Dangote Sugar Refinery Plc.: Strong Test in 2018; SELL

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Update: We revise estimates for DANGSUGAR following 2017FY results and call with management. Key change to our model estimates is the downward revision of volume and margin, and consequently, earnings. On net, we revise revenue estimate 5% lower, and EBITDA, EBIT, and net profit estimates by 9% average. Compared to 2017FY, our 2018E EBITDA (7%) and EBIT (4%) estimates are higher while net profit is lower (adjusting for the FX gain recorded in Q4-17) by 11%. The stock’s TP on our revised estimates is NGN17.97 (previously NGN19.03); SELL rating maintained. On our revised estimates, DANGSUGAR trades on one-year (2018E) forward P/E and EV/EBITDA multiples of 7.4x and 4.0x respectively, consistent with both its five-year historical averages of 7.9x and 4.4x and the 7.4x and 4.6x Middle Eastern peer averages.

Flattish revenue in 2018E: Our marginal revenue growth forecast of 0.5% is on freight revenue (+18% y/y), which has continued to grow – 18% in 2017FY and 26% average in the last five years – although accounting for barely 2% of gross revenue. We revise sugar revenue growth forecast lower to 0.2%, from 5%, given the conservative outlook on sales volume and price, than we previously had. On the recent call, management reiterated some of the volume concerns – although which it expects to improve this year – we had highlighted in previous notes, notably the activities of smugglers and the poor condition of the factory road. On price, we retain our NGN14,000/bag estimate for 2018E (-11% y/y), consistent with the rate management said it is currently able to achieve (vs. NGN17,010/bag same period in 2017). DANGSUGAR’s average selling price was lowered 9% q/q to NGN13,509/bag in Q4-17 (on our calculation), despite 4% q/q increase in per tonne cost, confirming pressure on market share. The selling price was reduced by cumulative 22% between Q2 and Q4 2017.

Margin revised lower: By our estimate, DANGSUGAR’s per tonne production cost increased 4% in Q4-17, after successive declines between Q1-Q3. The higher cost, combined with the lower selling price, produced a gross margin of 23%, below both the 32% rate achieved between Q2-Q3, and our 30% estimate. We have revised our gross margin estimate for 2018E 112 bps lower to 26%.  Our estimate remains above the 25% margin achieved in 2017FY, and DANGSUGAR’s five-year historical average of 24%. We reiterate that the downside risks to DANGSUGAR’s gross margin are (1) deeper cut in selling prices and (2) gas supply disruption, while the upside risks include (1) better energy mix and stronger exchange rate, (2) stable outlook of global raw sugar prices, and (3) positive mix from growing contribution of higher margin Savannah.

A step-up in CapEx: Capex increased to NGN9.8 billion in 2017FY, the biggest in three years. No specific guidance was given for spending in 2018 and beyond, but management reiterated that funding for its BIP will be 20% equity (and noted that this portion can be increased) and the balance via borrowings.

It guided to (1) the completion of the first phase of the BIP, comprising the establishment of 1 million sugar metric tonnes capacity in three locations – (Nasarawa 600,000, Adamawa 250,000, and Taraba 150,000) – in 2022 and (2) capital raising for the project in Q4-18.

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CORDROS RESEARCH

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