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There are indications that rising debt levels expose Presco Nigeria Plc to market risk amid growing inflation and higher benchmark interest rates.
Analysts at CSL Stockbrokers in a recent note to clients said elevated leverage means the management of the largest oil palm producer needs to raise additional capital through a rights issue or from the majority shareholder, SIAT SA, to reduce debt levels.
Of course, the company finances the larger part of its balance-sheet with borrowed money as debt to equity ratio increased to 150.29 percent in June 2022 from 26.37 percent the previous year.
Interestingly, the ratio was as low as 11.67 percent in 2017, the year that the central bank introduced a foreign exchange policy that enhanced the flow of foreign currency in the foreign exchange market.
It is important to note that the palm oil producer has used the borrowed money to underpin its expansion plans and magnify earnings as it continues to take advantage of government policies to increase its share of the market.
Presco owns four large oil palm estates covering 39,500 hectares (including the recently announced Siat Nigeria Ltd acquisition), as well as palm oil processing, refining and storage capacities.
“In recent years, revenue and profitability benefited from growth in FFB production, high Crude Palm Oil (CPO) market prices and efficiencies of scale,” said analysts at CSL Stockbrokers.
It is noteworthy that the company has generated reasonable earnings that are enough to service or meet debt obligations.
Times coverage ratio stood at 5.60 as at June 2022, however it is much lower than 30.16 the previous year.
Finance costs surged by 779.24 percent to N3.87 billion as at June 2022 from N440.18 million.
A coverage ratio, broadly, is a metric intended to measure a company’s ability to service its debt and meet its financial obligations, such as interest payments or dividends. The higher the coverage ratio, the easier it should be to make interest payments on its debt or pay dividends.
The lower the ratio, the more the company is burdened by debt expenses and the less capital it has to use in other ways. When a company’s interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable.
Presco has outperformed the broad market so far and investors have confidence in the company’s strategic plans.
Its share price has gained 62.41 percent so far this year, outperforming the NGX-ASI index 16.24 percent gains.