Presco: No Respite On Falling Profit
Presco Plc is losing profit for the fourth straight year and the downturn gained speed in the first quarter ended March 2020. The oil palm and rubber producing company lost 10.4 percent of the prior year’s profit at the end of 2019, accelerating to a 16 percent drop in the first quarter of the current financial year.
The company’s problem centres on disappointing sales revenue. It has been losing sales revenue since 2018 – which has sustained up to the first quarter of 2020. Weak commodity prices at the international market are the major constraint in building revenue.
The average selling price of crude palm oil declined by over 14 percent in 2019 to N409,271/tonne). That led to a drop of close to 8 percent in turnover for the company in the year.
The revenue drop slowed down to 2 percent in the first quarter but profit drop accelerated. That is pointing to some kinks in costs and input cost is the culprit – which rose by about 5 percent against the decline in sales revenue in the first quarter.
It is nevertheless a considerable improvement in the revenue-cost relationship in the first quarter compared to the company’s position at the end of last year. The cost of sales had climbed a clear 28 percent in 2019 against the drop in sales revenue. That forced a drop of 20 percent in gross profit.
Gross profit margin is still contracting on a year-on-year basis with a decline of 4 percent in gross profit in the first quarter. Compared to the closing position last year however, the gross profit margin has made a big leap from 64.5 percent to 78 percent at the end of the first quarter.
Further pressure on the bottom line in the first quarter came from a bad turn from other operating income of over N84 million in the same period last year to other operating loss of about N14 million.
Also, finance expenses on the company’s balance sheet debts of N23 billion remain torn on the flesh for Presco. Cash flow is under pressure from loan repayment with interest expenses. The company had to raise a new loan of about N3.4 billion in the first quarter in order to meet loan repayment and finance cost totaling over N5 billion.
Sales revenue amounted to N5.4 billion for Presco at the end of the first quarter of operations in 2020. That is a year-on-year decline of 2 percent, sustaining a decline in turnover for the third year running.
The company closed last year’s trading with a turnover of N19.7 billion, which is a drop of 7.6 percent. Its sales revenue peaked at N22.4 billion in 2017 but has since then faced downward. The decline in the average price of the company’s products is responsible, which is beyond its control.
Presco closed the first quarter operations with an after-tax profit of N1.8 billion, which is a drop of 16 percent year-on-year. This is accelerating from a drop of 10.4 percent at the end of last year. The summary of the company’s operations in the first quarter is therefore some strengthening of revenue against further weakening of profit capacity.
The company’s profit track has followed a pattern of sharp rise and fall, changing gear to one of a continuing drop from 2019. Its profit fell in 2017 from the height of close to N22 billion in 2016 to N5.7 billion. It dropped further to N4.3 billion in 2018 and N3.8 billion in 2019.
The 2016 profit height was built mostly with a gain on biological asset revaluation – which contributed 80 percent of pre-tax profit in the year. A change from a loss of N2.6 billion on biological asset revaluation in 2018 to a gain of N1.8 billion moderated the profit drop in the year.
Pressure on margins is continuing this year from an increase of 4.6 percent year-on-year in input cost at the end of the first quarter while sales revenue is still downward headed. That resulted in a drop of 4 percent in gross profit to N4.2 billion at the end of the review period.
Management kept selling/administrative expenses flat at below N1.3 billion over the same period and cut down distribution expenses by 23 percent to N61 million. Other operating income changed direction from a 20 percent increase last year to a loss of almost N14 million at the end of the first quarter. The developments led to a drop of over 8 percent in operating profit to N2.8 billion at the end of March 2020.
Finance expenses declined by over 7 percent to N499 million in the first quarter, making a favourable turn from a 59 percent advance at the end of 2019. With that, management cut down the proportion of operating profit devoted to finance cost from 34 percent at the end of 2019 to 17 percent in the first quarter.
Earnings per share declined from N2.14 in the first quarter of 2019 to N1.8 at the end of March 2020. The company earned N3.84 per share at the end of 2019 and gave out N2 per share to shareholders in the cash dividend.
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