Low Payout Ratio, Increasing Liabilities Profile; Crashed Presco Valuation Metrics

Coy: Presco Plc (PRESCO)
Rating: Hold
Current Market Price: N44.80

Latest Dividend: N2.00
Year High: N75.00
Year Low: N44.80
Fair Value: N40.89
By: Jeariogbe Tunde Segun (Equity Analyst)

Key Investment Ratios

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

Company figures

• The Turnover figure posted for the half year performance stood at N10.54 billion, same as 9.52% below the turnover in similar quarter of 2018
• Cost of Sales maintained similar 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 comparable period by 22.80% at the current estimate of N4.88 billion against N6.32 billion
• Operating Expenses grew above comparable period’s by 12.38% to stand at N3.68 billion against the previous N3.28 billion
• Finance Cost through the first six (6) months of 2019 is valued at N997 million, this is 65.47% above the N603 million reported at the end of 2018 half year businesss cycle
• Profit before Tax equally stood below similar period by 32.11% at the current estimate of N3.88 billion 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 corresponding quarter by 49.91%. We assume that major contributing factor to the reduction is the lower income reported, while other un-stated fact accounts for the rest
• Having taken care of Tax Expense, a total of N3.01 billion was finally reported as the half year profit, this is below comparable quarter by 24.39%

• Current Asset was valued at N20.37 billion as against N22.87 billion at the end of 2018 half year. The difference between the two valuation is same as 10.91%
• Similarly, Non-Current Assets is valued at N47.29 billion, this is 44.84% lower than the N85.74 billion quoted in its 2018 half year result
• Meanwhile, Current Liabilities grew by 71.85% to stand at N22.38 billion as against the previously reported N13.02 billion in 2018 half year result
• In the same trend, Non-Current Liabilities grows above 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 worth N27.19 billion same ass 66% below the previous value of N79.96 billion
• Also, Retained Earnings dropped by 65.25% to stand at 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 the similar period of 2018. This implies that, Total Liabilities is 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 is far higher than the equity through the period, this against the position in 2018 when the company reported high Equity and lower Debt
• It was established that Equity is same as 40% of Presco’s Assets Value, this is a large drop when compared to the 74% achieved in similar period of 2018
• Going by the far below unity beta value (0.31), we can safely conclude that shares of Presco is 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 2018 half year.
• As noted above, the tax rate within the two periods compared are quite apart, and due to the few information available in 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 effort to control its direct cost
• Return on Equity stood at 11.09% against 4.99% of 2018, this is because the Equity value quoted in the current quarter is far below that of 2018 half year

Efficiency Ratios

• Operating Expenses to Turnover value is same as 34.98%, this is 45.22% efficiency improvement from the 28.16% estimated from 2018 half year financial indices
• Turnover to Total Assets Ratios stood at 15.59% against 10.73% when this is compared to ratio estimate in 2018 result, it is a 45.22% improvement in efficiency
• Working Capital Ratio a ratio that indicates a company’s effectiveness in using its working capital was estimated at -5.26x as against the positive ratio of 1.18x estimated in similar period of 2018
• We also tested the Working Capital Ratio, which confirmed that Current Assets stood below the current liabilities at the end of the period. The reverse is the case in 2018 half year result

Investment/Valuation Ratios

• At the end of the quarter, the management made N3.02 on every unit of Presco shares 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 was found to have replicated that EPS in 14.85 times, that is, the P/E-Ratio is 14.85x against 14.93x
• The said earnings per share is a 6.73% yield of the current market price of Presco at released this is almost same as 6.70% yield achieved in 2018
• Book Value per shares shows an over-valued position at N27.19 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 which stood above unity in the current period against the below unity estimate in the corresponding quarter

Valuation

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 N40.89 and have Rated it a Hold.