Dangote Sugar Refinery Q2 2020 Results Review: Neutral Rating Maintained Despite Upside


Friday, August 14, 2020 / 02:22 PM / by FBNQuest Research / Header Image Credit: Dangote Sugar 


Slight increases to average earnings forecasts

Dangote Sugar Refinery's (DSR) Q2 2020 results indicate that topline was driven more by pricing than volumes, which were up 8% y/y compared with naira sales growth of 32% y/y. That said, the price increases effected were clearly not strong enough to compensate for fx pressure and a higher VAT, as gross margin contracted by -562bps y/y and was behind our forecast by -742bps.


During its H1 call, management communicated that there will be further price increments over the coming quarters. The other factors that should support earnings include a recent boost in the Savannah plantation volumes and a planned reduction of raw sugar import duty by the authorities from 10% to 5%. However, given softer demand, we expect that some fx inflation will be absorbed by DSR, eroding some of these benefits. As such, we have shrunk our 2020E gross margin forecast by -392bps despite a 25% increase in our sales forecast largely due to price increases. Nevertheless, our 2020E PBT is 14% higher, helped by a 6% reduction to opex following a H1 positive surprise of a similar magnitude.


Although we rolled over our valuation to 2021E, we also modelled the impact of a weaker naira on capex (due to the ongoing backward integration program) and payables given that the majority of raw sugar inputs are imported. Essentially, our average EPS forecast for 2020-22E and price target are 1.1% and 1.2% higher respectively. DSR shares are currently trading on a 2020E P/E multiple of 6.4x for an average EPS growth of 16% in 2020-22E. Year-to-date, DSR shares have shed -13%, behind the broad market index loss of -6%. Our new price target of N14.2 implies a potential upside of 19% from current levels.


Despite the modest upside, the following factors are weak spots for earnings: i) the company's sensitivity to fx headwinds, and ii) consumers' subdued purchasing power amid the inflationary environment. We therefore retain our Neutral rating on the stock.


Q2 PBT increased by double-digits y/y

PBT advanced 19% y/y to N7.5bn on the back of a -15% decline in opex and other income of N1.2bn versus a loss of -N610m in Q2 2019. These positives more than offset the gross margin contraction of -562bps y/y. On a sequential basis, sales increased by 17% q/q but gross margin contracted by 1,212bps.


Consequently, PBT was -21% lower q/q. PBT missed our forecast by -7% primarily due to a -742bp negative surprise in gross margin.

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