Monday, June 21, 2021

    Presco Q4’20 and Q1’21 Results Review: Solid Outlook for FY’21 Driven by Strong Fundamentals

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    Presco’s Q1 21 earnings beat our estimate by around 61%. Stronger-than-expected sales of N7.9bn vs. our N6.2bn forecast drove the positive surprise. Similar to Okomu, Presco’s topline was supported primarily by double-digit y/y price increases. The re-opening of global economies following COVID-19 related lockdowns in 2020 have sparked a rally in commodities.

    Over the last 12-months, crude palm oil futures prices are up 77% and up by around 9% year-to-date, to slightly above USD1,000/MT. Traditionally, local producers transfer changes in global palm oil prices to consumers. We do not expect an easing in pricing for the rest of the year.

    As such, we have raised our sales forecast for FY ’21 by around 32% to NGN29.7bn, which in our view more than offsets rising production and operating costs. Overall, our EPS forecasts over the ’21-22E period is up by around 47%. Our new price target of NGN109.3 is up by only 24% because we have raised our risk-free rate assumption to 12.5% from 10% to reflect the higher interest rate environment. At current levels, our price target implies a potential upside of 44%. Presco retained a NGN2.00 dividend for FY ’20, similar to the past four years. Management did not provide guidance on dividends for this year.

    As such, we retain a NGN2.00 dividend forecast for FY ’21, even though we believe strong earnings growth during this financial year provides management with enough flexibility to raise dividends. Year-to-date, Presco shares are up +5.7% vs. the ASI’s -4.6% decline. We retain our Outperform rating on the stock.

    Q1 ’21 PBT and PAT up 110% y/y and 114% y/y respectively

    Q1 ’21 results were very strong. Sales of NGN7.9bn were up 48% y/y and 59% q/q respectively. Pre-tax profit of NGN5.0bn grew 110% y/y while PAT grew by 114% y/y. Improved profitability was driven by a +280bps y/y gross margin expansion to 80.9% and a -41% decline in net interest expenses which more than offset a 16% y/y rise in operating expenses.

    Compared with our forecasts, sales and PAT beat by 28% and 61% respectively. The wider variance on the profit line was driven by positive surprises on the cost lines. For FY ’20, sales of NGN23.9bn grew 21% y/y while PBT and PAT of NGN8.7bn and NGN5.3bn advanced 43% y/y and 37% y/y respectively. Presco’s proposed dividend of N2.00/share implies a payout of c.40% and a yield of 2.6%.

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