Topline growth supported by higher CPO pricing
Following a rather weak FY’19 earnings performance which saw Presco report a 56% moderation in PAT (excluding revaluation gains), bottom line surged 86% y/y to ₦5.0 billion in FY’20 (excluding revaluation gains), albeit 14% below our ₦5.8 billion expectation.
The earnings appreciation was mostly driven by a recovery in FY’20 topline following the decision by the FG to close off land borders in Q3’19.
The resulting reduction in supply supported CPO pricing in the latter half of 2019 and through 2020, taking FY’20 topline 21% higher y/y to ₦23.9 billion, albeit 4% below our ₦24.8 billion estimates.
Furthermore, with the company opening up a new CPO processing facility in H1’20, we believe that higher CPO volume rollout also contributed to the increased topline. With the land borders reopened at the tail end of 2020, we foresee an increase in CPO supply and a consequent fall in CPO pricing.
That said, we expect the large spread between the official and parallel market rates to temper the fall in CPO prices, as CPO imports are ineligible for forex at the official windows. Accordingly, we estimate a mild 3% y/y drop in FY’21 Revenue to ₦23.3 billion.
Cost containment strengthens the bottom line
Similar to Okomuoil, Presco recorded sizeable improvements in cost containment, reporting a near 300bps jump in EBIT margin to 35%, with FY’20 EBIT jumping 34% y/y to ₦8.4 billion (excluding revaluation gains).
Notably, even as inflationary pressures dragged gross margin, the uptick in EBIT was largely driven by a 25% y/y reduction in OPEX.
Furthermore, as highlighted in our FY’21 outlook, the CPO manufacturer recorded a ₦2.1 billion gain on the revaluation of biological assets. We had predicted this gain on the back of the rising value of the USD versus the NGN and the increase in global CPO prices in FY’20.
Finally, with its debt balance falling 25% y/y, Presco reported a 26% y/y drop in interest expense to ₦1.5 billion, taking PBT 63% higher y/y to ₦6.9 billion.
Price appreciation prompts SELL recommendation
Even as we foresee sustained inflationary pressures on cost lines, we expect Presco to maintain its EBIT margin in FY’21, reporting an EBIT margin of 35% and an absolute EBIT value of ₦8.1 billion.
That said, amid an expected rise in average interest rates, we foresee an 8% y/y increase in Interest expense to ₦1.7 billion, taking FY’21 PBT to ₦6.4 billion.
After adjusting for tax, we arrive at an FY’21 PAT of ₦4.6 billion and a 12-month Target Price of ₦71.12. Despite the rise in intrinsic valuation, the c.5% increase in market price since the last valuation keeps PRESCO’s recommendation as aSELL.