Dangote Sugar Refinery Q1 2019 Results Review: Neutral Rating Maintained


Wednesday, May 15 2019  10:20AM / FBNQuest Research / Header Image Credit: Dangote Sugar


Negligible changes to EPS forecasts over the 2019-2021E period

Dangote Sugar Refinery’s (DSR) Q1 2019 earnings grew by 33% y/y to N7.0bn and was broadly in line with our forecast. As such, we have made negligible changes to our EPS estimates over the 2019-2021E period. Q1 sales declined by around -7% y/y to N38.2bn, driven by weaker finished sugar sales which have been negatively impacted by smuggling activities in the northern markets.

At Savannah Sugar Company (SSC), sugar volume sales came in at around 11% of production during the period. As a result, we expect to see elevated sales in Q2 for SSC. Q1 results benefitted from steady finished sugar prices amid declining raw sugar costs. Product evacuation from the Lagos Refinery continues to be constrained by congestion at the Apapa Port. Therefore, we believe that management will continue to attempt to hold prices steady for as long as it is possible.

We forecast sugar production and sales volume growth of 15% y/y and 8% y/y to 661,616mt and 629,216mt respectively for 2019E. We also retain our capacity utilisation forecast of around 45% for the year and project sales and EPS growth of 5% y/y and 15% y/y to N158.1bn and N2.10 respectively. To our minds, double-digit y/y sales growth in H2 is likely to offset subdued sales in Q1 and Q2. We do not anticipate any meaningful accretion to earnings from on-going backward integration projects during this financial year, although we continue to expect steady execution of the firm’s backward integration programme. Our price target of N14.9 is unchanged and implies a potential upside of 10% from current levels.

Hence, we retain our Neutral rating on the stock. Year-to-date, DSR shares have shed -10%, broadly in line with NSE ASI. DSR shares are trading on a 2019 P/E multiple of 6.5x for an EPS growth of 20% y/y in 2020E.


Q1 PBT and PAT up by double-digits y/y

In Q1, while sales declined by -7% y/y to N38.2bn, PBT and PAT of N10.7bn and N7.0bn both grew by 28% y/y and 33% y/y respectively. The growth was driven primarily by an 800bp y/y expansion in gross margin and a -9% y/y decline in operating expenses to N1.8bn, to a lesser extent.

Gross margin benefitted from steady finished sugar prices while raw sugar (key raw material) costs declined by double-digits in the last quarter of 2018. Sequentially, sales were up 14% q/q while PBT and PAT both grew by 28% q/q and 33% q/q respectively. Compared with our forecasts, while sales missed by around 12%, PBT was broadly in line.


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