Dangote Sugar Consolidates Growth 

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Another bounteous harvest awaits shareholders of Dangote Sugar Refinery Plc following its impressive nine months results, showing a jump of 162 per cent in profit, writes Goddy Egene

“Our focus in the current year and for the future remains leveraging our strengths to maximise every opportunity to generate sales, increase our market share and create sustainable value for our stakeholders.”

Those were the words of the  Managing Director of Dangote Sugar Refinery (DSR) Plc to  shareholders of the company at the annual general meeting (AGM) for the 2016 financial year.

DSR has been a regular dividend paying company since it became listed on the Nigerian Stock Exchange (NSE) in 2008. The company had paid N7.2 billion dividend that translated to 60 kobo per share. The Chairman of DSR, Alhaji Aliko Dangote had told the shareholders that the company was in a position to pay a higher dividend but it retained some part of its earnings for investment in its backward integration programme.

“Our focus is the actualisation of our backward integration plans, your board will continue with the effective management of resources to achieve this target, sustainable financial future for the company, and in the turn drive sustainable returns to shareholders,” Dangote had said.

Based on the nine months results released recently, shareholders should expect  higher dividend for the current financial year.

Nine months performance 

A look at the financial performance of DSR for the nine months ended September 30, 2017, showed that it recorded revenue of N163 billion, showing an increase of 41 per cent above the N115.3 billion posted in the corresponding period of 2016. Cost of sales went up from N96.3 billion to NN121 billion, making the firm to close the period with gross profit of N41.473 billion as against N19 billion in 2016.

Profit before tax (PBT) grew from N15.328 billion in 2016 to N39.251 billion, while profit after tax (PAT)  jumped from N16.5 billion to N25.4 billion. Gross profit margin improved significantly from 19 per cent to 41.5 per cent, just as net margin improved from 13 per cent to 24 per cent.

Commenting on the results, Sule said: “The company’s performance remains promising despite the various economic challenges in the country.  Increasing our local market share and achievement of our backward integration sugar production plans, remains our utmost focus.”

According to him, Dangote, “Sugar for Nigeria” continues to gain momentum with the signing of the Niger State Project MoU.

“The rehabilitation of Savannah Sugar’s infrastructure and expansion of the cane fields is well underway. Despite the numerous challenges the Board and Management is resolute and will continue with the quest for sugar sufficiency in Nigeria, through our backward integration goals,” he added.

The company explained that  the various challenges facing increased its operations, the balance sheet remains strong with Zero Gearing ratio.

“The company has capability to generate sufficient cash flow to fund its operations, and will be able to raise any additional fund for the Backward Integration Projects (BIP), if the need arises.  We are optimistic that barring any unforeseen circumstance, the Company will achieve its set goals through the continued review and implementation of its initiatives to grow sales and market share with focus on the actualisation of the set goals for the backward integration projects,” the company said.

 

Analysts’ assessments 

Assessing the nine months performance,  analysts at Cordros Capital  raised DSR’s  earnings before interest tax, depreciation and amortisation (EBITDA) and net profit  for the year ending  December 31, 2017, by 50 per cent each  and for 2018-2019F by 55 per cent and 56 per cent  respectively.

According to them, the upward revision follows better margin outlook on declining per tonne production cost, which we expect will offset price cuts.

“Our revised estimates translate to EBITDA and net profit growth of 158 per cent (+131% in 9M-17) and 155 per cent (+162 per cent in 9M-17) respectively in 2017F, and three per cent and  five per cent  average growth in 2018-2019F. On net, we raise target price (TP) for the stock by 39 per cent and upgrade our rating to buy. We roll forward our estimates and valuation by one year,” they said.

They cut   revenue estimates for 2017-2019F by 10 per cent average, on downwardly revised volume (for 2017F only) and selling price estimates.  They explained that sales volume (-17 per cent in 9M-17) has been hit by weakened demand, and more recently, by both the influx of smuggled sugar and the terrible condition of the road to the Apapa factory.

“And since reaching N17,010 average per bag in Q1, we estimate that average selling price is down by 12 per cent based on Q3-17 price of N14,912/bag. Compared to 2017F, we estimate DSR’s selling price over 2018-2019F will be lower by four  per cent average as management focuses on market share growth (we estimate average  seven per cent volume growth), having more than surpassed the gross margin target of 20 per cent (by 120 bps) between April-September 2017 following significant decline in per tonne production cost. While retaining average growth of 10 per cent in freight income, net impact is for two per cent growth in gross revenue over our forecast period,” they said.

They also  raised gross margin estimate for 2017F by 983 bps to 27 per cent, following the significant formation over 9M-17, particularly the last two quarters (33 per cent average).

“We also raise estimates for 2018-2019F by about 1,000 bps average, on the assumption that the expected cut in selling price will trail decline in per tonne production cost. Upside risks to our per tonne production estimate (down consistently q/q to -34 per cent between Q3-17 and Q4-16) include (1) better energy efficiency and stronger exchange rate, (2) stable outlook of global raw sugar prices, and (3) positive mix from growing contribution of higher margin Savannah. Downside risks to our margin estimate include (1) deeper-than-expected cut in selling price and (2) an upturn in global prices of raw sugar (sugar prices for 2019 delivery are higher by four per cent  for November contracts),” they said.

Strong earnings growth outlook 

In their own assessment,  analysts at FBN Quest said DSR  growth story over the medium term is compelling and forecasting earnings per share(EPS)  growth to average 45 per cent  over the 2017-19E period.

“We expect the company’s dominance of the sugar industry to persist well beyond the next few years given the firm’s aggressive backward integration project which is in line with the federal government’s sugar master plan. In comparison with peers which have struggled, DSR has successfully signed key land acquisition agreements. The most recent is a 60,000 hectare Tunga Project in Nasarawa which accounts for c.55% of DSR’s near term production ambition. According to management, the firm expects to produce around one million tonnes per annum (1MTPA) of finished sugar domestically, equivalent to two-thirds and 50% of current and projected national sugar demand by 2022,” they said.

National Sugar Consumption to rise

Nigerian sugar consumption is estimated at 8kg/capita, which according to the analysts,   pales in comparison with African peers South Africa (46kg/capita) and Ghana (16kg/capita) respectively. “Although sugar demand growth may have been subdued in recent years, we believe growing domestic sugar and ethanol (a by-product) production are likely to have a positive impact on sugar consumption over the medium term. Local production costs are estimated at a fraction of imports and we expect relatively subdued costs to reflect in market pricing. Other drivers for future growth are positive demographic trends and an improving economic outlook,” they said.

 

Bullish on near term performance

According to them, in the near term,  they  forecast full year sales and earnings growth of 29 per cent and 121 per cent  to N218.4 billion and N31.8 billion  respectively in 2017E.

“Our projections are primarily driven by a +42 per cent  rise in finished sugar prices. We expect that H2 sales growth will be modest compared with what DSR delivered in H1 due to base effects. Our 2017E earnings growth forecast of 121 per cent  y/y compares with 73 per cent y/y for our consumer goods coverage universe,” they said.

 

CBN’s policy central to improved profitability

The analysts said that benefits from increased central bank interventions in the FX market have eased production costs. According to them, management now indicates that the firm’s average FX rate is around N320/US$, compared with N450/US$ a year ago.

“Additionally, increased utilisation of gas compared with LPFO (which is 2x more expensive) bodes well for sugar production at the Lagos Refinery. Gas accounted for all of DSR’s production energy requirements in Q3. We expect this trend to persist through Q4,” they stated.