Dangote Sugar Refinery Q3 2016 Results Review - Rising Costs Impeding Growth


Tuesday, November 22, 2016 12:58 PM /FBNQuest Research

Price target cut by 13% to N5.3; 2016/17E EPS ests. cut by 9%

Dangote Sugar Refinery’s (DSR) Q3 2016 earnings declined -11% y/y and were behind our estimate by 23%. Although sales grew impressively both on a y/y and q/q basis, higher production and operating costs weighed on profitability. Higher energy costs due to the shortage of gas and a steady rise in raw sugar prices (a key input for DSR, up 33% year-to-date) were the key cost drivers.


We estimate that DSR raised prices by 70% y/y in Q3 in an attempt to pass on higher manufacturing costs to customers. For now, product demand growth is resilient, with sugar sales up 18% and 16% in Q3 and 9M respectively. Lagos, which consists mainly of large industrial buyers, now accounts for around 45% of the firm’s total sales. Retail sales are also trending up but are still not material.


Going forward, we retain our average sugar sales price estimate of N200,000/tonne (US$635/tonne) for 2016E. Going by the trend seen over the last three quarters, we expect sugar volume sales growth of 4% y/y to 800,000 tonnes for 2016E, leading to a topline growth of 61% y/y to N162.2bn for 2016E.


However, we have cut our 2016-17E EPS estimates by 9% on average in view of escalating costs. Our new price target of N5.3 is down -11%. Raw sugar prices are expected to remain at elevated levels for most of 2017. Additionally, continued fx volatility in the near term is likely to weigh on profitability given DSR’s reliance on raw sugar imports.


Our new price target implies a potential downside of -14.6%. The shares are trading on a 2016E P/E multiple of 6.6x for 6% y/y EPS growth over the 2016-18E period. Ytd, DSR shares have gained 2.2% (ASI: -13.1%). We have retained our Neutral rating.


Rising cogs and opex weigh on y/y performance
In Q3 2016, while sales were up 104% y/y to N44.8bn, PBT and PAT both declined by 6% y/y and 11% y/y respectively. A 51% y/y rise in operating expenses and a 1631bp y/y gross margin contraction completely offset any benefits coming from the sales growth.

Sales were mainly driven by finished sugar in Lagos which were up by c.420% y/y to N20.1bn in Q3 2016. The gross margin contraction is unsurprising given the recent devaluation of the naira. DSR imports almost all of its raw sugar which accounts for around 70% of COGS.


Sequentially, sales were up 18% q/q. PBT and PAT both declined by c.30% q/q. Compared with our estimates, while sales beat by 9%, PBT came in behind by 23% due to negative surprises on cogs and opex lines.

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