Dangote Sugar Towers above Operational Challenges

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Goddy Egene writes that despite the challenging operating environment, Dangote Sugar rode on the back of cost efficiency to record a 41% growth in profit in the first quarter of 2016

When the Chairman of Dangote Sugar Refinery (DSR) Plc, Alhaji Aliko Dangote assured shareholders recently that the company remained committed to delivering superior returns, many stakeholders might not have taken the assurance seriously.

Dangote gave that assurance during the annual general meeting (AGM) of the company in Lagos. The company paid N6 billion dividend for the year ended December 31, 2015.

Commenting on the performance of the company, Dangote said 2015 was a very challenging year as the political transition and economic slowdown impacted consumer spending and the global oversupply of crude oil weakened the naira, leaving an average Nigerian consumer with less purchasing power than in the past three to four years.

“In spite of this, we achieved a Group turnover of N101 billion in 2015, seven per cent higher than the turnover of N95 billion in 2014. Profit before tax NPBT) stood at N16 billion and Profit after tax at N15 billion. Our earnings before interest tax depreciation and armortisation (EBITDA) rose to N21 billion compared to N18 billion in the previous year,” he said.

He therefore pledged that the company remained committed to delivering superior returns to its shareholders.
Also speaking at the event, the acting Managing Director of DSR, Abdullahi Sule disclosed that 2016 commenced on a good footing as the company continued to increase its market share and implementing various initiatives and projects towards the actualisation of its target within the next five years.

“Achievement of the backward integration projects (BIP) targets remains our priority, and this will eliminate our reliance on foreign exchange as well as volatility of raw sugar prices, the highest single driver of our production cost,” Sule said.
In line with Sule’s disclosure that DSR commenced 2016 on a good footing, the company last week reported an impressive results for the first quarter(Q1) ended March 31, 2016.

First Quarter Performance
In a period when companies are recording decline in bottom line due to challenging operating environment, the management and board of DSR adopted an effective cost saving strategy to grow its bottom line by 41 per cent in Q1.

DSR posted revenue of N32.617 billion, up from N22.522 billion in 2015. Sales and distribution expenses reduced by 14 per cent from N581 million to N494 million, while administrative expenses and finance cost declined by 7.9 and 7.6 per cent from N1.118 billion to N1.029 billion and from 158 million to N146 million respectively. Profit before tax (PBT) rose by 34 per cent from N3.798 billion to N5.113 billion, while profit after tax (PAT) rose by 41 per cent from N2.374 billion to N3.339 billion.

Analysts’ Comments
Reviewing the performance of DSR’s performance, analysts at Afrinvest (West Africa), an investment banking firm, said posted a commendable growth in revenue for its Q1 as it grew by 44.8 per cent.
They said: “This striking growth was on the back of impressive volume growth which the Group recorded as sugar volume sales grew 23.2 per cent , increasing to 211,793 tonnes in Q1 of 2016 from 171,924 tonnes in Q1 of 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 per cent to 206,348 tonnes from 180,086 tonnes accounting for 97.4 per cent of total volume.”

According to Afrinvest, as part of its backward integration efforts, the company increased volume sales from Savannah Sugar, which was acquired in 2013 by the Group, increased sugar production by 71.2 per cent to 8,441 tonnes, also impacted on volume growth.

“Based on the 2012 Nigerian Sugar Master Plan (NSMP), a 70 per cent duty imposition on imported raw sugar, which was due since 2014 but was moved to 2016, was later negotiated for 20 per cent by the company with the Federal Government of Nigeria. This necessitated a 21.8 per cent price increase (from average selling price of N6, 218/tonne in 2015 to N7,574/tonne in 2016) as DSR was able to pass on the cost to consumers,” the analysts noted.
They explained that the leadership of DSR 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 NSMP, which is targeted at ending importation of Sugar by 2020, DSR is taking the major lead given its huge investment in backward integration, which over the next five years is expected to actualise this target. Sales to distributors continue to account for approximately 70 per cent of the company’s revenue while large corporate/industrial users account for 30 per cent 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 per cent price increase from 3.0 per cent to 20 per cent,” they said.

Higher profit
Afrinvest said against the backdrop of 20 per cent higher tariff in 2016 (relative to 10 per cent 2015) coupled with a 5.5 per cent higher global price of sugar in Q1:2016, cost of sales grew 52.0 per cent faster than revenue pressuring cost to sales margin to 79.2 per cent relative to 75.5 per cent in Q1:2015.
“Freight expense component of the cost of sales jumped 147.1 per cent to N1.0 billion from N0.4 billion 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 per cent, 20.6 per cent and 41.4 per cent respectively. Consequently, OPEX margin toned-down considerably from 7.5 per cent in Q1:2015 to 4.7 per cent in Q1:2016,” the added.

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

Raising Target Price
The analysts said in light of recent information on DSR, volume growth momentum and the approximately 22.0 per cent increase in price, they are somewhat tuned to project a better performance for the Group in the 2016 financial year.

“This is on the back of DR’s leadership of the sugar market and its leading pricing power in the industry in passing on higher cost to consumers should the 70 per cent tariff imposition becomes fully effective. We revised our revenue growth forecast to 20 per cent from the initial 3.0 per cent 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 per cent against 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.”