Presco outperforms peers on returns, operating margin

In the nine months ending September 30, 2024 (9M 2024), Presco Plc posted one of its best financial performances as it was the company’s best-ever earning year. During the period, the palm oil maker posted revenue of N128.6 billion, marking a 67 percent year-on-year growth from the N76.9 billion revenue recorded in 9M 2023.

Presco also recorded a profit after tax of N51.8 billion during the first nine months of 2024, representing a 121 percent year-on-year increase from the N23.5 billion net profit posted in the corresponding period of 2023. For companies operating in the real sector, the earnings growth being reported by Presco is a total departure from the entire sector’s outlook, thus spotlighting the company’s performance this year.

However, within real and financial sectors in Nigeria, Presco Plc is outperforming every other listed company in Nigeria on three metrics.

Return on Assets

With a Return on Assets (RoA) of 36 percent as of 9M 2024, Presco had the highest RoA among companies listed on the NGX. Coming in quite distant second place is Okomu Oil Palm Company with a RoA of 26 percent.

Return on Assets basically describes how efficiently a company uses its assets to generate profits. In simpler terms, it shows how much profit a company makes for every Naira of assets it owns. An RoA of 36 percent shows that the company has crafted a model that is very efficient at turnings its investments in assets into earnings.

In terms of cash management and efficiency in Nigeria, the oil palm producers are in a class of their own, with Okomu Oil coming in second place in terms of RoA. Transcorp Power had an RoA of 20 percent, while Dangote Cement recording an RoA of 6 percent. In the financial services sector, GTCO Holdings posted an RoA of 9 percent in 9M 2023.

Read also: Okomu Oil announces change in shareholders’ dividends payout date

Gross Margin

Presco Plc also outperformed other companies in terms of gross margin, posting a 72 percent gross margin. Most of the company’s revenue came from the sale of crude and refined palm oil, a product that sells in the global market for about $1,080 per tonne and has appreciated by about 40 percent in one year.

The depreciating Naira for most of 2024, in conjunction with the rising global price of palm oil, has greatly helped Presco’s revenue potential this year. Okomu Oil Palm also posted a gross profit of 57 percent, highlighting the high-margin nature of that business.

Operating Margin

In a year when inflation is greatly eroding the margins for most Nigerian businesses, Presco has been able to weather the storm. Despite a 45 percent year-on-year increase in operating expenses to N23.2 billion in 9M 2024 from N16 billion in 9M 2023, the company maintained a robust operating margin of 58 percent.

Presco, like other companies, was affected by 2024’s inflationary pressures, as its operating margin in 9M 2024 declined by 300 basis points (bps) from the 61 percent recorded in 9M 2023. However, in terms of operating margin, the only company which came close was Aradel Holdings Plc, with an operating margin of 45 percent. Okomu Oil Palm followed with an operating margin of 39 percent, Seplat Energy posted an operating margin of 38 percent, with Transcorp Power posting an operating margin of 36 percent.

Given the depreciation of the naira, companies with dollar-earning potential are well-positioned to outperform others in 2024.

One notable performance indicator that shows Presco’s strength is Return on Equity (RoE), as the company posted a 61 percent RoE for 9M 2024. However, Transcorp Power surpassed this with a 72 percent RoE during the period.

With a Free Cash Flow (FCF) of N53.1 billion, the company has a free cash flow yield of 11 percent, surpassed by UAC Nigeria, with an FCF yield of 15 percent. Presco’s cash generation over the past nine months has been remarkable, especially considering its market size, with figures that some might view as extraordinary.

With a share price of N485.40 as well as a 152 percent year-to-date gain, Presco is still on track for further gains in the market. The stock has a P/E ratio of 9.38x, suggesting an undervaluation when compared to some of NGX’s best performers outside the financial services sector.