DANGSUGAR: Earnings flat YoY despite volume rebound in Q4 2015


Friday, March 18, 2016 01:24PM /Vetiva Research

Volumes rebound in Q4 on price cut, improved distribution
DANGSUGAR reported a 7% y/y revenue growth for FY’15 driven by a 0.1% volume growth and an 8% average price increase. More interesting was the surprisingly material volume rebound in Q4 (54% q/q), supported by a significant 28% price cut in September (implemented to counter lower priced smuggled sugar).

We recall that Management had stated that the company would explore rail transportation in response to the traffic gridlock in Apapa (location of the refinery) which constrained volumes in Q3. Instead, DANGSUGAR added 100 trucks to its fleet, which in addition to the price cut enabled the company to sell all sugar produced in Q4.

PBT up 8% y/y but higher tax rate cuts PAT lower 1% y/y
Gross profit came in 11% higher for the year with a 90bps y/y gross margin improvement to 20.5% (Vetiva estimate: 24.7%).

However, gross margin declined sharply to 7% in Q4 from the preceding 9 month average of 26% due to the price cut and a 40% increase in global raw sugar prices. Growth in profit before tax came in slower at 8% y/y as interest expense, lower other income undercut efficiency gains in operating costs.

Overall, a hike in the effective tax rate cut Profit after tax 1% y/y. The Board of Directors has proposed dividend of N0.50/share (2014: N0.40, Vetiva estimate: N0.45), which is a 52% payout ratio and 8% dividend yield on last market close price.

2016 Outlook – tougher year ahead, Cut to EPS, TP
Amid higher raw sugar prices, continued tightness in FX supply and expiration of the raw sugar import duty concession in 2015 (FG considering increase to 10% duty/10% levy from 5% duty/5% levy), we think sugar volumes will come under pressure in 2016.

Nonetheless, we think reduced traffic congestion in Apapa, higher parallel market FX rates constraining smuggled sugar volumes, and the absence of the Q1 election effect on volumes will provide a buffer. Hence we have maintained our FY’16 volume forecast at 760,000 tonnes but increase our price per ton assumption.

Our FY’16 revenue forecast is therefore revised upward to N106.4 billion (Previous: N104.9 billion). Nonetheless, after lower margin assumptions, our EPS forecast is revised to N1.04 (Previous: N1.14) with a consequent downward revision in our target price to N7.33 (Previous: N7.81).

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