Focus for the week: PRESCO PLC 9M’24 Earnings – Elevated pricing sustains topline growth
Cost efficiency shines through in Q3’24
In Q3’24, revenue increased by 41% y/y to ₦40.5 billion, primarily driven by strong domestic and global CPO prices. Interestingly, cost of sales recorded a slower growth of 16% y/y, highlighting PRESCO’s cost efficiency despite the current FX situation. More so, gross margin expanded by 8ppts y/y to 72%.
Elsewhere, operating costs rose by 21% y/y to ₦6.8 billion, with most pressure coming from the Selling and Distribution expenses (+64% y/y: ₦685 million), reflecting the rising cost of AGO. Nonetheless, EBIT margin came in higher by 7ppts to 66%, buoyed by the cumulative impact of the strong growth in revenue and other income (+19% y/y: ₦816 million). In absolute terms, EBIT increased by 59% y/y to ₦20.4 billion. On the other hand, although finance income increased by 822% y/y to ₦193 million, it was unable to offset the 100% surge in finance costs to ₦4 billion, causing net finance expense to increase by 92% y/y to ₦3.8 billion. However, PBT came in strong, increasing by 53% y/y to ₦16.6 billion. Overall, after accounting for a tax expense of ₦3.7 billion, PAT increased by 53% y/y to ₦12.8 billion.
Navigating headwinds, delivering strong results
For 9M’24, revenue increased by 67% y/y to ₦128.5 billion, reflecting the strong demand and higher pricing of palm oil derivatives, across the three quarters, especially PRESCO’s premium products. Additionally, we believe that the rise in global prices (+35.9%) for the 9M’24 period, contributed to the price hike in the domestic market.
Meanwhile, even though input costs remain vulnerable to FX volatilities, PRESCO recorded a slower cost expansion of 29% y/y, giving rise to an 8ppts y/y expansion in gross margin to 72%. For operating expenses, the hike in AGO prices remains the bane for PRESCO, driving Selling and Distribution costs higher by 69% y/y to ₦1.8 billion. Overall, operating expenses increased by 45% y/y to ₦23.1 billion. However, EBIT margin improved by 9ppts to 58% y/y, with EBIT rising by 98% y/y to ₦74.9 billion. Although FX gains declined by 15% y/y to ₦3.2 billion, PBT increased by 111% y/y to ₦67 billion. After accounting for a tax expense of ₦15.3 billion, PAT printed at ₦51.7 billion (+121% y/y).
Global supply constraint, a blessing in disguise
Crude palm oil (CPO) has seen substantial price appreciation in global markets, with a 44.8% surge since the beginning of the year. Looking ahead, tight production conditions in major palm oil-producing nations suggest that CPO will likely maintain its price advantage relative to alternative edible oils.
That said, we expect this to influence prices in the local market, thereby sustaining the financial performance of PRESCO in Q4’24.
That said, we forecast revenue growth of 79% y/y to ₦184 billion and value PRESCO at a 12-month TP of ₦525.17 with a HOLD rating.
What shaped the past week?
Equities: In the week, the local equity market witnessed mixed sectoral performances, with the bears coming out on top. At Friday’s close, the market recorded a 1.09% loss w/w to settle at 97,651.23 pts. This was majorly driven by losses in the Consumer Goods (-0.22% w/w), Industrial Goods (-3.70% w/w), and Insurance sectors (-0.40% w/w). On the flip side, the Oil & Gas (+1.15% w/w), as well as Banking (+0.19% w/w) indices printed weekly gains. Stocks such as BUACEMENT (-11.09% w/w) and JAPAULGOLD (-7.79% w/w) dragged the Industrial Good index lower, CADBURY (-9.89% w/w) and HONYFLOUR (-6.53% w/w) impacted Consumer Goods performance, while REGALINS (-12.50% w/w) and GUINEAINS (-10.00% w/w) contributed to losses in the Insurance space. On the other hand, CONOIL (+9.14% w/w) and GTCO (+6.35% w/w) were the biggest gainers in the Oil & Gas and Banking sectors, respectively.
Fixed Income: This week, system liquidity was positive, as borrowings at the SLF window stayed minimal following significant inflows at the start of the week. The financial system opened on Monday at ₦369 billion and closed on Friday at ₦398 billion. As a result, OPR decreased significantly by 10.53ppts to 19.25% w/w. At the end of the week, the secondary market closed on a mixed note, with the shorter end of the market being bullish, while the mid-long ends of the curve saw tepid activities with a bearish tilt. The yields on most benchmark instruments varied. The 91-Day (-41bps w/w), and 182-Day (-395bps w/w) bills inched lower w/w, while the 364-Day bill (+160bps w/w), 2-year (+64bps w/w), 3-year (+581bps w/w), 5-year (+301bps w/w), 10-year tenors +6bps w/w) inched higher w/w.
Currency: At the NAFEM, the Naira depreciated by ₦66.72 w/w to close the week at ₦1,666.72 per dollar.
Domestic Economy:
The Federal Government announced a nine-month programme beginning on October 31, 2024, that allows individuals to deposit dollar bills held outside the formal banking system without scrutiny. This comes after a successful $800 million domestic dollar bond issuance. Concerns about dollar stockpiling by citizens have surfaced amid successive years of currency weakness. We observe however that foreign portfolio investors are taking up Naira assets at these depressed currency valuation levels as foreign portfolio inflows improved in October (c.$1 billion), which trumps the foreign portfolio inflows observed in Q3’24 (c.$730 million).
Global: Major stock indices ended mostly lower across regions amid a flurry of earnings reports, economic data, and geopolitical concerns. US October nonfarm payrolls data showed an increase of 12,000 jobs, much smaller than economists’ estimate of a 113,000 rise. However, the unemployment rate held steady at 4.1%, reassuring investors the labour market remained on solid ground. After the jobs data was released, investors largely stuck to bets that the central bank would cut rates by 25 basis points in November. However., the S&P 500 (-1.38% w/w) and Nasdaq (-1.51% w/w) retreated as mixed earnings from tech giants Meta and Microsoft impacted growth stocks. Labor market disruptions from strikes and hurricanes added uncertainty, while a continued manufacturing slump raised concerns of renewed inflation. In Europe, the STOXX 600 Index fell 1.52%, influenced by Middle East tensions, weak corporate results, and tempered expectations of ECB rate cuts. The UK’s FTSE 100 Index was down 0.29%, after a new budget introduced higher taxes and borrowing, sparking market selloffs. Japan’s Nikkei rose 0.4%, as the Bank of Japan maintained rates amid political uncertainty. In China, the Shanghai Composite Index fell 0.84% w/w, as factory activity showed signs of recovery, though property sector improvements offered a tentative economic boost. Finally, In Hong Kong, the benchmark Hang Seng Index lost 0.41% w/w.
What will shape markets in the coming week?
Equity market: We expect another mixed sectoral performance to start out the new week, with selloffs in some large-cap names weighing on the market, amid cherry-picking activities across board.
Fixed Income: Following the bullish close to the past week, we expect more of the same sentiments to filter to the new week pending rate direction from next week’s NTBs auction.