Dangote Sugar Refinery Plc: External Factors Weigh On Q3’18 Performance

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  • Sugar selling prices reduced further amid smuggled sugar competition
  • Gross margin moderated in Q3’18, down 952bps q/q
  • 9M’18 PAT down 37% y/y to ₦16.7 billion (Vetiva: ₦18.7 billion)
  • Earnings revised to reflect 9M’18 result, BUY rating reiterated

Revenue prints 5% below estimate amid further selling price cuts

DANGSUGAR released its 9M’18 results showing a 28% y/y revenue decline to ₦117 billion, 5% below our estimate. While we had expected revenue in Q3 to come in lower q/q, given that it is a seasonally slower quarter, topline still came in at ₦33 billion (Q2: ₦42 billion), below our ₦38 billion estimates. This variance was driven by a further reduction in sugar prices in the quarter (Average selling price down 3% from H1’18 to ₦256,680/MT) as well as lower than expected volumes (Q3’18 volumes 9% below estimate at 131,581 MT).

According to Management, the weaker run rate in Q3’18 was as a result of the influx of lower quality unlicensed sugar smuggled into the country that has continued to gain ground. The company also reported a deterioration in the Apapa traffic gridlock which continued to hamper evacuation and distribution of finished products from the refinery in the quarter. On a y/y basis, we note that prices have declined by 19% y/y, in line with the 31% y/y downtrend in global sugar prices as at Q3’18, while sugar volumes have moderated 16% y/y driven by the aforementioned factors.

Bucking the trend of gross margin improvement recorded in previous quarters, Q3’18 gross margin came in 952bps weaker q/q at 21% (Vetiva: 27%), the lowest level since Q1’17. We believe this was due to lower prices in the period, and possibly efficiency losses. As such, Q3’18 EBIT declined 54% q/q to ₦5.4 billion (Vetiva: ₦9.4 billion), weakest EBIT in eight quarters. Overall, 9M’18 PAT came in at N16.7 billion, 37% and 11% lower when compared to 9M’17 and Vetiva estimate respectively.

Earnings revised lower, BUY rating maintained

Despite the more competitive operating environment, we expect DANGSUGAR’s volumes to improve 20% q/q in Q4’18 supported by the seasonal boost from the festive season. Nonetheless, we revise our revenue estimate for the year to ₦156 billion (Previous: ₦171 billion) to account for the Q3 results as well as lower sugar prices for the rest of the year. After revising our gross margin estimate lower following the sharp variance in Q3, our FY’18 EBIT margin comes to 23% (Previous: 25%). Driven by this, our FY’18 PAT figure is revised lower to ₦23.6 billion (Previous: ₦26.4 billion). With this, our 12-month target price is revised to ₦21.46 – reiterating our BUY rating on the stock. DANGSUGAR currently trades at a FY’18 P/E of 7.1x and dividend yield of 7.0% (FY’18E DPS: ₦0.98).

Overall, we highlight that most of the challenges facing DANGSUGAR in the current financial year are more external with respect to the Nigerian operating
environment. While these factors should be transient in nature, efforts to curtail the smuggled sugar by government authorities as well as improve traffic flow in the Apapa axis have yielded very dismal results and we are less optimistic about the timeline for improvement in these conditions.

Nonetheless, we highlight that DANGSUGAR has noted its independent efforts to bypass these impediments, with Management stating new initiatives to explore waterways for product logistics. Meanwhile, we highlight possible upside for domestic sugar prices in the near term given recent uptick in global sugar prices (up 25% QTD).

Corporate Announcements:

After being appointed as the substantive Group Managing Director of Dangote Sugar Refinery Plc in June 2018, DANGSUGAR reported the resignation of Engr. Abdullahi Sule effective 1st of August 2018. We note that Engr. Sule had served in the company for seven years and had been Acting Group Managing Director since 2015. He has reported resigned for personal reasons. Following this, the company announced the appointment of Mr Ravindra Singh Singhvi as the Chief Operating Officer effective 13th of August 2018. Mr Singhvi holds 37 years of experience in Manufacturing and Processing of Sugar, Petrochemicals, Cement and Textiles in India.

 

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