Presco isn’t hopeful of achieving a strong growth in sales revenue this year and profit is headed for a decline for the second year based on the first quarter performance. The oil palm producing company experiences fluctuating earnings records and another down year looks very likely for it in 2014. First quarter ended with a flat growth in sales revenue and full year outlook is indicating a weak growth after a major drop in 2013.
The company’s profit fell from its 2012 peak last year and another decline is to be expected based on the first quarter growth rate. The company’s critical earning periods are the first two quarters of the year and the inability to achieve a strong profit growth in the first quarter seems to underscore a difficult year ahead for the company in 2014.
At the end of the first quarter, the company reported a net profit figure of about N407 million, which is a moderate improvement of 8.9% over the corresponding figure last year. Full year net profit figure is forecast at N1.2 billion for the company at the end of 2014. This will be a decline of 10.4% from the full year net profit figure of N1.34 billion in 2013. Profit growth is expected to slow down significantly in the second half of the year, which is the company’s off season.
The company’s profit had dropped by 62.2% to a three-year low in 2013 from the 2012 peak of N3.55 billion. Rising cost, more than slowing sales explain the weakening profit capacity of the company. Mr. U. Pilani, the company’s chief executive officer, couldn’t grow wealth for shareholders last year on falling profit margin. He is still knee deep into that problem in the current year.
The company closed the first quarter with sales revenue of about N2.11 billion, which is a marginal increase of 5.5% over the corresponding figure in the preceding year. The full year turnover is projected at N8.8 billion for Presco in 2014. This will be an improvement of 3.8% over the full year revenue figure of N8.48 billion in 2013. Sales revenue had dropped by 24.6% from the 2012 peak of N11.25 billion in 2013.
The full year profit and revenue projections are subject to wide fluctuations that are a fact of the oil palm extraction business. Sales revenue depends on product yield, which in turn is affected by changing weather conditions. Full year earnings outlook therefore changes significantly from quarter to quarter with major slow downs, even declines in the second half. For instance, the company’s full year net profit of N1.34 billion in 2013 was a drop from the third quarter figure of N1.89 billion. Okomu Oil also closed its third quarter of last year with a net profit of N3.06 billion but ended the year with just N425 million.
Cost of sales grew ahead of sales revenue in the first quarter at 6.8% compared to 5.5%, which encroached further into profit margin. Gross profit improved by 3.6% to N1.09 billion during the period, while gross profit margin declined from 52.5% in the first quarter of last year to 51.7% in the current year.
Further pressure on the bottom line came from an increase of 31.2% in selling and administrative expenses as well as a drop of 32.5% in other operating income during the review period. An upsurge of 687.5% in income tax expense created the difference between a growth of about 57% in pre-tax profit and the moderate improvement of 8.9% in after tax profit for the company in the first quarter.
Apart from a few changes, the company’s balance sheet has not changed significantly from the closing figures for the 2013 financial year. Current financial liabilities have increased by 54.3% to N1.08 billion, trade and other receivables have grown by 24.6% to N2.39 billion and cash and bank balances are up by 34.4% to N172 million.
Purchase of plant and equipment created cash flow constraints for the company during the period. Net cash used for investing activities doubled at N2.01 billion at the end of the first quarter, which could not be financed fully with a net cash of N1.8 billion generated from operating activities. With a net cash of N156 million used in financing activities, the company closed its first quarter with a net decrease of N364 million in cash and cash equivalents against a negative opening cash balance of N548 million.
The company earned 41 kobo per share at the end of the first quarter, inching up from 40 kobo in the corresponding quarter last year. It is expected to close the year with earnings per share of N1.20 based on the current projection. It earned N1.34 per share for its 2013 operations.
For the company to prevent a decline in after tax profit for the second year, profit growth needs to accelerate in the remaining quarters. It needs to earn an average of N311 million in net profit per quarter for the remaining three quarters.