DANGSUGAR: Investing for Sustainable Growth; FSDH Places a BUY

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Wednesday, September 30, 2015 06:47PM / FSDH Research   

HY 2015 Performance Analysis:
The HY 2015 result of Dangote Sugar Refinery Plc (DangSugar) for the period ended June 30, 2015 shows that its Turnover (T/O) increased marginally by 3.06% to N51.12bn in HY 2015, compared with N49.60bn recorded in the corresponding period of 2014. The increase in T/O was as a result of an increase in the average selling price.

The average price per 50kg bag rose by 18% from N5,685 in HY 2014 to N6,741 in HY 2015. The cost of sales also increased by 4.85% to N38.42bn from N36.64bn recorded in HY 2014, driven by the increase in energy costs with the use of more Low Pour Fuel Oil (LPFO) than natural gas.

The cost of sales was also affected by the devaluation of the Naira, which eroded most of the savings from the lower raw sugar prices in the international market.

These costs as a percentage of T/O rose to 75.15% in HY 2015 from 73.87% in HY 2014. The administrative, selling and distribution expenses decreased by 10.02% to N2.63bn in HY 2015. These expenses as a percentage of T/O fell to 5.15% from 5.90% in HY 2014.

The other income for HY 2015 decreased by 69.31% to N93.47mn, compared with
N304.55mn recorded for the corresponding period of 2014, while the finance charges increased from N74.91mn to N361.65mn in HY 2015, representing a significant increase of 382.77% from the previous year.

The company’s HY 2015 Profit Before Tax (PBT) stood at N9.80bn down from N10.26bn in 2014. The tax provision increased marginally to N3.49bn from N3.43bn in HY 2014. This led to a Profit After Tax (PAT) of N6.31bn in 2015, down by 7.66% from N6.84bn recorded in 2014.

The drop in profitability is a reflection of the increased finance and operating costs. The performance in absolute terms for the 3-months ended June 2015 shows an improvement over the 3-months ended March 2015 and over the corresponding period of last year.



The company’s profit margins decreased in HY 2015 compared with HY 2014. The Gross Profit (GP) margin stood at 24.85% in HY 2015, down from 26.13% in HY 2014. The PBT Margin in HY 2015 also decreased over the HY 2014 figure but is higher than the PBT margin of the Financial Year ended December (FY), 2014. The PBT margin decreased to 19.17% in HY 2015 from 20.69% in HY 2014 but up from 16.10% in FY 2014. The PAT margin currently stands at 12.35%, down from 13.78% in the corresponding period of 2014, but up from 12.27% as at FY 2014.

This result also indicates that the percentage of T/O, PBT, and PAT in the HY June 2015 to the Audited T/O, PBT and PAT for the period ended December 2014 are: 53.99%, 64.18% and 54.25%, respectively.

Given the run rate, the company should meet and surpass its previous year’s performance. However, PAT in 2015 may be marginally lower than the previous year because of higher provision for tax which is anticipated to be slightly higher than was recorded in 2014.





A cursory look at the balance sheet position as at HY 2015 compared with the position as at FY 2014 shows a marginal increase in the company’s fixed assets. The total fixed assets increased by 2.11% to N51.54bn in HY 2015 from N50.47bn in FY 2014.

The stock increased by 29.42% to N19.54bn in HY 2015 from N15.10bn in FY 2014. The cash and bank balances recorded a decrease by 43.09% from N7.10bn in FY 2014, to N4.03bn in HY 2015. The trade debtors and other receivables increased in HY 2015 by 31.65% to N18.45bn from N14.01bn in the FY 2014, while trade creditors and other payables increased by 24.52% to N31.41bn from N25.23bn as at FY 2014.

Working capital stood at N1.49bn in HY 2015, while net assets for the period increased by 2.94% to stand at N52.93bn from N51.41bn in the FY 2014. The company needs to put in place appropriate measures to lower its trade debtors.

The total assets of the company which stood at N100.43bn as at HY 2015 were financed by a mix of equities and liabilities in the ratio of 52.70% and 47.30% respectively.

Our analysis of the liabilities shows that the short-term liabilities stood at N42.90bn, accounting for 90.29% of the total liabilities, while the long-term liabilities which constituted solely of deferred taxation stood at N4.61bn, accounting for 9.71% of the total liabilities.

The short term liabilities constituted mainly of Trade and other payables and short term borrowings. Short term borrowings rose significantly by 210.38% to N7.42bn HY 2015 from N2.39bn FY 2014.This also impacted the finance costs.



FY 2014 Performance Analysis:

As at FY 2014, turnover decreased by 8.04% to N94.86bn, compared with N103.15bn recorded in the corresponding period of 2013. The administrative, selling and distribution expenses decreased by 28.42% to N8.17bn in FY 2014. The company also recorded a significant decrease of 87.42% in its net finance income of N179.15mn in FY 2014 from N1.42bn in 2013.

The Profit Before Tax (PBT) fell to N15.27bn, a decrease of 6.10% from N16.27bn recorded in the corresponding period of 2013. The tax provision decreased by 32.88% to N3.64bn from N5.42bn, leading to a Profit After Tax (PAT) of N11.64bn in FY 2014 from N10.85bn in the corresponding period of 2013, representing an increase of 7.28%.

As at FY 2014, all profit margins excluding the gross profit margin increased over the FY 2013 figures. The Gross Profit margin fell to 19.64% from 23.85% in FY 2013 while the Earnings Before Interest and Tax (EBIT) margin rose to 15.91% from 14.39% in FY 2013. The PBT margin increased to 16.10% in FY 2014 from 15.77% as at FY 2013. Also, the PAT margin stood at 12.28%, up from 10.64% in the corresponding period of 2013.

 
Drivers of Performance:

The company’s performance was impacted by the following factors:

Positive Factors:

       I.            Lower raw sugar prices.

    II.            Increased average selling price per bag.

 III.            Better cane yield/quality from Savannah Sugar.

  IV.            Upgrades of the Apapa refinery resulting in better sugar yield.

 

Negative Factors:

       I.            The devaluation in the foreign exchange market which affected operating and

finance costs.

    II.            The fall in disposable income and the declining purchasing power in the

economy.

 III.            Higher energy costs due to disruptions to the supply of natural gas.

  IV.            Production at the Apapa refinery constrained due to the traffic gridlock in the

Apapa area.

     V.            The insurgency issues facing North East Nigeria.

  VI.            Zero exports to neighbouring countries due to uncompetitive selling price.


Valuation:
In arriving at a fair value for the ordinary shares of the company, we used the Discounted Free Cash Flow (DCF) model. We applied a terminal growth rate of 5.99% and used a beta value of 0.90x .

We used the yield of 15.95% as our risk free rate, and market premium of 11.15%. Applying the foregoing parameters on the Capital Asset Pricing Model (CAPM), the cost of equity generates 25.98%.

The company has long term debt, with the after tax weighted cost of the debt estimated at 9.18% using a tax rate of 32%. The Weighted Average Cost of Capital (WACC), which is our discount rate, was estimated at 25.45%. Using 12bn shares in issue, the DCF model generates N10.14 per share, which is our fair value.

The current market price of DangSugar shares is N6.62. The highest and the lowest closing price in the last 52 weeks are N8.30 and N4.94 respectively. The forward earnings yield and dividend yield based on our fair value are: 9.38% and 3.96% respectively.

The total return, a combination of the capital appreciation and the forecast dividend for the year 2015, generates 59.21%. This is higher than the current yield on the FGN Bond of 15.95%.

We therefore place a BUY on the shares of Dangote Sugar Refinery Plc at the price of N6.62 as of September 29, 2015.

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