Dangote Sugar: Q1-2016 Earnings Impress, as Cost Pressure Bites Margins


Friday, April 22, 2016 3:46 PM / Cordros Capital

This afternoon, Dangote Sugar Refinery Plc (DANGSUGAR) released result for first quarter ended March 31, 2016.

The result impressed across all key items, with revenue (45% y/y) and PAT (39.6% y/y) growing significantly. Compared to Q4-2015, the top and bottom line figures also grew by 16.4% and 52.5%. Annualized, Q1-2016 revenue and net profit of N130.5 billion (vs. Cordros' N111.5 billion estimate) and N13.4 billion (vs. Cordros' N12.1 billion estimate) beat consensus by 25.5% and 13.9% respectively. That said, margins were subdued, as we expected, and could have come in worse, were it not for the price increase at the beginning of the year

While we await clarity (conference call for the result comes up 27 April, 2016, at 3:00pm Lagos time) from management to determine the extent of changes (if any) we make to our full year estimates, in the meantime, we expect positive market reaction (due to consensus upward review of estimates) to trail the result.

Revenue growth was both volume and price driven. Compared to Q1-2016, volume increased by 23%, supported by

(1) the base effect of Q1-2015 sales that was adversely impacted by election activities;

(2) efficient delivery, helped by the newly acquired distribution trucks;

(3) Easter induced demand; and

(4) greater access to the North (43% of sales, vs. 38% in Q1-2015).


On prices, management instituted an increase in mid-January to N8,500/50kg bag (from N5,000/bag) of refined sugar, bringing average price in Q1-2016 to N7,574, representing 38% and 22% increases respectively, over Q4-2015 and Q1-2015 average levels.


Cost of sales increased by 52% y/y, and despite gross profit growing by 22.6% y/y, gross margin fell by 376bps y/y. Management claims to have been able to source forex at the CBN's official rate (although it didn't state what percentage of its total requirements are met at this window), and hence somewhat insulating raw materials and energy inputs from forex pass through pressure.

That said, concerns were raised around the newly increased import tariffs (from 10% to 20%), as well as higher freight expenses and unit prices of gas and LPFO. Freight expenses increased by 147.1% y/y and we estimate per tonne costs of raw materials and energy costs to have increased by 32.6% y/y. Overall, cost per tonne increased by 23% y/y, slightly above the 22% y/y average price increase.

Also supporting earnings growth was a 10.4% y/y fall in operating expenses. In addition, finance charges fell by a marginal 7.6% y/y while effective tax rate stood at 34.7%, versus 37.5% in Q1-2015.


DANGSUGAR's result adds to the list of better-than-expected Q1-2016 results released so far by consumer companies (NB and UNILEVER). While results in subsequent quarters should confirm the companies' resilience in the current challenging operating environment, we note the capacity of the impressive start to year positively shaping investor sentiments towards the sector.


Year-to-date, DANGSUGAR's share price has lost 8.9%, although it outperforms both the market (ASI down 13%) and the consumer goods sector (-21%). Its forward PE of 5.7x is at reasonable discount to Bloomberg's Middle East and Peer average of 11.7x.

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