Nigeria | Dangote Sugar Refinery Plc Q1:2016 Earnings Update

LAGOS, Nigeria, Capital Markets in Africa — Dangote Sugar Refinery Plc (“DANGSUGAR” or “the Company” or “the Group”) published its Q1: 2016 results last week with the result showing an impressive performance for the period. Revenue for the Group was up 44.8% Y-o-Y to N32.6bn vs. N22.5bn in Q1:2015 on the back of increased sales volume and price increase which lifted the overall revenue for the Group. Cost restraint measures noticed across major operating cost lines as well as lower effective tax rate impacted positively on profitability as the PAT increased markedly by 40.6% Y-o-Y to N3.3bn from N2.4bn in Q1:2015. Our outlook for the Company remains positive on the back of the growing volume and the relatively easier cost pass-through mechanism to the consumers. We upgrade our rating to a “BUY” from “ACCUMULATE”.                                                                                                        

Commendable Leap in Revenue on Price and Volume Growth
DANGSUGAR posted a commendable growth in revenue for its Q1:2016 result as it grew by 44.8%Y-o-Y (Q1:2016 – N32.6bn; Q1:2015 – N22.5bn). This striking growth was on the back of impressive volume growth which the Group recorded as sugar volume sales grew 23.2% Y-o-Y, increasing to 211,793 tonnes in Q1:2016 from 171,924 tonnes in Q1:2015. The volume sales growth was majorly driven by increased demand which spurred higher production at the Lagos Apapa factory which grew by 14.6% to 206,348 tonnes from 180,086 tonnes accounting for 97.4% of total volume. As part of its backward integration efforts, increased volume sales from Savannah Sugar, which was acquired in 2013 by the Group, increased sugar production by 71.2% to 8,441 tonnes, also impacted on volume growth. Based on the 2012 Nigerian Sugar Master Plan (NSMP), a 70.0% duty imposition on imported raw sugar, which was due since 2014 but was moved to 2016, was later negotiated for 20.0% by the Company with the Federal Government of Nigeria. This necessitated a 21.8% price increase (from the average selling price of N6, 218/tonne in 2015 to N7,574/tonne in 2016) as DANGSUGAR was able to pass on the cost to consumers.

The leadership of DANGSUGAR in the Nigerian sugar market on the back of its price competitive strategy, despite the rising competition, has continued to support the Group’s revenue performance. In alignment with Nigeria’s Sugar Master Plan which is targeted at ending the importation of Sugar by 2020, DANGSUGAR is taking the major lead given its huge investment in backward integration, which over the next 5 years is expected to actualize this target. Sales to Distributors continue to account for approximately 70.0% of the Company’s revenue while large corporate/industrial users account for 30.0% of the Company’s sales. Consequently, we revised upward our revenue forecast for FY: 2016 on the back of the growing industrial demand impacting volume growth and the recent 21.8% price increase from 3.0% to 20.0%.
  
Improved Operating Cost Efficiency Buoying Profitability
Against the backdrop of 20.0% higher tariff in 2016 (relative to 10.0% 2015) coupled with a 5.5% higher global price of sugar in Q1:2016, the cost of sales grew 52.0% Y-o-Y faster than revenue pressuring cost to sales margin to 79.2% relative to 75.5% in Q1:2015. Freight expense component of the cost of sales jumped 147.1% Y-o-Y to N1.0bn from N0.4bn in Q1:2015 and could be 3.5x higher in subsequent quarters when the full effect of the hike in tariff is absorbed. Operating efficiency was however noticed in administrative and distribution expenses despite the increased volume sales and the gas/fuel supply challenges that the group experienced in the quarter. Notably, salaries & related costs, selling & marketing expenses and management fees were significantly down by 14.6%, 20.6%, and 41.4% Y-o-Y respectively. Consequently, OPEX margin toned-down considerably from 7.5% in Q1:2015 to 4.7% in Q1:2016.

Moderate operating cost profile impacted on profitability as the PBT grew 34.6% Y-o-Y to N5.1bn from N3.8bn in Q1:2015 though the pre-tax margin deteriorated to 15.7% as against the Q1:2015 level of 16.9%. Effective tax rate however moderated to 34.7% from 37.5% impacting on PAT which grew faster than PBT at 40.6% while the net margin settled at 10.2% in Q1:2016 from 10.5% in Q1:2015.

We Revise Our Target Price on DANGSUGAR from N6.73 to N7.45 and our Rating to a “BUY”
In light of recent information on DANGSUGAR volume growth momentum and the approximately 22.0% increase in price, we are somewhat tuned to project a better performance for the Group in the 2016 financial year. This is on the back of DANGSUGAR’s leadership of the sugar market and its leading pricing power in the industry in passing on the higher cost to consumers should the 70.0% tariff imposition becomes fully effective. We revised our revenue growth forecast to 20.0% Y-o-Y from the initial 3.0% on the assumption that the Group will sustain volume growth at the current run rate given its dominance of the Nigerian sugar market. We also revised our direct cost assumptions to reflect the recent change in the cost profile on the back of increased tariff. Our blend of absolute and relative valuation methodologies revealed a target price of N7.45 as against the previous target price of N6.73. This implies an upside of 29.1% from the market price of N5.77 as at 22/04/2016. The target price is also at an implied forward P/E and P/BV of 5.2x and 1.2x against the trailing multiples of 5.5x and 1.1x respectively. We reviewed our investment recommendation from “ACCUMULATE” to “BUY”.

Source: Afrinvest (West Africa) Limited Research Team