Presco PLC’s interim first quarter 2022 results released to the investing public on NGX, show that Q1 2022 profit after tax for the period ended March 31, 2022, grew by 53% to N5.889 billion from N3.844 billion reported in Q1 2021 on top-line growth of 147% compared to Q1 2021. Overall, earnings per share grew by 51% to 582 kobo per share from 384 kobo reported in Q1 2021.
A cursory view of the company’s annual reports shows that the Oil palm producer Q1 2022 revenue growth deviated from its 4-year average growth of 38% per year as revenue grew by 147% to N19.613 billion from N7.927 billion reported in Q1 2022. Though the company’s revenue was higher in 2021 compared to 2020, the cost of generating the revenue was higher in 2021 than in 2020, as the cost of sales grew by 100.86% in 2021 compared to 2020FY. It further grew by 281% in Q1 2022 compared to Q1 2021.
The growth in revenue (including prior periods) is on a significant rise in the company’s main business segment; sale of crude oil palm and refined products. For instance, the rise in revenue in 2021 compared to 2020 was due to the significant rise in the sale of crude and refined products buoyed by the government border closure law during the period, as consumers have to heavily rely on locally produced oil palm products since imports of food and other commodities was hampered due to the closure. But the high cost of sales, overheads, finance costs, etc., have always dampened the margins. For example, cost of sales, admin expense, and finance costs grew by 281%, 151% and 400% respectively compared to Q1 2021, sponsored by rising raw materials consumed, higher plant maintenance costs and high staff overhead.
The growth is however not surprising as the company has over the years embarked on massive expansion. In 2019, the company completed the construction of a new 350 tons per day palm kernel crushing plant and 30 tons palm kernel shell boiler. The expansion of its palm oil mill from 60 tons of fresh fruit bunches per hour to 90 tons per hour and 800 tons per day of vegetable oil refining was completed in 2020. In 2021, the company secured a N23 billion loan from three banks; GTCO, Zenith, and Stanbic IBTC to purchase SIAT shares in SNL.
No doubt, the company has been recording strong growth in revenue, margins, and earnings over the years, especially in recent years, but what is paramount now is how to manage its debt profile, as well as market risks in the midst of spiraling inflation, the recent hike in benchmark interest rate by CBN and negative impact of Federal government policy change.
The company’s massive expansion equally expanded the balance sheet size as the total assets of the company stood at N137.364 billion as of March 31, 2022, from N59.261 billion in 2018. The company’s borrowings have risen to N51.138 billion as of March 31, 2022, from N11.799 in 2018; with 45% of the loans as a bridge to bond facility, which are likely to be impacted by market changes. Already the net debt to equity ratio is surging from 54% in 2020 to 115% in 2021. Also, foreign exchange risk is likely to impact the company’s earnings as the 2021 average rate of N456.59 to the dollar is expected to increase this year.
It appears Presco’s next step is to address its rising debt portfolio which could mean a possible rights issue or injection of capital from its majority shareholders. This will have a significant impact on its share price down the line.