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.
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.
|Income statement (NGN mn)||9M’15||9M’16||9M’17||9M’18||9M’19|
|Cost of Sales||(54,279)||(96,252)||(121,556)||(86,670)||(88,406)|
|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
|WSTC Q3‘19F||DSR Q3’19 actual||Variance|
|Cost of sales||(25,106.764)||(29,156.577)||-16%|
|Selling and distribution expenses||(158.695)||(209.699)||-32%|
|Admin and Other expenses||(1,506.406)||(2,116.787)||-41%|
|Fair value adjustments||(310.912)||326.769||205%|
|Profit before tax||5,346.062||5,936.126||11%|
|Profit after tax||3,448.21||3,726.412||8%|
Source: Company accounts, WSTC Research estimates
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.
Financial Statement Summary
|Income statement (NGN mn)||FY17A||FY18A||FY19F||FY20F||FY21F|
|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|
|Revenue growth (%)||20%||-26%||2%||2%||3%|
|Balance sheet (NGN mn)||FY17A||FY18A||FY19F||FY20F||FY21F|
|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|
|Dividend payout ratio||40.00||60.00||60.00||60.00||60.00|
Company accounts, WSTC Research estimates