision to shut down land borders in Q3’19, limiting the supply of illegally smuggled CPO into the Nigerian market.

“We also believe that Presco’s CPO sales increased over the period, with demand for food and hygiene products (largely oil palm based) rising during the lockdown and demand shifting towards domestic producers while imported volumes declined”, Vetiva analyst said.

Boosted by significant investments in production and processing capacity, Vetiva analyst said Presco was in a decent position to take advantage of the stronger demand in the period.

Notably, the firm explained that the CPO producer had completed construction of a new 350 tons/day palm kernel crushing plant as well as a 30 tons/day shell boiler in 2019.

Furthermore, the palm oil mill was expanded to a capacity of 90 fresh fruit bunches (FFB)/hour from 60 FFB/hour in January while a new 500 tons/day vegetable oil refinery was slated to be completed in Q2’20.

Amid a strong focus on hygiene and with macroeconomic woes unlikely to slow down demand for food and other CPO based products, Vetiva forecasted a 41% year on year growth in 2020 revenue to ₦27.8 billion.

Following Presco’s impressive first half performance, Vetiva analysts adjusted a number of cost estimates to match the second quarter run rate.

Thus, the firm arrived at a 71% year on year growth in financial year 2020 earnings before interest and tax (EBIT) to ₦13.9 billion.

However, after accounting for interest expense and tax, the investment firm arrived at a 230% year on year jump in 2020 profit after tax to ₦8.8 billion.

Vetiva analyst believes that this a record bottom line for the CPO producer.

Adjusting for the expected improvement in performance over the forecast period, lower interest rate environment as well as Presco’s reduced net debt balance, Vetiva now value the stock at ₦59.94 and place a BUY recommendation on the stock.

Earnings Outlook: Presco Looks Good for Analysts Buy Recommendation

VIAJulius Alagbe
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