Business

Presco’s earnings decline on cost pressure

Rising operational challenges have impacted negatively on earnings of Presco Oil Palm Plc. Chris Ugwu writes

 

 

O

ver dependent on oil and gas as major source of revenue has continued to remain a major factor contributing to Nigeria’s inability to meet up with the global rise in demand for palm oil.

 

 

Aside from the likes of Presco Oil Plc and Okumo Oil Plc, two big commercial operators in the Nigerian palm oil sector, the country’s  oil palm industry is dominated by smallholders and to lesser extent semi-mechanised and mechanised processors.

 

Smallholders and semi-mechanised palm oil processors account for about 95 per cent of the total domestic production.  For effective production, the role of the drivers is essential. These include farmers, processors, marketers/consumers and equipment fabricators.

 

 

For Nigeria to increase her share of domestic production, reduce importation and produce palm oil with improved quality, the challenges of the drivers need to be addressed.

 

 

While it is accepted generally that the overall economic and business climate is a mixed fortune due to mounting economic challenges and the current COVID-19 challenge, Presco Oil has not been insulated following recurrent disappointing results being released by the company.

The company like others has remained susceptible to the challenges facing the manufacturing businesses in Nigeria.

 

 

However, the market  sentiments for the company have remained firm not only on the back of demand for palm oil, which outstrips local supply by almost 50 per cent, but also as rubber, which it also produces, offers diversification opportunities. The share price stood at N45.25 per share when the closing bell rang on Friday.

 

 

Financials

Presco Plc began the financial year 2019 with 17.6 per drop in profit after tax for the Q1 ended March 31. The company’s financial report for the period showed a profit after tax of N2.141 billion as against N2.597 billion in 2018, representing a drop of 17.6 per cent. Profit before tax declined by 24 per cent from N3.432 billion in 2018 to N2.576 billion in 2019. Revenue dropped by 16.4 per cent to N5.506 billion from N6.500 billion in 2018.

According to market watchers, the firm’s Q4-2018 and Q1-2019 results showed weak core operating performance  despite an improved gross profit margin, the company’s EPS dipped by 25 per cent  year on year (y/y), due to the negative impact of biological asset revaluation (loss of N2.6 billion vs. N374 million in the preceding year).

Stripping out the volatile asset revaluation loss, EPS would have expanded by 21 per cent. Similarly, in Q1-19, EPS declined 18 per cent y/y, driven by lower revenue (-16.4 per cent y/y to NGN5.5 billion), higher OPEX (+15 per cent y/y to N1.65 billion), and finance charges (+86 per cent y/y to N540 million), according to Cordros Report.

 

 

Presco sustained disappointing results during the half year as posted 24.39 per cent drop in profit after tax for the half year ended June 2019.

According to a report obtained from the Nigerian Stock Exchange (NSE), the unaudited financial result for the first half showed profit after tax of N3.016 billion from N3.989 billion recorded in 2018, accounting for a drop of 24.39 per cent.

Profit before tax stood at N3.882 billion in 2019 from N5718 billion a year earlier, representing a decline of 32.1 per cent.

 

Revenue equally declined to N10.548 billion during the period under review from N11.658 billion in 2018, amounting to a decrease of 9.52 per cent.

 

 

According to analysts at Investment-One Research, “moving down to the P& L line, a combination of the jump in OPEX/Sales to 40.40 per cent in Q2 2019 from 36.17 per cent in Q2 2018, a 26.59 per cent y/y decline in other income and a 46.25 per cent y/y increase in net finance cost added to the impact of the weaker gross profit margin. As a result, PBT margin fell to 26.98 per cent in Q2 2019 from 45.12 per cent in Q2 2018 and PBT declined by 40.50 per cent y/y to N1.36 billion in Q2 2019.

 

 

“On a sequential basis, turnover fell by 8.42 per cent q/q due to lower prices in the third quarter of the year with average price of crude palm oil declining by 5.16 per cent q/q in Q2 2019.

 

 

“In the same vein, gross profit margin declined to 74.00 per cent in Q2 2019 from 85.07 per cent in Q1 2019, which may be due to lower prices. That said, the jump in OPEX/sales to 40.40 per cent in Q2 2019 from 30.00 per cent in Q1 2019 and the fall in gross profit margin offset the impact of a 15.15 per cent q/q fall in net finance cost. As a result, PBT margin fell to 26.98 per cent in Q2 2019 from 45.81 per cent in Q1 2019 and PBT shed 46.06 per cent q/q to N1.36billion.

“In the first half of the year, turnover remained under pressure due to lower Crude Palm oil price. As such, revenue shed 9.52 per cent to N10.55billion in H1 2019. Similarly, gross profit margin declined by 82bpsy/y to 79.78 per cent during the same period. In the same vein, the jumped in OPEX/ Sales by 682bps and a 65.47 per cent rise in net finance cost drove the PBT margin down to 46.01per cent in H1 2019 from 49.05 per cent in H1 2018. Similarly, PBT fell by 32.10  per cent y/y to N3.88billion in H1 2019.”

Presco’s revenue fell by 7.6 per cent YoY to N19.7 billion in FY’19, following a decline in the average unit selling price of crude palm oil (-14.2 per cent YoY to N409,271/tonne). Passthrough from top-line weakness, as well as a 28.4 per cent YoY increase in cost of sales, resulted in a 10.0ppts contraction in the company’s gross margin to 64.5 per cent. Pressures on the cost of sales front largely reflected a surge (c.3.0x) in expenditures related to the upkeep of mature plantings, harvesting, and laboratory expenses

Operating margin also declined by 16.0ppts YoY to 31.9 per cent as higher SGA expenses (+14 per cent YoY to N6.8 billion) added to overall cost pressures. Further breakdowns reveal that administrative expense was bloated by higher consultancy fees, transport costs, and exchange rate losses

Net finance cost surged by 59.3 per cent YoY to N2.1 billion after the company increased its borrowings by N21.9 billion in the period

Presco began 2020 with a record of 15.88 per cent drop in profit after tax for the first quarter ended March 30, 2020.

According to a report obtained from the Nigerian Stock Exchange (NSE), the unaudited financial result for the first quarter showed profit after tax of N1.800 billion from N2.140 billion recorded in 2019, accounting for a drop of 15.88 per cent.

 

Profit before tax stood at N2.353 billion in 2020 from N2.576 billion a year earlier, representing a decline of 8.66 per cent.

Revenue equally declined to N5.375 billion during the period under review from N5.506 billion in 2019, amounting for a decrease of 2.38 per cent while cost of sales stood at N4.199 billion from N4.382 billion in 2019.

 

 

Looking ahead

Chairman of Presco Plc, Pierre Vandebeeck, said that if the Federal Government’s strategy to partner the private sector as parts of its youths engagement initiative to cultivate no fewer than one million hectares of oil palm succeeds, the country would regain its number one position as the major producer and supplier of palm oil in the world.

 

 

Vandebeeck stated this during the 26th Annual General Meeting, AGM, of the company’s shareholders to review its operations for the year 2018, noting that the management of the company had proposed N2 billion to be shared as dividends by the shareholders.

Vandebeeck however, said the year under review was a difficult one, especially with abuse by several persons of the ECOWAS Trade Liberalisation Scheme, ETLS, but that the company was able to weather the storm and kept afloat.

 

 

He said: “We are nursing a very good relationship with our neighbours, they have given us peace and our CSR is one of the best. It has been recognised by many stakeholders in the country and we came number one.

 

 

“We are working together with the Federal Government to structure a huge oil palm programme of no fewer than one million hectares and if this comes through, Nigeria will regain its former place as the major supplier of palm oil to the world. Today as you know, we are importing about a million tons per annum, it is not a very enviable position but the future looks bright with the assistance of the Federal Government.”

 

 

To analysts at Investment-One, going forward, we expect the company to continue to benefit from the government’s exclusion of importers of crude palm oil from the official foreign exchange market, which has been a barrier to importation of crude palm oil thus preserving the market for local big players like Okomu and Presco. In the same vein, we expect the company’s 15,000 hectares expansion project to continue to support its top line growth within the medium to long term. The company did plantation on 4,000hectares in 2018 and intends to do plantation on another 4,000 hectares in 2019. In the same vein, the expected improvement in consumer spending in H2 2019, could improve demand for crude palm oil particular for the production of other consumer goods.

 

Nonetheless, the current decline in price of crude palm oil may continue to weigh on gross profit margin and turnover growth in the near term. Similarly, the volatility in revaluation gain on biological assets is a concern considering the impact it could have on the company’s PBT performance.

Last line

 

 

Relegating palm oil as a result of crude oil discovery was a big gaffe that will continue to haunt Nigeria. The authorities have to come up with innovative policies to encourage palm oil producing firms.

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