Presco: Rebuilding profit after a crash

Presco, the oil palm company, shows promising prospects tor beginning a turnaround this year after it suffered a crash in profit in 2015. The company’s profit, which soared to an all time high in 2014, fell by more than 55% last year. Its first quarter profit this year is however promising a strong recovery move at full year.

The company’s main revenue lines are looking up impressively and two major cost lines are either moderating or declining. However major changes on the income statement have left the bottom line flat at the end of the first quarter despite a significant tax credit.

Earnings performance in the core business of the oil palm and rubber company has improved significantly to the point of nearly doubling operating profit at the end of the first quarter. However a big drop in gain on changes in the fair value of non-biological assets claimed all the increase in operating profit and left the net profit position virtually unchanged on year-on-year basis. The full year profit outlook is however promising despite an expected slowdown in earnings growth in the second half of the year.

Presco ended the first quarter operations with a turnover of N3.18 billion, an outstanding growth of 47.7% year-on-year. The company deals on products in which demand remains firm and largely unmet, as foreign exchange restrictions have limited importation of palm oil and forced increased dependence on local output.

The strong growth in sales revenue in the first quarter isn’t expected to be sustained to full year. A slowdown is normal in the business in the second half of the year – which is the off season for palm produce. The full year outlook indicates sales revenue in the region of N11.14 billion for Presco in 2016. That will be an increase of 6.5% over the full year figure of N10.45 billion in 2015. It will also be a slowdown from the growth of 14.3% the company recorded last year but close to the company’s peak revenue figure of N11.25 billion posted in 2012.

The company’s earnings figure in the first quarter is significantly improved by an upsurge in other operating income, which advanced by 844% to N236 million at the end of March. That is reinforced by two favourable cost behaviours. Distribution expenses dropped by 69.2% and cost of sales moderated during the period. At an increase of 38.4%, cost of sales moderated relative to sales revenue, which permitted a growth of 54% in gross profit, raising gross profit margin from 60.4% to 63% over the review period.

Operating profit rose by 96.3% to N1.76 billion and despite an increase of almost 50% in finance expenses and sustaining exchange losses, profit before gain on changes in fair value of non-biological assets advanced by over 143% to N1.54 billion. A gain of over N1.0 billion in these assets provided the main strength for the net profit the company posted in the first quarter of last year. A drop of over 76% this year equally accounts for the inability to grow the bottom line at the end of the first quarter.

After tax profit was virtually flat at about N1.40 billion at the end of the first quarter. The full year position is projected at N2.92 billion for Presco in 2016. That will be an increase of 26% over the full year profit figure of N2.32 the company earned at the end of 2015.

Presco recorded a drop of over 55% in after tax profit in 2015 from its all time profit peak of N5.19 billion in 2014. Net profit margin remains very good at 44% at the end of the first quarter despite dropping from 64.7% in the same period last year. The company has one of the highest profit margins among the entire group of listed companies.

Earnings per share is a little improved at N1.40 at the end of the first quarter while N2.92 is projected for the company at full year. It earned N2.32 per share last year. There is a major improvement in its cash flow position with an exceptional growth in net cash generated from operating activities leading to a net cash increase of N994 million at the end of the first quarter.