Operating inefficiency dampens Presco’s profits

Background

Presco Nigeria plc is a public limited liability company incorporated on September 24, 1991, under Nigerian law. Its corporate head office is at the company’s Obaretin Estate near Benin City, Edo State.

Presco holds the Obaretin Estate (a concession of 7,000 hectares) and the Ologbo Estate (a concession of 11,000 hectares), both located in Edo State, and the Cowan Estate, a concession of 2,800 hectares in Delta State.

Presco today consists of: Oil palm plantations of 11,760 hectares of which 8,347 are mature; a palm oil mill with a capacity of 60 tons fresh fruit bunches/hour; a refinery/fractionation plant with a capacity of 100 tons/day, and a palm kernel crushing plant with a capacity of 60M tons/day.

Presco employs about 3,580 people: 476 are permanent staff and 3,104 are contract workers as of May 2013. Presco is a subsidiary of Siat s.a., a Belgian agro-industrial company specialised in industrial as well as small-holder plantations of tree crops, mainly oil palm and rubber, and allied processing industries such as palm oil mills, palm oil refining/fractionation, soap making and crumb rubber factories.

Siat diversified its activities into cattle ranching. Siat has as its shareholders agronomists and economists with experience in the development of agro-industrial ventures in the tropics.

The company has 1 billion shares outstanding with shareholders fund of N17.38 billion as of December 31, 2013.

Financial results for 2013

Presco has just released its financial results for 2013, which showed weak performance at both top- and bottom-line level.

Based on BussinessDay investigation, the company may not have recovered from the palm oil glut, which had been taking toll on price at the international level as revenue dwindles. For the year ended December 31 2013, Presco’s gross revenues fell by 24.89 percent year-on-year to N8.48 billion from N11.251 billion same periods in the prior year (FY12).

The bottom-line level was also hit as profit before tax (PBT) in the review period slumped by 39.8 percent to N2.33 billion in FY13, compared with N3.87 billion as of FY12.

The profit after tax (PAT) declined by 61.78 percent to N1.33 billion in FY13, as against N3.48 billion as of FY2012.

The above weak performance impacted negatively on profitability and efficiency of the company as net margin declined to 15.68 percent in 2013, from 30.90 percent in 2012. The company had envisaged that as a result of illegal importers of oil palm flooding the market with cheaper products, profits for 2013 may dip.

In other to boost performance, Presco has decided to diversify into the production of rubber.

Operating expense in the review period reduced by 20.46 percent to N1.71 billion in FY13, compared with N2.15 billion as of FY12, while operating expense ratio increased to 20.16 percent in 2013, as against 19.11 percent in 2012. Cost of production or input costs were controlled as it reduced to 15.68 percent in FY13, from 30.90 percent as of FY2013.

The company was able to produce each unit of product at a lower cost as gross margin reduced to 45.51 percent in FY13, as against 53.32 percent as of FY2013. Despite the lower cost of production, gross profits were down by 11.85 percent to N4.61 billion in 2013, compared with N5.23 billion in 2012.

The weak operational inefficiency also affected the returns on shareholders investment as return on average equity (ROE) shrank to 7.65 percent in FY13, from 20.47 percent as of FY2012.

Return on assets (ROA) also fell to 4.09 percent in FY2013, as against 13.80 percent as of FY2013.

Its total assets for the year ended December 2013, increased by 16.6 percent to N32.66 billion compared with 28 billion as of FY2012.

Share performance and outlook

Shares of the company closed at N37.05 May 6, 2014, on the floor of the Nigerian Stock Exchange, and total market capitalisation on the same day was N37.05 billion.

Price-to-book ratio of the company was 2.16x percent, while price-to-sales ratio stood at 3.29x, according to Bloomberg.

Presco supplies palm oil to food and consumer-products companies operating in Nigeria, including Nestle SA (NESN), Unilever, PZ Cussons plc (PZC), and Dangote Industries Ltd.

Its palm-oil and rubber expansion plans may result in annual profit of N20 billion to N25 billion, and sales of more than N100 billion, according to a statement released by the company in 2013.

BALA AUGIE