DANGSUGAR: Better-than-expected Q2 2015


Monday, August 10, 2015 09:30AM / FBN Capital Research   

Raising our 2015-16E EPS ests by 8%; PT by greater margin
Dangote Sugar Refinery’s (DSR) Q2 2015 results came in better than expected due to a combination of higher prices y/y, lower opex and improving sugar sale volumes.

Although higher fuel costs and fx volatility offset some of the benefits which accrue from relatively soft raw sugar prices (DSR’s key raw material), we believe that higher y/y sales of around 7% in H2, driven by the resumption of cross-border trade in northern Nigeria, will support earnings.

As such, we have raised our EPS forecasts by around 8% on average over the 2015-16E period. Our new price target of N6.8 is up by 12% as we have rolled forward our valuation to 2016.

Our new target implies a potential upside of 13% from current levels. DSR shares are trading on a 2015E P/E multiple of 5.9x for a 7% growth in EPS in 2016E. Ytd, DSR shares have declined -5.5%, outperforming the NSE ASI’s by around 4%. We retain our Neutral rating on the stock.

Q2 2015 PBT up 34% y/y
While sales were up 21% y/y to N28.6bn, PBT and PAT grew by 34% y/y and 25% y/y respectively. A double-digit y/y topline growth and a 29% y/y decline in opex were the primary drivers for the growth in profitability.

Topline growth was primarily driven by a 19% y/y rise in pricing. Sequentially, while sales grew by 27% q/q, PBT and PAT were up 58% q/q and 60% q/q respectively. Compared with our estimates, sales and PAT came in 28% and 24% ahead of our forecasts respectively.

DSR’s present energy mix, which is heavily skewed to the more expensive fuel oil, weighs on profitability. However, we expect that the completion of the rehabilitation of gas delivery lines will lead to higher gas utilisation and improve earnings on a y/y basis.

We also expect DSR to continue to benefit from soft raw sugar prices. According to Bloomberg estimates, global raw sugar prices are likely to average around US$0.12/lb through 2015 down by around 25% y/y.

We estimate both sales and EPS in 2015E to rise by around 12% y/y. Key risks to our outlook are higher opex levels and a spike in raw sugar prices.

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