By Modupe Gbadeyanka
The 2017 financial year was good for Dangote Sugar Refinery Plc despite some challenges the company faced.
During the year, the firm had to deal with less expensive sugar smuggled into the country, which impacted on its sales and market share, which dropped to 60 percent.
But despite this, the company managed to grow its revenue by 20 percent year-on-year, while the average selling prices went up by 43 percent y/y to offset a 16 percent y/y decline in sugar volumes sold during the year.
According to Ifedayo Olowoporoku of Vetiva Capital Management Limited, the top line figure came in at a record high of N204 billion, marginally below expectation.
She said the deviation was largely driven by lower than expected volume rollout in Q4’17 (3 percent q/q rise versus 11 percent Vetiva estimate) as well as some price cut recorded within the quarter.
Vetiva said whilst management noted that government’s effort to curtail smuggling has been somewhat impactful, the company has had to take further price cuts in 2018 amidst intense competition (Current price: c.N280,000/ton vs. FY’17 average: N312,720/ton).
Also worthy of note is the shift in regional sales breakdown with percentage of volumes to Lagos and other Western region moderating significantly to 37 percent (FY’16: 59 percent, FY’15: 56 percent).
According to Vetiva, the terrible road conditions around the Apapa environs in Lagos continue to impact business negatively.
From the analysis, supported by well contained Operating Expenses, stronger (y/y) selling price, as well as moderation in FX related production cost, FY’17 EBIT margin rose to 23 percent (FY’16: 10 percent).
With this, EBIT rose by 171 percent y/y to N47 billion, albeit 12 percent lower than had expected as price cuts in Q4’17 drove a 970bps q/q moderation.
Bottom line was further supported by an extraordinary Finance Income of N4.3 billion in Q4’17 (attributed to exchange rate gains) as well as N3.3 billion Investment Income recorded for FY’17 (FY’16: N601 million).
Overall, FY’17 PAT came in 8 percent above estimate at N39.8 billion, a significant leap from N14.4 billion recorded in FY’16. The Board proposed a final dividend of N1.25 (Total dividend: N1.75, Dividend yield: 13 percent).
Given improved FX liquidity and porous borders, Vetiva expects threat from smuggled sugar to remain pronounced in 2018. As such, it revised its Revenue forecast lower to N189 billion amidst lower y/y prices and volumes – particularly given previous year’s high base.
Though sustained stability in gas supply and benign global raw sugar prices are expected to support margins, the firm revised its FY’18 EBIT margin estimate 100bps lower to 22 percent (Previous: 23 percent; historic average of 20 percent) amidst lower selling prices.
“Also driven by our expectation of normalization in FX related gains, we estimate a N29 billion PAT for FY’18. We revise our 12 Month Target Price to N20.60 and maintain a HOLD rating on the stock. Dangote Sugar trades at a forward P/E of 9.0x vs Consumer Goods Coverage P/E of 22.0x.
“We note that the medium term outlook for Dangote Sugar remains largely positive – supported by the company’s backward integration project ‘Sugar for Nigeria’ where 1.08 million MT/PA of refined sugar is expected to be sourced from locally grown sugarcane across five sugar factories,” Vetiva said.
Dipo Olowookere 
Adedapo Adesanya