Presco Plc

PRESCO PLC

Ticker:                            PRESCONature of Business:    Crop ProductionLocation:                            Nigeria
Recent Price:                    NGN46.00       52-Week High/Low: NGN57.05/31.25Estimated Fair Value:    NGN32.9-NGN39.5
Expected Return:          15.4%Consider Buy:          Below NGN39.5Business Risk:            Average
Financial Risk:  MediumEconomic Moat:          WeakCorporate Governance: Strong

 

Company Overview                                                                                                                   
Presco Plc (PRESCO) started as oil palm plantation cultivated by the government of former Bendel State in Nigeria before it was acquired by President Industries Nigeria Limited (PINL), a textile company,   in 1985. PRESCO was spun off from PINL in 1991 and Societe d’Investissement pour l’Agriculture Tropicale (SIAT SA Belgium) obtained a stake  in the company. PINL disposed of its shareholding in PRESCO in 1997. The company listed its shares on the Nigerian Stock Exchange in 2002. Currently SIAT SA Belgium possesses 60% shareholding of the company while 40% is available to the investing public.

PRESCO is based in Edo and Delta States of Nigeria; it engages in the development of  oil palm plantations, palm oil milling, palm kernel processing and vegetable oil refining. Its product portfolio  includes  palm olein, refined bleached and deodorised palm oil, palm stearin, palm fatty acid distillate, crude palm kernel oil and refined palm kernel oil. These products are used in soap making, food products, bakery, confectionery, etc.

The company has not relented on its effort at improving oil production per hectare of plantation by investing in research and development (R&D). R&D hit NGN210.5 million in the current period (NGN608.3 million in 2018). Besides, it has branched out into the development of rubber plantation in order to widen its product portfolio.

Mr. Pierre Vendebeeck (Belgian) is the chairman of the board of directors. Amb. Nonye Udo (Nigerian) and Mr. Gerald Ray (South African) replaced Dr. Shettima Mustafa (Nigerian) and Mr. Thor  Bakken (Norwegian) who resigned as directors on 24th July, 2019. Mr. Felix Nwabuko (Nigerian) is the managing director of PRESCO.

Investment Thesis
PRESCO operates in the palm oil and vegetable oil sector with industrial facilities for oil milling and refining. It has made effort to penetrate the offshore market with its products. However, no export sale was made in 2019 compared to NGN745 million sales of 2018. We are of the opinion that export sales would rise when the company start selling its rubber products to the international market.

The company has accumulated NGN6.9 billion more debts in the year. And it has to repay NGN16.2 billion within a year. This is 2.8 times the operating profit made in 2019. However, the company produces enough profit and cash flow to pay up its interest obligation.

Management’s efforts are directed to rubber plantation development and expansion of oil palm processing capacity. This, inevitably, has increased the company’s indebtedness but we expect these efforts to pay off in the not-too-distant future. PRESCO benefits from the clampdown on illegal importation by the Federal Government of Nigeria. Therefore, we expect the supply of its products to increase in order to take advantage of strong demand for vegetable and palm oil.

Investors of PRESCO have been receiving dividend on a regular basis.  Returns to shareholders are not bad. Return on Average Equity (RoAE) stood at 14.4% in 2019 while Return on Average Assets (RoAA) was 5.8% in the same year.  However, these were below the historical averages of 22.5% (RoAE) and 12.4% (RoAA) of the past 10 years. We expect investors to profit from investing in PRESCO in the medium term.

Valuation
Currently, PRESCO trades at 2.1 times Average Book Value Per Share and 9.5 times Average Earnings Per Share. Our estimated fair value for a share of the company ranges from NGN32.9 to NGN39.5. We anticipate a return of 15.4% from a share of PRESCO.

Financial Overview
Though it shed 7.6% year-on-year in 2019 financial year, revenue has grown by 7.9% on a 3-Year Compound Annual Growth Rate (CAGR).  Rising cost of sales led to a 40.3% dip in operating profit as at 31st December, 2019. PRESCO had a Profit Before Tax (PBT) of NGN6.1 billion, down from NGN6.3 billion of the prior year, 2018. Profit After Tax (PAT) has been on the decline since 2017; it dropped NGN445.4 million to close at NGN3.8 billion at 2019 financial year end.

Profit margins are high, though they have declined. Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) margin was 37.3%, down from 52.4% of the preceding year. Gross profit margin lost 10 percentage points compared to 1% gain in 2018 due to a 28.4% increase in the cost of sales. Cost of sales to turnover increased from 25.6% to 35.5% in the period under review.  Operating profit margin trailed the 10-year average of 33.5% by 3.5%. Similarly, PBT margin lessened by 1.1% as the company achieved a PBT margin of 30.7%.

The company’s financial leverage has increased with total debt as a proportion of shareholders’ equity jumping from 73.3% to 88.7%. The total debt now accounts for 35% of total assets (2018:30.5%).

Short-term loans leapt from NGN11.2 billion to NGN16.2 billion within a year and accounted for more than 60% of total loans. However, we do not believe that the long-term solvency of PRESCO is in doubt.

Business Risk
Pricing of agricultural products in the export market affects the fortune of PRESCO. China and India are the top importers of palm oil and their economic outlook is one of drivers of demand and price in the international market. Besides, high cost of inputs reduces profits and profit margins of the company.

Recommendation: Overpriced

Earnings Chart of Presco

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