Dangote Sugar Refinery Plc - Recommendation Upgraded


Friday, November 11, 2016 3:50 PM / Cordros Capital

We upgrade recommendation on DANGSUGAR to BUY (previously HOLD), with 2017 TP of N8.31. The company’s dominance in the sugar industry -- more so considering that unofficial imports have been significantly constrained by FX scarcity -- has allowed management to boldly respond to cost pressures via price increases (70% recovery over 2016F to N213, 899/tonne).

Despite the downward revision following the below expected performance in Q3, we still look for 2016F net profit growth of 25% (previously 37%).

While demand is set to ease by 28% in 2017 (with price per tonne now at N342, 000 ex-VAT), the decline will be more than compensated for by significantly higher average price, suggesting potential growth in topline (we estimate 15%). Except for material deceleration in costs, especially given the adverse impact on Q3-16 margins, it is unlikely that prices would be reduced, at least in the first half of next year.

The management of DANGSUGAR’s sister company, also in the business of manufacturing and which has raised selling prices recently, said that emphasis in 2017 will be on margins via reduction of energy costs and by retaining the higher prices.

Our volume forecast is based on expected decline in national consumption. Corporate demand (accounting for 30% of DANGSUGAR’s sales) will be affected by (1) weak volumes, as they seek to pass on costs to consumers and (2) the substitution of sugar with relatively cheaper glucose. Management, however, expects that the deficit in the domestic market will be met by potential growth in cross-border demand.

Costs are likely to peak at 2016 levels, though risk is to the upside. Key risks are unresolved FX issues and high energy costs. DANGSUGAR’s management stated recently that it purchases about 70% of its total FX requirements from unofficial sources (at between N450-N470/USD, against the CBN’s N305/USD) owing to lingering shortages. On energy, the currently high LPFO substitution is unlikely to improve materially, given the unrelenting attacks on gas pipelines.

Overall, we forecast 34% net profit growth in 2017. Risks to the forecast are (1) lower than expected sales volume, or price reduction, or both and (2) significant cost inflation. DANGSUGAR’s stock is up 4% YtD, and is trading on a forward PE of 5.2x, at 40% and 63% discount to Bloomberg's SSA and Nigerian comparables.

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