Dangote Sugar Refinery: Double-Digit Earnings Growth Underpins Solid Performance

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Dangote Sugar Refinery: Double-Digit Earnings Growth Underpins Solid Performance
Dangote Sugar Refinery: Double-Digit Earnings Growth Underpins Solid Performance

Dangote Sugar Refinery (‘DSR’ or the ‘Group’) closed the 2020 financial year (FY’2020) on an impressive note, attributed to a double-digit price and volume growth.

Revenue grew by 33% YoY from N161.09bn in FY’2019 to N214.29bn in FY’2020.

Operating profit grew by 48% YoY from N29.93bn in FY’2019 to N44.44bn in FY’2020, while profit after tax grew by 33% YoY from N22.36bn in FY’2019 to N29.78bn in FY’2020.

As a result of the stronger operating performance in FY’2020, the Group declared a N1.50 dividend for FY’2020, representing a 36% increase relative to N1.10 dividend declared in FY’2019.

Improved Access To Market Drive Topline Growth

On the back of the efforts of the regulators to curtail smuggling activities, which was a major factor in the Group’s market share erosion in recent times, the Group had improved access to market during the financial year.

Following the land border closure policy by the government, the Group was able to supply more of its products to the market.

As a result, the Group recorded a 14% growth in production volume from 13.10mn bags in FY’2019 to 14.9mn bags in FY’2020. However, the COVID-19 induced contraction in national sugar consumption limited the sales volume growth to 7% YoY from 13.70mn bags in FY’2019 to 14.60mn bags in FY’2020.

The Group raised prices during the period, to reflect increased cost pressures induced by
exchange rate volatilities and shortage. Energy costs also increased during the period.

Hence, the combination of price and volume increases culminated in the strong topline growth in FY’2020. Other developments that positively impacted on the Group’s topline growth were improved crop yield, and injection of new trucks to strengthen distribution capacity.

FX Scarcity Drive Input Costs Upwards

Cost of sales grew by 31% YoY from N122.80bn in FY’2019 to N160.55bn in FY’2020, driven by the impact of FX scarcity during the period. We note that the Central Bank of Nigeria adjusted the exchange rate, driven by COVID-19 induced collapse in crude oil prices.

The increase in VAT also contributed to the higher costs incurred during the period. Cost margin, however, lowered by 100 basis points from 76% in FY’2019 to 75% in FY’2020, resulting from an effective transfer of cost burden to the consumers in the form of higher prices.

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As a result, gross profit grew by 40% YoY from N38.29bn in FY’2019 to N53.75bn in FY’2020.

Margins Further Expand on the Back of Operating Efficiency

Operating expense margin declined by 100 basis points from 6% in FY’2019 to 5% in FY’2020, due to a 14% YoY increase in operating expenses relative to a 41% YoY growth in operating income.

Therefore, the operating efficiency resulted in a 48% YoY increase in operating profit
from N29.93bn in FY’2019 to N44.44bn in FY’2020.

Bottomline Gets Support From Non-Operating Income

The Group recorded an 871% YoY increase in fair value adjustment gain from a loss of N313mn in FY’2019 to N2.42bn in FY’2020. The fair value adjustment gain related to the Group’s biological assets. Although net finance cost stood at N1.23bn in FY’2020, from a net finance income of N204mn in FY’2019; the fair value adjustment gain offset the net finance cost during the period. Hence, profit before tax grew by 53% YoY from N29.82bn in FY’2019 to N45.62bn in FY’2020.

However, a higher effective tax rate (34% in FY’2020 vs 25% in FY’2019) lowered the net bottom-line growth to 33%.

Outlook

We expect to see continued volume growth in FY’2021, on the back of sustained market share and increased demand for the products amid an economic recovery. However, we also expect to see persistent cost pressures due to rising crude oil prices. According to the management, a rising crude oil price tend to drive raw input prices upwards due to the preference to produce ethanol from sugar cane instead of raw sugar. We maintain a positive business outlook for DSR, on the back of the strong industry fundamentals and the Group’s continued investments in Backward Integration, which are expected to drive value for the Group, in the form of lower-cost pressures, and a higher scale.

Using a blend of Discounted Cash Flow, Dividend Discount Model, Residual Income Model, and EV/EBITDA valuation methodologies, we estimate a N15.93 fair value for the stock (previous: N18.85). The decline in our fair value estimate resulted from the application of a higher cost of equity in discounting our projected earnings and cash flows.

At the current market price of N17.95, the stock offers a -1% total return (price return: -12%, dividend yield: 10%). Hence, we recommend a HOLD.