Company Analysis

Presco: Profit boosters still missing


Presco’s full year operating result for 2018 isn’t likely to have the profit performance boosters that gave it extraordinary leaps in the preceding two years. Save for a last quarter surprise, the oil palm and rubber producing company is expected to report a sharp fall in profit for the 2018 financial year.
Two performance boosters had helped the company to push profits to towering heights in 2016 and 2017. A gain of N24.8 billion on biological assets revaluation was the performance enhancer in 2016. A tax credit of N14.5 billion was the key element of the company’s profit figure of N25.4 billion in 2017.
At the end of the third quarter operations in September 2018, the performance boosters were missing though reappearance in the final quarter isn’t ruled out. A final quarter surprise changed the earnings story of the company in 2017, as a tax expense of N2.6 billion at the end of the third quarter changed to the huge tax credit recorded at full year.
Further constraining the company’s earnings outlook is inability to grow sales revenue. Turnover amounted to N16.24 billion for Presco at the end of the third quarter operations. That is a decline of 4% year-on-year – a step up however from a 9% drop at half year.
The full year sales revenue estimate for Presco is unchanged at the earlier forecast region of N20 billion. The margin of sales revenue decline could widen to 7% at the end of the year. The company had grown sales revenue by 42% to N22.4 billion in 2017.
Presco closed the third quarter operations with an after tax profit of N5.28 billion, a marginal decline of 1.5%. This is a major improvement from a year-on-year drop of 28% at half year. The gain in profit momentum follows the appearance of biological assets revaluation gain, a major reduction in input cost and an increase in other operating income.
The full year profit outlook for the company is subject to a number of possible changes in the final quarter. A further step up in sales revenue and the other favourable developments seen in the third quarter could produce another pleasant profit surprise for the company. A slowdown in the key factors is also not rule out, as the second half is the company’s off season for palm produce.
Based on the third quarter position, Presco is likely to report the lowest profit figure in three years for 2018. The company’s earnings track is marked by a pattern of sharp rise and fall and the 2018 financial year looks very much like one of a sharp drop.
In the preceding two years, the company built profit monuments that towered far above its sales revenues. Tax credit produced 57% of after tax profit in 2017 and a gain on biological asset revaluation produced 80% of pre-tax profit in 2016.
Cost saving from input cost increased at the end of the third quarter operations, extending its year-on-year drop from 13% in June to 20% in September. That enabled the company to improve gross profit by 2.7% from the 4% decline in sales.
Selling/administrative expenses changed direction from a 7% decline at half year to a 37% advance to N4.3 billion at the end of the third quarter. This claimed more than all the cost saving from input cost and an increase of 27% in other operating income, resulting in a decline of 9.4% in operating profit to N8 billion.
A respite came from an increase in gain from changes in fair value of biological assets from insignificance at half year to about N370 million at the end of the third quarter. An increase of 46% in finance expenses to N928 million claimed a good part of the gain during the review period.  The company’s interest bearing debts have grown further from about N8 billion at the end of 2017 and from N14 billion at the end of June to about N18 billion at the end of September.
Earnings per share declined from N5.36 in the same period in 2017 to N5.28 for Presco at the end of September, 2018. The company earned N25.36 per share at the end of 2017 and gave out N2 per share in cash dividend.

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