Presco gains margin, grows profit on flat revenue

Presco Plc, the oil palm producing company, has made a good first quarter start by reducing cost and improving profit margin. Despite that sales revenue was flat during the period, the company lifted after tax profit by 37% – one of the impressive earnings growth records seen so far this year.

The company appears to be on the way to repeating the earnings pattern of the preceding year – lowering the cost-income ratio to more than counter the slowly moving sales revenue. That was how it nearly doubled profit in 2014 from just 7.7% increase in sales revenue. It is following the same pattern in the current year as per its first quarter interim report.

Sales revenue growth has been weak for the company since 2013 when there was a sharp fall of close to 25%. Since then, it has not been able to come anywhere close to its sales revenue peak of N11.25 billion in 2012.

First quarter operations closed with a turnover of N2.15 billion, just 2.1% up on the corresponding first quarter figure in 2014. The full year outlook indicates sales revenue in the region of N9.36 billion for Presco at the end of 2015. That will be a marginal increase of 2.5% over the full year sales revenue in 2014.

The revenue projection is subject to a wide variation due to the uneven quarterly earnings pattern of the company. Its critical earning season is the first half of the year and the peak period is the second quarter. Earnings performance can therefore be expected to improve significantly in the second quarter while a slowdown is likely in the second half of the year.

The slow growth in revenue in the first quarter was more than compensated by a drop of 21.4% in cost of sales, which amounted to N800 million. Cost of sales equally dropped by 17.3% in the 2014 financial year. The favourable cost behaviour enabled the company to lift gross profit by 24% to N1.35 billion from the 2.1% gain in sales revenue. Another favourable development during the period is a gain of N79 million in biological assets against a loss of N150 million in the same period last year.

On the other hand, selling/administrative expenses rose by almost 37% and claimed a good part of the revenue saved. Again, other operating income dropped by over 62% during the period in spite of which the company achieved a leap of 55.6% in operating profit to N1.01 billion.

A major event in the company’s income statement in the first quarter is a rise of over 178% in interest charges. This is very likely to be the trend this year, indicating that a significantly increased share of non-growing revenue will have to be devoted to payment of finance charges.

Balance sheet borrowings have expanded by almost 93% within the first three months of the year and the cash flow situation is indicating that increased dependence on debts will sustain to full year.Net cash flow from operating activities provided only a small fraction of total cash requirements for investing and financing activities.

A fresh loan of N2.34 billion was therefore taken during the period from which repayment of previous loan had to be made. A net cash decrease at the end of the first quarter against an opening negative balance indicates the level of cash flow pressure facing the company this year. Inventories and receivables are up on the 2014 closing figures by 14%and 11.5% respectively while payables declined slightly by 3.7% during the period.

The company posted an after tax profit of N557 million at the end of the first quarter, an increase of 36.8% year-on-year. Full year projection indicates an after tax profit in the region of N2.43 billion for Presco at the end of 2015. This will be a decrease of 6.6% from the net profit figure of N2.61 billion the company recorded in 2014. A significant adjustment of the profit forecast is very likely for the company at the end of the second quarter, which is its peak earning season.

The company earned 56 kobo per share at the end of the first quarter, up from 40 kobo in the same period last year. Full year earnings per share is projected at N2.43 for Presco in 2015, a likely decline from N2.68 in 2014. This is however subject to significant modification, as the company moves on through uneven earning quarters.