Monday, March 21, 2016 8:32AM /Cordros Capital
We have revised the TP for Dangote Sugar Refinery Plc's (DANGSUGAR) shares slightly to N5.48 (previously N4.97), and upgraded recommendation to HOLD (previously SELL). Whilst the Group's share of the refined sugar market is poised to benefit from (1) the increasing difficulty competitors (both smugglers and licensed dealers) face accessing the USD and (2) improved delivery channels, we have pruned EBIT (relative to initial estimates) over the forecast period, considering (1) the recent 10ppt increase in raw sugar import tariff to 20%, (2) persisting volatility in global raw sugar prices (up 14% average in Q4-15 and 2% YtD), and (3) limited cost pass-through to consumers, in a short to medium term subdued macroeconomic environment.
The Group revised the price of its refined sugar back to N8,000 per 50kg bag (from N5,750) at the beginning of this year following the announcement of the tariff increment, in addition to heightened forex pressure. Despite cost pressure from these two factors, including unavoidable intermittent gas supply challenges, we do not expect prices to be retained at current level over the year, considering the weakness in the macro environment, amidst weak sugar consumption per capita (c.9.kg). We forecast PAT to increase by 10% in 2016 (previously c.19%), via 20% volume increase and flattish prices
DANGSUGAR released Q4-2015 and full year 2015 results on the NSE yesterday. The 12 months revenue (up 6.5% vs. 2014) and profit after tax (down 1% vs. 2014) beat our estimates by 6.5% and 15% respectively, following positive surprises in Q4 sales volume (up 47% y/y and 54% q/q) and operating expenses (down 44.7% y/y). Consequently, the Board proposed a final dividend of N0.50 (vs. N0.42 we expected), representing a payout of 52%.
The Q4-2015 result was mixed. Revenue surprised to the upside (by 33% y/y and 27.8% q/q) while profit after tax fell by 11.6% y/y (and 27.2% q/q). Revenue got a boost from a sharp increase in volume following (1) a major price cut in September (from N8,000/50kg bag to N5,750/50 kg bag), (2) reduced activities of smugglers (as USD scarcity intensified, rendering unofficial fx rates highly uncompetitive), and (3) improved traffic situation along the Apapa factory axis, and (4) the addition of 100 delivery trucks to existing fleet. Q4 revenue and volume notably came in at record highs.
A combination of 323bps y/y increase in gross margin and 44.7% fall in operating expenses helped offset 63% y/y decline in other income, producing an operating profit (EBIT) of N750 million, from a loss of N410 million in Q4-2014 (using the restated numbers). We note however that the gross margin of 7% recorded in Q4 was the lowest in all quarters of 2015 (Q4-2014 gross margin was equally the weakest in all quarters of 2014), and was driven principally by the 39% price cut.
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