Dangote Sugar: Price Hikes Sweeten Earnings

By ARM Securities

Over 2016, Dangote Sugar Refinery Plc (DSR) reported an upsurge in earnings despite lingering pressures: currency weakness, elevated raw sugar prices and higher energy cost.

Solid earnings reflected the steep hike in refined sugar prices as well as volumes resilience hinged on the largely non-discretionary nature of DSR’s product.

In addition, the company improved its financial efficiency by refinancing its expensive debt with CBN’s concessionary borrowings which, together with support from higher revaluation gains on biological assets, capped an impressive year for the company. In view of this, the company raised its DPS to N0.60 (2015: N0.50).

Going forward, whilst we expect volumes to track lower as corporate institutional clients seek cheaper alternatives, revenue should maintain its upswing on the back of higher prices.

Aided by the impact of stronger naira (at the parallel market) on COGS, cheaper borrowings, as well as improved cash position, we expect earnings to rise for the second consecutive year in 2017.

Over 2016, DSR faced sizable input cost pressures as steep naira depreciation combined with bullish raw sugar prices (+40% YoY) to drive cost of raw materials nearly two-fold higher YoY. To add, energy cost surged as lower gas supply compelled the company to rely on increased utilisation of more expensive alternative (LPFO).

Furthermore, OPEX tracked higher (+12% YoY) following upswing in S&D cost which mirrored movement in PMS prices.

Faced with sizable input cost pressure, DSR responded by hiking refined sugar prices 68% YoY (9M 16: +36.3% YoY) to N10,900/50kg bag on average.

Though volume growth consequently suffered in the final quarter of the year (YoY: 9M 16: +16%, Q4 16: -33%), overall sales in the year was flat at 778.5KMT to leave DSR’s topline printing at a record high of N169.7 billion over FY 16

In a bid to minimize margin compression, DSR substituted its more expensive intercompany loan (interest rate at 13.5% per annum) with concessionary CBN financing (9% per annum). Aided by improved cash position, stemming from efficient working capital management, the company reported net finance income of N302 million vs. net interest charge of N653 million in FY 2015.

In addition, the company reported a more than two-fold YoY rise in fair value adjustments on biological asset reflecting improved yield and longer tenor life.

Consequently, mainly riding on pass-through from strong top-line growth, DSR reported its fastest earnings growth in four years.

Going forward, we expect the latest round of price hike to N17,000/50kg bag to keep average refined sugar prices 56% higher relative to 2016.

That said, amidst increasing desire for cheaper substitutes by DSR’s corporate institutional clients (30% of overall revenue) as well as potential cutback in indirect exports, on the back of recent naira gains at the parallel market, we expect some volume contraction in the current year (FY 17E: -13% YoY to 674KMT).

Nonetheless, largely reflecting higher prices, we project revenue growth of 34% over FY 17 to N227.6billion.

On cost, whilst higher raw sugar prices should ordinarily stoke COGS pressures, we are now more sanguine on input cost in view of increased gas supply and currency appreciation at the parallel market which we believe should temper pressures from global raw sugar prices.

Specifically, we project a 1.5pps YoY decline in COGSSales ratio to 85% with COGS at N193.5billion (+32% YoY). In addition, we think the company’s sizable cash position and debt refinancing bode positively for net finance income, which we project to climb 14% YoY. Overall, reflecting higher pricing and financial efficiency, we expect earnings to print at N16.3billion, which translates to 13% increase from FY 16 level.

DSR trades at a current P/E of 6.4x vs. 16.4x for Bloomberg Middle East & Africa peers. The stock has gained 0.16% YTD (Food: -7.3% YTD, NGSE: -4.6%) with last trading price of N6.12 at a 32% discount to our FVE of (N8.08). We have a BUY rating

Source: www.armsecurities.com.ng.