We upgrade our fair value estimate of Dangote Sugar Refinery Plc (‘the Group’) to N22.97 from N15.93, after the release of its Q1 2021 earnings performance.
The Group reported a 41% YoY revenue growth in Q1 2021 (N67.39bn in Q1 2021 from N47.64bn in Q1 2020), majorly driven by higher prices during the period. The higher price realization was a response to higher input costs.
Foreign exchange scarcity, higher taxes (VAT), and higher raw material costs were some of the drivers of input costs during the period. Cost of sales rose by 41% YoY to N49.35bn in Q1 2021 from N34.92bn in Q1 2020.
Volume sold grew by 6% YoY to 200.78mn tonnes in Q1 2021 from 189.72mn tones in Q1 2020. Meanwhile, the average price per tonne increased by 34% YoY.
Due to the effective transfer of cost burden to the consumers, the Group’s gross margin remained unchanged at 73% in Q1 2021 (Q1 2020: 73%). In absolute terms, gross profit grew by 42% YoY to N18.04bn in Q1 2021 from N12.72bn in Q1 2020.
Operating Efficiency Widens Bottom-line Growth
Operating profit grew by 48% YoY to N15.88bn in Q1 2021 from N10.75bn in Q1 2020. The Group optimised its expenses during the period, reflected by a lower operating expense margin to 3% in Q1 2021 from 4% in Q1 2020. Essentially, due to its pricing power, the Group generated a significantly higher revenue at a lower marginal cost.
Meanwhile, the earnings growth lowered as it moved towards the bottomline. Profit before tax grew by 26% YoY to N11.95bn in Q1 2021 from N9.51bn in Q1 2020, on the back of a 152% spike in finance cost to N3.41bn from N1.35bn. The source of the finance cost increase was higher foreign exchange losses in Q1 2021. Therefore, the Group shed some of the profit growth.
The Group’s Q1 2021 performance was above our expectations, due to a higher-than-expected price increase realised. However, we kept our forecasts for the subsequent quarters unchanged. Going forward, we expect consumers to react to the higher price, especially as competitors like BUA Sugar and Flour Mills ramp up production.
After incorporating the Q1 2021 numbers, we now have a revised FY 2021 earnings per share estimate of N3.36 (previous forecast: N3.03). We also raised our dividend forecast for FY 2021 to N2.02 (previous: N1.82). In the medium to long term, we expect the ongoing backward integration programme (BIP) of the Group to drive significant earnings and value for the Group, in the form of increased output capacity and lower costs. We also expect the Group to sustain and leverage its market leadership status to grow topline. Therefore, the higher valuation reflects our increased earnings forecast and growth prospects of the Group. At the current market price, the stock trades at a 41% discount (inclusive of price return and dividend yield) to our fair value estimate. Hence, we recommend a BUY