Dangote Sugar Refinery Outlook is Less Bullish in Q3 2021 Results Review

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Thursday November 25, 2021 / 12:04 PM / by FBNQuest Research / Header Image Credit:  Dangote Sugar Refinery

 

Earnings over the '21-23f period cut by 15.3%

DSR's earnings disappointed in Q3 '21 due to topline miss, raw material costs pressure and higher-than-anticipated net interest expenses during the quarter. As such, we have lowered our EPS forecasts over the '21-23f period by 15.3% and cut the company's price target by 15.9% to NGN15.8. We believe the pressure on the topline is as a result of pressure on prices, arising from increased smuggling in the north, as well as tougher competition across the B2C and B2B segments in Lagos and other southern markets. Based on Q3 '21 results, average finished sugar prices fell by -6.1% y/y and -15.8% q/q to NGN289,040/tonne. However, unit volume grew by 18.1% y/y and 6.9% q/q to 219,858 tonnes, confirming our view that management cut prices in response to a price reduction by a competitor in July. This new trajectory informs a reduction in our topline estimate for FY'21 to NGN262.6bn (-1.6% vs. prior forecast).

 

Our gross margin estimate is now lower by -200bps to 18.2% (from 20.2%), due to the sustained rise in raw material costs (+50.6% y/y to USD447.5/tonne in Q3'21 alone). From our checks, raw sugar prices are up by around +27.0% ytd and +33.2% y/y in the international sugar market, driven by improved demand amidst reduced inventories. Further down the P&L, we have raised our net interest forecast to -NGN8.4bn, after it rose significantly ahead of our estimate in Q3 '21. Net interest expenses is driven by interest on letter of credits and fx losses. For bottomline, we have reduced PAT for FY '21 by 22.5% to NGN19.5bn and average EPS over 21-23f by 15.3%. Our risk-free rate and equity risk premium assumptions are unchanged; however, we have a higher adjusted beta of 1.1 (from 1.0 previously).

 

With these adjustments, we have a new price target of NGN15.8 (-15.9% lower). This indicates a potential downside of -4.2% from current levels. As such, we maintain our Neutral rating on DSR. We expect a dividend/share of around 97kobo, which indicates a yield of 5.9% and a 60% pay-out in FY'21. On multiples, DSR trades on a FY '22 EV/EBITDA of 2.4x, compared with a selected global peer average of 10.7x. Year-to-date, DSR's shares have shed -6.5% vs. the ASI's +7.4%.

 

Q3 '21 earnings disappoint

DSR's Q3 '21 bottom line was behind expectations. Sales grew by 10.9% y/y to NGN63.9bn but came in behind our estimate of NGN65.2bn (variance of -2.6%). Also, gross margin fell to 12.8% (its lowest since Q4'16) largely due to higher-than-expected cost pressure, while net interest expenses increased to -NGN1.2bn (from NGN236mn in Q3' 20). The company's PAT fell by -80.7% y/y and -32.4% q/q to NGN2.9bn (behind our forecast of NGN4.7bn).

 

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Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

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