Dangote Sugar Refinery Plc - Production costs surge, caps earnings growth


Thursday, November 03, 2016 10:48am/ Vetiva Research

Strong revenue growth persists, hinged on higher volumes, price
DANGSUGAR maintained the impressive revenue growth run-rate recorded from H1’16 in its Q3’16 results, posting an 18% q/q growth in the period.

Though flattered by a low base from the preceding year (volumes impacted by distribution challenges and higher smuggled sugar volumes), 9M’16 revenue was up 58% y/y to ₦115 billion (Vetiva estimate: ₦102 billion).

This notable growth can be attributed majorly to multiple price increases implemented through the year, up 45% y/y to ₦187,590/ton in 9M’16.

Management has taken this pricing action in order to protect margins from rising input costs emanating from the 55% ytd currency devaluation, uptick in global raw sugar prices, increase in import tariff for raw sugar from 10% to 20%, and higher unit price of both gas and LPFO (alternative fuel).

However, given its lion share of the market, DANGSUGAR has also been able to consistently grow volumes – up 16% y/y to 614,389MT – amidst stronger demand arising from reduced competition from smuggled sugar and an improved distribution network.   

Lower margins suppress earnings
Notwithstanding the price increases (16% hike taken in Q3), gross margin recorded a third consecutive quarterly moderation in Q3’16 to 11.3%, down from 18.9% in Q2 and 20.8% in Q1.

We believe the full effect of the initial currency depreciation (effected middle of June) and a further 11% depreciation in Q3’16 are responsible for the sharp dip in margins. Also, management stated that disruption in gas supply persisted in Q3, which led to increased usage of more expensive LPFO.

Margins were further impacted by rise in OPEX (as % of sales) from 3.1% in Q2’16 to 4.3% in Q3’16. With this, Q3’16 PAT declined 32% q/q to ₦2.7 billion (Vetiva estimate: ₦3.0 billion). Overall, 9M’16 EPS at ₦0.84 came in 7% below our estimate.

Downward revision to EPS, TP – BUY rating maintained
We expect revenue growth to remain strong in Q4’16, bringing FY’16 estimate of ₦157 billion - implying a 56% y/y growth.

We believe continued tightness in the FX market and incline in global raw sugar prices will persist in Q4’16.

After updating for our lower margin assumptions, we have revised our FY’16 EPS to ₦1.09 (Previous: ₦1.21, FY’15: ₦0.96) and cut our target price to ₦8.75 (Previous: ₦9.27). We expect FY’16 DPS of ₦0.54 (2015: ₦0.50) – dividend yield of 9%.

Related News


1.       DANGSUGAR Declares N10.12billion PAT in Q3 2016 Result SP N6.25k

2.      Increase in Selling Price to Cushion Dangote Sugar Plc Cost Pressures

3.      Dangote Sugar Refinery’s Rising costs Weigh on Growth Outlook

4.      DANGSUGAR Declares N7.38billion PAT in Q2 2016 Result SP N7.00k

5.      Dangote Sugar Refinery Plc Q2 16 - Interest savings on debt pay-down saves the day

6.     Dangote Sugar Refinery Operating Expenses Grow by 28% YoY in Q2'16

7.      Dangote Sugar Records N70.5bn Revenue in Q2’16

8.     DANGSUGAR Declares N3.34billion PAT in Q1 2016 Result SP N5.50k

9.      DANGSUGAR Maintains Neutral Rating as Sugar Production Growth is Likely in 2016

10.  DANGSUGAR Records Strong Sales Performance as PBT Drops by 47.4 QoQ in Q4 15

11.   DANGSUGAR Declares N11.53billion PAT in  2015 Audited Result,(SP:N6.31k)

12.  DANGSUGAR Weaker volumes behind lukewarm outlook Shares Rated NEUTRAL
13.  DANGSUGAR Appoints Engr. Abdullahi Sule as Acting Group MD


14.  Dangote Sugar grows PAT by 2.07 as revenue down by 1.02 in Q3 15


15.   Dangote Sugar grows PAT by 2.07 as revenue down by 1.02 in Q3 15


16.  Dangote Sugar Sustains bottom-line growth despite low sales in Q3 15


17.   DANGSUGAR Investing for Sustainable Growth FSDH Places a BUY


18.  DANGSUGAR Better-than-expected Q2 2015


19.   DANGSUGAR Records N51.1bn Revenue in H1 15 EBITDA Up by 3
20. DANGSUGAR declares N6.31billion PAT in Q2 15 result SP N6.00k
Related News