Presco: Will Profit Fall For The Third Year?
Presco Plc has been losing profit since 2017 and the year-on-year profit drop marked the company’s trading all the way to the third quarter in 2019.
Will the final quarter end at a loss as happened in 2018 or will there be profit good enough to prevent profit dropping for the third straight year are the questions on the oil palm and rubber-producing company for the 2019 operations.
The company’s 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 the profit drop was sustained up to the end of September 2019. The drop was as much as 31 per cent year-on-year at the end of the third quarter with an after-tax profit of N3.6 billion.
The final quarter isn’t the critical earning period for the company, indicating that further profit improvement from the third quarter figure may not be expected at full year. Instead, a drop may be the case if the final quarter ends in a loss. That was the company’s position in 2018 when it reported an after tax profit of N5.3 billion at the end of the third quarter but closed the full year with a profit of N4.3 billion.
The downward trend in profit performance follows the absence of gains on biological asset revaluation – which was the profit booster that gave the company an extraordinary leap in profit in 2016. There is also the challenge of declining sales revenue, which the company faced for the second year in 2019. Rising finance expenses is yet another profit constraining factor in the year.
A gain of almost N25 billion on biological asset revaluation lifted the company’s after tax profit to N21.76 billion in 2016. The company’s profit dropped in 2017 and 2018 as losses took the place of gain on biological asset revaluation. There was neither gain nor loss in the asset values in 2019 as at the end of the third quarter.
Sales revenue amounted to N15.40 billion for Presco at the end of the third quarter operations in September 2019. That is a year-on-year decline of 5 percent, sustaining a decline in turnover after a decline of 4.6 percent at the end of 2018.
The full-year sales revenue outlook for Presco is estimated to be in the region of N20 billion in 2019. The company’s peak sales revenue is the N22.4 billion it posted in 2017, which declined to N21.34 billion in 2018.
Presco closed the third quarter operations with an after tax profit of N3.65 billion, which is a drop of about 31 percent year-on-year. The loss in profit momentum reflects the continuing absence of biological asset revaluation gain, declining sales revenue and a sharp growth in finance cost during the review period.
The full year profit outlook for the company is uncertain, as profit prospects within the final quarter are slim. The possibility of a loss in the quarter leaves a chance of ending the year with a lower profit figure than posted at the end of the third quarter. A profit in the final quarter will expectedly reduce the full year margin of decline or even step up to flat growth. A reappearance of performance enhancer – gain in biological asset revaluation is also not ruled out.
The company’s profit track shows a pattern of sharp rise and fall and the 2019 financial year looks very much like one of a continuing profit drop. In the preceding years, the company built profits from unsustainable channels.
A gain on biological asset revaluation produced 80 percent of pre-tax profit in 2016. Before its restatement, tax credit accounted for 57 percent of after tax profit in 2017. In 2016, the profit figure towered far above the company’s sales revenues of N15.7 billion.
There was pressure on margins in 2019, which came from an increase of 9 percent in input cost at the end of the third quarter against the 5 percent decline in sales revenue. That resulted in a drop of 9 percent in gross profit to N11.7 billion at the end of the period. Cost of sales had dropped ahead of turnover in the prior year and provided a cost saving centre for the company in the year.
Selling/administrative expenses grew by close to 12 percent over the same period and distribution expenses also went up as sales revenue declined. The further strain came from a drop of 31 percent in other operating income. The developments led to a drop of 19 percent in operating profit to N6.21 billion at the end of the third quarter.
Finance expenses constrained profit performance further with a sharp growth of 53 percent to N1.42 billion over the review period. The rising cost of finance reflects rising balance sheet debts. The company’s interest-bearing debts have grown from less than N18 billion at the end of 2018 to over N24 billion at the end of September 2019.
Earnings per share declined from N5.28 in the same period in 2018 to N3.65 for Presco at the end of September 2019. The company earned N4.30 per share at the end of 2018 and gave out N2 per share to shareholders in cash dividend.
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