Presco: Profit heads for sharp drop

Presco, the oil palm and rubber producing company, is headed for a sharp drop in profit this year after lifting profits to great highs in the preceding two years. Gain on biological assets revaluation of N24.8 billion multiplied the company’s after tax profit close to nine times in 2016 and a tax credit of N14.5 billion helped to produce the company’s towering profit figure of N25.4 billion at the end of 2017.

The performance boosters are missing so far this year and inability to grow sales revenue is adding further strain to earnings performance. Prospects for a reappearance of the performance enhancers aren’t ruled out however in the second half of the year. Last year, the company’s tax expense of over N2 billion at half year gave no clue to the huge tax credit at full year. Based on the current growth rate however, Presco is headed for the lowest profit figure in three years in 2018.

The company closed half year operations with an after tax profit of a little below N4 billion, down by 28% year-on-year. The drop follows mainly the absence of asset revaluation gain, a decline in sales revenue and an increase in finance expenses.

Profit growth is uneven for the company and its critical earning period lies within the first half of the year. A significant slowdown in profit growth is therefore expected in the second half of the year – which is the company’s off season for palm products.

The company’s profit records show a pattern of wide margin rise and fall and this year looks very much like one of a sharp drop. In the past two years, the company built profit figures that far exceeded its sales revenues. Tax credit accounted for 57% of its after tax profit last year and gain on biological asset revaluation produced 80% of pre-tax profit in 2016.

Sales revenue amounted to N11.66 billion for Presco at the end of half year operations in June 2018. That is a drop of 9% year-on-year with a full year outlook indicating a turnover in the region of N20 billion. The company had grown sales revenue by 42% to N22.4 billion in 2017.

There was some cost saving from input cost at the end of half year operations, which dropped ahead of sales revenue at about 13%. That enabled the company to moderate the effect of the decline in turnover on gross profit. Again, with a decline of 7% in selling/administrative expenses and a strong growth in other operating income, the margin of decline in operating profit narrowed down further.

The drop in after tax profit was directly accounted for by a drop in gain from changes in fair value of biological assets to insignificance and a 91% rise in finance expenses during the review period.  The company’s interest bearing debts have grown from about N8 billion at the end of last year to about N14 billion at the end of June.

Earnings per share declined from N5.55 in the same period last year to N3.98 for Presco at the end of June, 2018. The company earned N25.36 per share at the end of 2017 and gave out N2 per share in cash dividend.