Presco 2019H1: Hold, Despite Shrinking Valuation Metrics

Company: Presco Plc
Rating: Hold
Current Market Price: N44.80
Latest Dividend: N2.00
Year High: N75.00
Year Low: N44.80
Fair Value: N40.89
Equity Analyst: Tunde Segun Jeariogbe

Key Investment Ratios
• In this report, we observed the 2019 half-year financial records of Presco Plc, compared the same with similar result released in 2018 to establish growth.
• Generally, performance for the year was low when compared with a similar period in 2018.
• While attempting to rightly value each unit of Presco shares, one major disadvantage is the management’s payout ratio in the past two financial years.
• We observe that despite improvements in the profit line in the 2017 full year performance indices, the management paid N2.00, which reduced the growth expectations and invariably depressed the company’s share price.
• While comparing the released data for the current quarter we noticed that the management of Presco only grew its liabilities, while all the Asset elements dropped outstandingly against those of a similar period in 2018.
• The impact of the above is a substantial reduction in the shareholders’ funds against the comparable quarter in 2018 and a 65.47% increase in the amount reported as Finance Cost within both periods.

Company figures
• The Turnover posted for the half-year performance stood at N10.54 billion, same as 9.52% below the turnover in the similar period of 2018.
• Cost of Sales maintained same impact on Turnover as in the comparable year, though the quoted Cost of Sales for the current quarter is 5.70% below that of 2018.
• Operating Profit equally stood below that of the comparable period by 22.80% at the current estimate of N4.88 billion, from N6.32 billion.
• Operating Expenses grew above comparable period by 12.38% to N3.68 billion from the previous N3.28 billion.
• Finance Cost through the first six months of 2019 is valued at N997 million, which is 65.47% above the N603 million reported at the end of 2018 half-year business cycle.
• Profit before Tax equally stood below a similar period by 32.11% at the current estimate of N3.88 billion, as against N5.71 billion in 2018 H1.
• Although the report did not provide enough reason for the reduced tax expense, the tax paid at the end of the quarter stood below that of the corresponding quarter by 49.91%. We assume that the major driver of this reduction was the lower-income reported, while other unstated facts accounted for the remainder.
• Having taken care of Tax Expense, a total of N3.01 billion was reported as half-year profit, which is the below that of the comparable quarter by 24.39%.

• Current Asset was valued at N20.37 billion, as against N22.87 billion at the end of the 2018 half-year. The difference between the two valuations is same as 10.91%.
• Similarly, Non-Current Assets is valued at N47.29 billion, 44.84% lower than the N85.74 billion reported in its 2018 half-year.
• Meanwhile, Current Liabilities grew by 71.85% to N22.38 billion, as against the previously reported N13.02 billion in the 2018 half-year result.
• Similarly, Non-Current Liabilities grew above the similar quarter of 2018 by 15.89% at the current estimate of N18.10 billion, compared to N15.62 billion in 2018.
• Net Assets is therefore estimated to be worth N27.19 billion, the same as 66% below the previous value of N79.96 billion.
• Also, Retained Earnings dropped by 65.25% to N27.19 billion versus the N78.25 billion in 2018.

Financial Strength/Solvency Ratios
• Debt Ratio is currently estimated at 0.60x, 126.83% above the 0.26x estimated in a similar period of 2018, which implies that Total Liabilities is the same as 60% of Total Assets.
• Total Debt to Equity was equally estimated at 1.49x as against 0.36x estimated in the comparable quarter. This simply implies that Debt was far higher than equity through the corresponding period of 2018 when the company reported high Equity and lower Debt.
• It was established that Equity was the same as 40% of Presco’s Assets Value, a significant drop when compared to the 74% achieved in the similar period of 2018.
• At 0.31, (far below unity beta value), we can safely conclude that shares of Presco are relatively not liquid.

Profitability Ratios
• Profit before Tax had been estimated to be 36.81% of the Turnover Figure as against the 49.06% achieved at the end of the 2018 half-year.
• As noted above, the tax rate within the two periods compared are quite apart, and due to the limited information available on the company’s earnings documents, we cannot readily ascertain the reason for the difference.
• Cost of Sales was 20.22% of the Turnover figure this is only 4.22% above the 19.40% estimated in 2018. This is a confirmation of the management’s effort to control its direct cost.
• Return on Equity stood at 11.09% against 4.99% of 2018, because the Equity value quoted in the current quarter is far below that of 2018 half-year.

Investment/Valuation Ratios
• At the end of the quarter, the company reported N3.02 on every unit of Presco listed on the floor of the exchange. This is 24.39% below the N3.99 earned at the end of 2018 half-year
• The price of Presco shares as at the time this report was made available to the investing public had replicated that EPS in 14.85x, translating to a 14.85x P/E ratio, as against 14.93x in the preceding half-year.
• The said earnings per share is a 6.73% yield of the current market price of Presco at the released date, which is almost same as the 6.70% yield achieved in 2018.
• Book Value per share shows an over-valued position at N27.19, as against the previous estimate of N79.97, this is due to the large drop in the Net Assets Value.
• Further confirming this position is the Price to Book value at above unity in the current period against the below unity estimate in the corresponding quarter.

While valuing Presco shares, we considered the low Pay-Out Ratio as noted above, the large increase in the Liabilities instruments which did not result to improvement its Assets and Profit for the year, and the large reduction in the Net Assets Value. We have fairly valued each unit of Presco Plc share price for N40.89and have Rated it a Hold.