Decline in biological assets revaluation gains dampen Presco’s profit

A significant decline in biological assets revaluation gains have dampened the profit of Nigerian oil palm producer Presco Plc, hindering top line growth from trickling down to the bottom line.

For the year ended December 2015, Presco’s net income fell by 55.23 percent to N2.32 billion as against N5.19 billion as at December 2014. Sales increased by 14.34 percent to N10.44 billion, driven by decline in global prices of palm oil prices as well as the company’s aggressive planting.

The faltering performance at the bottom lines was as a result of an 81.62 percent drop in biological asset valuation to N1.06 billion, resulting in an inevitably  contraction in margins and reduction in the required returns to shareholders.

The fall in profits was as a result of a gross margin contraction of -5,587bps y/y to 80.1% and a -N1.2bn loss on biological assets revaluation, according to Kingston Nwosu equity research analyst with FBN Capital, in an emailed note to BusinessDay.

“Further down the P&L, income tax expense grew significantly to N593m from N27m in the prior year, worsening the loss after tax,” said Nwosu.

Presco’s net margin, a measure of profitability and efficiency, fell to 22.22 percent in 2015 from 56.84 percent in 2014. Gross margin reduced to 63.50 in the period under review as against 64.95 percent as at December 2014.

The Nigerian oil palm producer has embarked on aggressive expansion with a view to bolstering top lines and increasing its share of the market.

The company’s total land area increased by 18 percent to 16,650ha while mature palm trees increased by 46 percent to 15,356ha in 2015, according to a recent report by FBN Capital.

As a result of its expansion drive, finance costs increased by 95.22 percent to N707.15 million while total debt in the balance jumped by 75.47 percent to N4.56 billion.

Gearing ratio, which measures the extent to which a firms balance sheet are financed by either external borrowings or equity financing increased to 16 percent in 2015 as against 9 percent in 2014.

“Total loans amounting to N4.6bn were sourced from a combination of local banks and the CBN, in order to fund its rubber expansion programme and other capex needs,” said Nwosu.

Experts opined that the availability of improved oil palm nuts/seedlings, accessibility of fertiliser to farmers, flexible government control and adherence to good field maintenance practices are the prerequisite to deepening growth in a sector that was a major driver of the economy in the 60’s.

With the drop in global price of oil which makes up two thirds of government revenue and nearly all foreign exchange earnings, analysts say it is time for government, through private sector partnership, to invest copiously in the oil palm industry. This will help bolster non oil revenue.

Despite the significant drop in profit and margins contractions, Presco, known for its steady dividend policy, has recommended dividend payment of N1 billion.

This translates to a dividend payout of 43 percent while dividend gross yield stood at  2.80 percent. Return on equity (ROE) rose to 7.76 percent in 2015 from 17.86 percent in 2014, according to data compiled by BusinessDay.

Presco’s share price closed at N35.70 on the floor of the exchange while market capitalization was N35.70 billion.

 

BALA AUGIE