- Revenues increased by 0.6% y/y
- Cost of Sales climbed by 2.0% y/y
- Slump in investment income
Dangote Sugar released its 9M 2019 financials on October 29, 2019, where the company reported a 0.6% y/y rise in Revenue to N117.4bn in 9M 2019 from N116.8bn in 9M 2018. However, on a q/q basis, Revenue dipped 12.2% q/q to N37.1bn in Q3 2019 from N42.2bn in Q2 2019. Nevertheless, we note Revenue in Q3 2019 came in higher than Q3 2018 Revenue by 13.4% y/y. This suggests the company may be feeling the impact of the border closure positively as we believe the entry of smuggled sugar must have been severely limited. Across business segments, sales of the 50kg bag category grew 0.9% y/y to N111.2bn while Revenue from retail sugar was up 2.7% y/y to N3.3bn. On the other hand, Revenues from retail molasses and freight services were down 26.8% y/y and 7.3% y/y.
Raw sugar prices drive production cost higher
Cost of Sales climbed higher by 2.0% y/y to N88.4bn for 9M 2019 from N86.7bn in 9M 2018. On a q/q basis, Cost of Sales fell by 13.5%, higher than the 12.2% q/q decline in revenue. However, the growth in Cost of Sales on a y/y basis was faster than the growth in Revenue driven by 4.6% y/y growth in raw materials cost which suggests DangSugar must have been impacted by the mild pressure on raw sugar price. Consequently, Gross Profit fell 3.5% y/y to N29.0bn in 9M 2019 from N30.1bn in 9M 2018. Gross margin printed at 27.3% in 9M 2019, 1.3ppts lower than 9M 2018 28.6%.
Management keeps a lid on OPEX
Operating Expenses edged higher albeit marginally, up 1.6% y/y to N6.2bn for 9M 2019 compared to N6.1bn in 9M 2018 suggesting sustained efforts on keeping costs tight due to weak revenue growth. The rise in OPEX was driven by an 11.2% y/y growth in Administrative Expenses to N5.6bn. On the other hand, Selling & Distribution expenses were down 43.6% y/y to N607.0m. On the back of lower Gross Profit, EBITDA declined 5.1% y/y to N26.1bn in 9M 2019 from N27.5bn in 9M 2018. The EBITDA margin for 9M 2019 was lower by 1.3ppts y/y to 22.3%.
Investment income slumps as profit edges lower
EBIT fell 7.2% y/y to N22.5bn in 9M 2019 from N24.2bn in 9M 2018 on the back of lower Other Income (down 64.2% y/y to N122.1m) and lower operating profit. Notably, Investment income was lower by 72.5% y/y to N593.7m on the back of lower Cash & Cash Equivalents (down 60.6% y/y to N11.6bn). Lower Tax Expense (down 13.0% y/y to N6.1bn) cushioned the decline in Net Income which fell 12.0% y/y to N14.7bn in 9M 2019 from N16.7bn in 9M 2018. Earnings per Share (EPS) stood at N1.24/s for 9M 2019 compared to N1.41/s in 9M 2018.
Overall view – renewed optimism on border closure
Q3 results give us cause for optimism as Revenue continues to recover with the impact of the border closure being partially felt. While cost pressures, particularly on raw materials, remain, we are largely optimistic about Dangote Sugar going forward as we expect the full impact of the border closure to filter into Revenue in Q4. Target price of N12.50/s.
Dangote Sugar Earnings Highlight 9M 2019