Dangote Sugar Refinery released its Audited reports for FY’20, which showed an impressive performance for the sugar producer as it reported its highest Revenue figure ever of ₦214.3 billion.
Although this figure was 1% less than our forecast of ₦217.3 billion, it was still a 33% improvement on the previous year’s performance.
We had mentioned in our FY’21 outlook, the increased attention to the National Sugar Master Plan (NSMP) which was established to protect local raw sugar production. In light of this, during the year, the government imposed a 20% import duty on refined sugar while also reversing an earlier 5% duty hike on the importation of raw sugar for investors in the Backward Integration Program (BIP).
Additionally, we believe that the closed borders policy implemented during the year supported expansions in volumes and price for sugar manufacturers. Thus, for Dangsugar, volumes grew 7% to 732,000 Metric Tonnes while price per Tonne averaged ₦330,000 (from ₦276,000 in billion), due to the impact of FX challenges on raw material sourcing. For context, Sugar refiners in Nigeria import c.90% of their raw sugar needs.
This, combined with increased production volumes and the currency devaluations in the period, underlie the 35% increase in raw material expense. However, prices, supported by the limited foreign supply of refined sugar, increased to mitigate this hike.
Thus, unlike the industry trend we have observed so far, DSR’s gross margin improved c.1 ppt y/y to 25% (Vetiva: 22%). EBIT also strengthened 47% y/y to ₦45.1 billion despite a 5% increase in Opex to ₦10.1 billion. On the whole, the company reported a 33% rise in PAT to ₦29.7 billion and has proposed a dividend of ₦1.50 (FY’19:1.10).
Our outlook for DSR’s Revenue in FY’21 is based on three key assumptions: the border restrictions, traffic and logistics constraints vis-à-vis the Apapa congestion situation, and expansion initiatives of the firm.
While the borders have been reopened, the return of strong competition from smuggled and other imported sugar is less likely. Firstly, given the changes in the FX market that have happened in the past year, FX sourcing remains a challenge. Secondly, Sugar remains on the exclusive list under the AfCFTA. Thus, no special privileges are applied to its importation under the agreement. Furthermore, as mentioned earlier, the 20% import duty in place on refined sugar imports which will curtail the influx of imported competition. This also keeps the pricing power dynamic in favour of local producers.
After several attempts to alleviate the traffic situation at the Apapa port – where one of the Dangote Sugar Refineries is located, an e-call up system has been implemented. While it remains to be seen whether this system will be effective in the long run, some reports have stated that the congestion at the ports has eased considerably. With this development, we believe that the turn-around time for sales could improve significantly and positively impact volumes.
Lastly, we had mentioned in an earlier report that the milling capacity of the Savannah Sugar mill was undergoing an expansion and was projected to be completed by Q4’20.
However, management has updated this to an extended timeline of Q4’21 – due to the impact of the pandemic. Thus, we revise our earlier projection of increased volumes in line with this revised timeline.
Thus, for FY’21, we adjust our projections and forecast a 6% y/y growth in Revenue (Previous expectation: +7% y/y) to ₦229 billion.
Will Margins Remain Stable?
Next, looking at costs, DSR imports raw sugar from Brazil; so in addition to FX, we look at the outlook for the country’s trade in fully determining our outlook for the company’s raw material costs in the year. Although global food outlook reports had indicated increased production expectations from Brazil this year, possible shipping challenges in the country may keep prices stable at current levels.
Thus, in line with this and considering the current performance, we expect gross margin to decline slightly to 24%. This brings our EBIT projection to ₦46.3 billion (previous estimate: ₦41.4 billion), 3% higher y/y. Based on this, we expect PAT to print at ₦30.2 billion (+1% y/y). We maintain a BUY rating on the stock with an upward revised target price of ₦21.08.