Dangote Sugar released its 9M’20 financial statements showing remarkable growth in both topline and bottom-line figures. The company’s Q3 revenue grew 55% y/y to ₦57.3 billion, translating to a 9M’20 figure of ₦160.5 billion and a growth rate of 37% y/y (Vetiva estimate: ₦145.3 billion).
The restriction of cheaper smuggled sugar from the Nigerian market has continued to support high double-digit growth in Revenue across major Revenue streams. For instance, in the nine-month period, revenue from the sale of 50kg bags (which accounts for c.95% of total Revenue) grew 38% y/y to ₦153.8 billion, while revenue from the sale of Retail sugar grew 55%, partly buoyed by front-loading purchases in Q2.
Ahead of the festive season, we expect increased demand from food, beverage and confectionary makers in the next quarter to sustain this Revenue expansion track. Whilst this has been an outstanding performance so far, we see some downsides to this growth momentum in FY’20. One is that the novelty gains from the closed borders may be waning given that the borders were closed around this time toward the fourth quarter last year. Two, the recent disruption to retail stores may prove a headwind to sales of Retail sugar. That said, we project a 35% rise in Revenue for FY’20 to ₦217.3 billion (Previous: ₦194.7 billion).
FX erosion on margins remains a challenge
Despite the substantial gains in revenue, gross margin declined 4ppts y/y for 9M’20 to 21% owing to increased FX pressure on input costs, although 9M’20 gross profit increased to ₦34.1 billion from ₦29.0 billion in the previous year.
Share Price Performance
Increasing slightly, Opex printed at ₦6.1 billion, 9% higher than the ₦5.6 billion in 9M’19 and our ₦5.4 billion expectation. This further pressured already-weak gross margins and brought EBIT margins down to 18% from 20% in the previous year. Although Finance costs increased significantly by 23x to ₦1.9 billion due to FX challenges, this was compensated for by a ₦2.6 billion income from fair value adjustment. Thus, PBT rose 27% y/y to ₦29.2 billion. Finally, after accounting for a tax credit of ₦3.0 billion in Q3, 9M’20 tax reduced 70% y/y to ₦2.5 billion, boosting PAT for the company by 82% to ₦26.7 billion.
Earnings momentum to ride on market share gains
We expect gross margin to remain lowered at c.21% as the company battles with increased importation costs. Furthermore, we expect the slight expansion in Opex to persist in this last quarter, owing to inflationary pressures on the back of energy costs hike. Overall, we project a PBT of ₦40.6 billion and a PAT of ₦34.9 billion, a 36% y/y increase. Thus, we increase our target price for Dang sugar to ₦1