DANGSUGAR Rated Neutral; Gross Margin Contracts QoQ to 7% in Q4 2015 Result


Thursday, March 17, 2016 05:05PM /FBNQuest Research

Event: Dangote Sugar Refinery reports Q4 2015 results

Implications: Slight downward revision to consensus 2016 PBT forecasts expected 

Positives: Q4 sales were up 33% y/y and 28% q/q respectively; opex declined 45% y/y

Negatives: Gross margin contracted significantly q/q to 7%; PAT declined by 12% y/y and 27% q/q respectively to N2.2bn

This afternoon, Dangote Sugar Refinery (DSR) published its Q4 2015 results which showed that while sales and PBT were both up 33% y/y and 79% y/y to N28.0bn and N2.3bn respectively, PAT declined by -12% y/y  to N2.2bn. The difference in trends seen for the PBT and PAT is driven by a tax rebate of N1.2bn in Q4 2014 compared with a tax expense of N124m during Q4 2015.

A gross margin expansion of 324bp y/y and a 45% y/y decline in opex more than offset declines in other income and net finance income to deliver PBT growth of 79% y/y. We however await management’s comments on these lines. Other income in Q4 2014 was unusually boosted by insurance claims of N1.3bn and writebacks of around N600m. Sequentially, while sales were up 28% q/q, PBT and PAT both declined by 47% q/q and 27% q/q respectively.

This time around, a significant q/q gross margin contraction, a rise in opex of around 80% q/q and a 45% q/q decline in net finance income more than offset topline growth. Compared with our estimates, while sales were ahead by 22%, PBT came in 35% behind our estimate due to negative surprises on both the opex and gross margin lines. However, PAT was in line due to a positive surprise on the tax line.

DSR proposed a DPS of 50 kobo (we forecast a DPS of 48kobo) implying a dividend yield of 7.9%.

DSR’s full year 2015 PBT missed consensus analysts estimates of N17.7bn by around 6%. On the back of these numbers and given the current high inflationary environment and somber outlook, we expect slight downward revisions to consensus 2016E estimates. Looking forward, DSR’s significant q/q gross margin is a big concern.

For now we suspect that a combination of higher fuel costs, increased fx volatility during the quarter and a q/q contraction in unit volumes are to blame. We await management’s comments. Although, raw sugar (a key raw material) imports remains on the central bank’s approved list, our channel checks reveal that difficulties in accessing the required sums remain.

To put this into context, raw sugar accounts for around 80% of COGS. For now, we expect DSR to attempt to pass on rising costs to customers. Additionally, over the last month global raw sugar prices are up by around 20%.

Year to date, DSR shares have gained +4.6%, outperforming the All Share Index which has shed -10.3%. We expect the market to react slightly negatively to the results. At current levels, on our published estimates, DSR shares are trading on a 2016E P/E multiple of 6.9x for an EPS decline of around 7% in 2017E.

We rate the stock Neutral.  

Our estimates are under review.

Conference call: Details to be circulated

Dangote Sugar Refinery Q4 2015 results: actual vs. FBN Capital Research estimates (N millions)

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