Dangote Sugar Refinery Plc rides on Border Closure in Q3’19

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Dangote Sugar Refinery Plc (DSR) reversed the declining trend on its top-line in Q3’19 after a  7%  year-on-year revenue decline in  Q1’19,  and  2% year-on-year revenue decline in Q2’19. Revenue in Q3’19 grew by 13% year-on-year from N32.68bn in Q3’18 to N37.06bn in Q3’19. The revenue growth in Q3’19 is attributed to volume growth during the period, as DSR begins to regain market share following the directive of the Federal Government on border closure. In prior periods, DSR had lamented at the high spate of smuggling and influx  of cheaper unlicensed sugar in the markets,  an  activity which reduced the market share of DSR from 60% to 40%. According to the management, the average selling price of sugar had to decline to match the competition. The implication of the border closure meant that smuggling activities reduced, thus limiting supply in the markets and therefore, creating the room for DSR to grow volume.

The double-digit revenue growth in Q3’19 was enough to offset the revenue decline in the previous two quarters, thus, resulting in a 1% year-on-year revenue growth as of 9M’19 from N116.75bn in 9M’18 to N117.42bn in 9M’19.

Cost pressures arise, but DSR remains efficient

Cost of sales grew by 2% year-on-year from N87.09bn in 9M’18 to N88.41bn in 9M’19. The increase in cost was mainly driven by higher raw materials cost (which contributes 74% of total costs) during the period. Raw materials cost increased by 5%, consistent with an increase in raw sugar prices in the international markets. Meanwhile, direct labour costs and direct overhead  (which contributes a combined 17% to total costs) declined by 8% from N15.32bn in 9M’18 to N14.10bn in 9M’19. The decline in direct costs mitigated the impact of a higher cost of raw materials during the period.

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Nonetheless, a higher increase in the cost of sales of 2%, relative to a revenue increase of 1%, resulted in a 4% year-on-year decline in gross profit.

Cost management helps to limit profit decline

Although operating expenses increased by 2% year-on-year from N6.14bn in 9M’18 to N6.24bn in 9M’19, the operating expense margin yet stood at 5% of revenue in both periods; reflecting the efficiency and efforts of the Group to keep costs and expenses controlled amid weak revenues.

Hence, operating profit declined by 6% year-on-year,  from  N24.29bn in 9M’18  to N22.90bn in 9M’19. Consequent to an increase in the loss from fair value adjustments from N78.71mn in 9M’18 to N443.23mn  in  9M’19; and a decline in investment income from   N2.16bn in 9M’18 to N593.69mn in 9M’19; profit before tax dipped by 12% year-on-year, from N26.21bn in 9M’18 to N22.97bn in 9M’19. In a similar direction, profit after tax declined by 12% year-on-year, from N16.71bn in 9M’18 to N14.70bn in 9M’19.

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Historical Performance

Income statement (NGN mn) 9M’15 9M’16 9M’17 9M’18 9M’19
Revenue 73,046 115,253 163,031 116,756 117,425
Cost of Sales (54,279) (96,252) (121,556) (86,670) (88,406)
Gross profit 18,767 19,001 41,475 30,086 29,019
Operating profit 15,115 14,722 36,362 24,287 22,903
Profit before tax 14,224 15,319 39,251 26,207 22,968
Profit after tax 9,335 10,117 26,520 16,710 14,703

Source: Company accounts, WSTC Research estimates

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Recommendation

WSTC Q3‘19F DSR Q3’19 actual Variance
Revenue 32,188.159 37,060.94 15%
Cost of sales (25,106.764) (29,156.577) -16%
Gross profit 7,081.395 7,904.363 12%
Other income 30.427 45.388 49%
Selling and distribution expenses (158.695) (209.699) -32%
Admin and Other expenses (1,506.406) (2,116.787) -41%
Operating income 5,446.721 5,623.265 3%
Fair value adjustments (310.912) 326.769 205%
Investment income 237.006 5.506 -98%
Finance costs (26.752) (19.414) -27%
Profit before tax 5,346.062 5,936.126 11%
Tax (1,897.852) (2,209.714) -16%
Profit after tax 3,448.21 3,726.412 8%

Source: Company accounts, WSTC Research estimates

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DSR’s performance in Q3’19 beat our estimates across the board. The variances were mainly due to the impact of the border closure, in which we did not anticipate. However, following the recent directive of the FG to extend the border closure to January 31, 2019, we expect to see revenue growth in Q4’19 and the near term. In the medium to long term, we do not see the sustainability of the border closure. Hence, we have adjusted our models, and we now have a revised estimate of N1.60 (relatively unchanged to our previous EPS estimate of N1.61).  Following  a downward revision of risk-free rate amid declining yields in the fixed- income markets, we valued DSR at a fair value of N12.46 (previous: N12.72). We retain our BUY rating, as the stock currently trades at a 20% discount to our fair value.

Read Also:  Complete Border Closure: Hinderance To A Single- Digit Inflation Dream?

Financial Statement Summary

Income statement (NGN mn) FY17A FY18A FY19F FY20F FY21F
Revenue 204,422 150,373 152,723 155,778 160,451
EBITDA 48,940 37,925 35,769 37,849 39,418
EBIT 43,907 32,684 29,813 31,154 32,088
Profit before taxation (PBT) 53,599 34,601 30,059 32,107 32,826
Net profit (PAT) 39,784 21,976 19,196 20,548 21,009
EPS (N) 3.32 1.83 1.60 1.71 1.75
DPS (N) 1.25 1.10 0.96 1.03 1.05
Revenue growth (%) 20% -26% 2% 2% 3%
Balance sheet (NGN mn) FY17A FY18A FY19F FY20F FY21F
Current assets 128,488 103,675 108,467 113,981 123,517
Non-current assets 66,593 71,441 76,176 78,828 79,521
Total assets 195,080 175,117 184,643 192,809 203,037
Current liabilities 95,665 69,406 73,115 72,428 74,155
Non-current liabilities 6,680 6,736 6,557 6,379 6,201
Long-term debt 1,467 1,426 1,247 1,069 891
Shareholders’ equity 92,736 98,975 104,971 114,002 122,682
Book value per share (N) 7.73 8.25 8.75 9.50 10.22
Cash flow statement (NGN mn) FY17A FY18A FY19F FY20F FY21F
Cash from operating activities 26,060 3,771 21,433 34,202 27,000
Cash from investing activities (6,269) (8,230) (9,595) (8,229) (7,147)
Cash from financing activities (13,407) (15,326) (12,193) (13,510) (12,644)
Net increase/ (decrease) in cash 6,384 (19,785) (355) 12,463 7,208
Ratio analysis (%) FY17A FY18A FY19F FY20F FY21F
EBITDA margin 23.94 25.22 23.42 24.30 24.57
Operating margin 21.48 21.74 19.52 20.00 20.00
ROAE 50.08 22.93 18.82 18.77 17.75
ROA 21.67 11.87 10.67 10.89 10.61
Dividend payout ratio 40.00 60.00 60.00 60.00 60.00

Company accounts, WSTC Research estimates

WSTC Securities Limited

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Dangote Sugar Refinery Plc rides on Border Closure in Q3’19 - Brand SpurDangote Sugar Refinery Plc rides on Border Closure in Q3’19 - Brand Spur

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