Dangote Sugar Refinery Plc: Equity Update

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Dangote Sugar recorded improved profitability in Q1 2019 compared with Q1 2018, despite the challenging business environment the company faced. Apart from the weak purchasing power in the country, other specific challenges the company faced included smuggling of unlicensed goods and traffic gridlock on the Apapa axis in Lagos State. The company reported a lower revenue figure in Q1 2019 than in Q1 2018 because it lowered its selling price to compensate consumers for the drop in the cost of sales. However, it sold more units of sugar in Q1 2019 than in Q1 2018, resulting in higher prot margins. Overall, the result of Dangote Sugar shows that the company has improved its drive for cost savings.

The company’s balance sheet remains strong – the working capital position and cash balance remained strong as at Q1 2019. However, it has lots of cash tied down in inventories and trade and other receivables. Raw materials account for almost half of the total inventories. This may be a deliberate strategy to have sufficient stock during the
period of the general election. Amount of receivables due from related parties is substantial. The company needs to work to reduce this so that it can drive efficiencies.

The ratio of the cash profit generated from core operating activities to revenue increased significantly to 31.75% in Q1 2019 from 26.25% in Q1 2018. This is an indication that more revenue translated to cash profit in 2019 compared with 2018. However, the company also tied down a substantial amount of cash in working capital resulting in a drop in cash generated from operating activities. The other main drain to the cash flow in Q1 2019 was the acquisition of plant and repayment of borrowings. The company generated net increase cash flow of N21.83bn in Q1 2019, a decrease from the net increase cash ow of N44.04bn generated in Q1 2018.

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All the profit margins increased in Q1 2019 over Q1 2018. The gross profit margin increased to 33% in Q1 2019 from 25% in the corresponding period in 2018. Earnings Before Interest and Tax (EBIT) margin increased to 28.46% from 20.54% in Q1 2018. The Profit Before Tax (PBT) margin increased to 28.05% in Q1 2019 from 20.40% as at Q1
2018. The Profit After Tax (PAT) margin also increased to 18.36% in Q1 2018, from 12.83% in Q1 2018. The result also indicates that the percentage of T/O, PBT, and PAT in the Q1 2019 to the Audited T/O, PBT and PAT for the period ended December 2018 are: 25.37%, 30.93% and 31.87%, respectively. Given the run rate, the company should meet and surpass its previous year’s profitability. The company has a history of good dividend payment which makes it’s stock attractive to investors.

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Dangote Sugar is a dominant player in the sugar market in Nigeria, controlling about 60% of the market size. In order to take full advantage of the Federal Government’s ‘Nigerian Sugar Master Plan,’ the company aims to produce 1.08M MT/PA rened sugar from locally-grown sugarcane in 6 years across its various sites and 1.5M MT/PAin 10 years. The Nigerian Sugar Master Plan is a road map for the attainment of self-sufficiency in the local sugar production.

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Valuation – We employed a relative valuation method using enterprise value (EV) to Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) multiple. Applying the EV/EBITDA multiple of 5.41x on EBITDA for the forecast period, we arrived at N18.37 per share as the fair value.

Dangote Sugar Refinery Plc: Equity Update - Brand Spur
FSDH Research AnalysiS

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