Downgrading to Neutral despite PT upgrade
- Upward revision to PT despite cut to estimates: Presco’s Q3 2017 results surprised negatively, even excluding a biological asset revaluation loss of –N1.4bn. As such, we have cut our earnings estimate over the 2017-18E period by -26%. Despite the cut, we have increased our price target by 15% to N76.3, mainly because of our decision to reduce our risk free rate and equity risk premium assumptions by 150bps and 50bps to 14% and 6% respectively. These adjustments are on the back of the current lower interest rate environment. Presco shares are trading on a 2017E P/E multiple of 10.5x for a 9% y/y growth in 2018E EPS. The shares returned 71% last year (ASI: 42%). Although we see an +11% upside potential to our price target, we are downgrading the stock from Outperform to Neutral.
- Outlook remains positive: The local palm oil producers continue to be in an advantageous position, owing to the significant supply deficit in the country and government policies which have encouraged local production. Last year, Presco improved on its prior year’s impressive financial performance as well as its plantation expansion drive. The company grew 9M sales and PBT by 42% y/y and 55% y/y respectively after stripping out biological asset revaluation gains and losses. Our view on the sector and the company remains positive and we expect to see similar trends in 2018. We expect both volume and pricing to be driver for growth in the near term. As such, we see sales and PBT growth of 19% and 9% y/y respectively in 2018E.
- Q3 2017 PBT (ex-biological asset revaluation) declined -6% y/y: Presco’s Q3 2017 results showed sales and PBT declines of -7% y/y and -94% y/y to N4.1bn and N351m respectively. Presco reported an after-tax loss of –N196m compared with a PAT of N3.8bn reported in the corresponding quarter of 2016. In addition to the sales decline, gross margin contracted by –3,991bps y/y to 55.8%, net finance costs increased by 168% y/y and the company reported a –N1.4bn loss on the revaluation of biological assets. These offset a -77% y/y decline in operating expenses and led to the weak bottom line. If we strip out the loss on biological asset revaluation, the underlying results reveal that Q3 PBT declined by -6% y/y. The company recorded a N3.8bn gain on biological asset revaluation in Q3 2016. On a sequential basis, sales and PBT declined by 28% q/q and 86% q/q respectively.