Friday, July 29, 2016 4:51pm/ FBNQuest Research
Event: Dangote Sugar Refinery reports Q2 2016 results
Implications: Upward revision to consensus 2016 PBT forecasts expected
Positives: Q2 sales were up 32% y/y and 16% q/q respectively;
Negatives: Operating expenses grew by 28% y/y to N1.2bn
This afternoon, Dangote Sugar Refinery (DSR) published its Q2 2016 results which showed a double-digit y/y topline growth. While sales were up 32% y/y to N37.9bn, PBT and PAT were both flattish y/y respectively. A 28% y/y rise in operating expenses and a 623bp y/y gross margin contraction completely offset any benefits coming from sales growth delivered during the period.
Sales were mainly driven by higher finished sugar sales in Lagos, more than doubling y/y to N30.7bn in H1 2016. Additionally, higher sales in the northern region helped. According to management, DSR is benefitting from the relative calm in the north-east of the country, a region which supports cross-border trade with Cameroon, Chad and Niger Republic.
The gross margin contraction is unsurprising given the recent 30% devaluation of the naira. DSR imports almost of its raw sugar (a key raw material for the firm) requirements, an input which accounts of around 70% of COGS. At this point, a hike in finished sugar prices would be unsurprising. Sequentially, while sales were up 16% q/q, PBT and PAT both grew by 18% q/q and 20% q/q respectively. Compared with our estimates, sales and PBT beat by 34%, and 22% respectively.
On an annualised basis, DSR’s H1 2016 sales and PBT are both tracking well ahead of consensus estimates of N131.0bn and N17.1bn respectively. On the back of these numbers we expect upward revisions to consensus 2016E estimates.
Going forward, we believe the improved security situation in northern Nigeria and enhanced distribution would continue to drive higher sugar sales volumes. Compared with peers, we believe DSR is in a much better position to benefit from the opening up of northern markets and the steady elimination of smuggled competition given the firm’s scale and distribution network.
Year to date, DSR shares have gained +16%, outperforming the All Share Index by around 18%. We expect the market to react positively to the results. At current levels, on our published estimates, DSR shares are trading on a 2016E P/E multiple of 6.6x for an EPS growth of around 3% in 2017E.
We rate the stock Neutral.
Our estimates are under review.
Dangote Sugar Refinery Q2 2016 results: actual vs. FBNQuest Research estimates (N millions)