Dangote Sugar Refinery Q4 2019 and Q1 2020 Results Review: Price Target Cut Driven By FX Constraints


Thursday, June 18, 2020 /02:55 PM  / By FBNQuest Research / Header Image Credit: Investor Advocate


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-12% average cut to earnings forecasts

Dangote Sugar Refinery's (DSR) recently published earnings came under pressure from an upswing in raw sugar prices in Q4 2019, and a weaker exchange rate in Q1 2020 due to lower crude oil prices. That said, the company recorded unit volume growth of 20% y/y and was able to implement price increases in Q1 thanks to the border closure. As such, Q1 sales in naira terms increased by 25% y/y to N47.6bn.


Still, gross margin contracted by -630bps y/y to 26.7% as the price increase was not large enough to make up for increased fx costs. The other notable squeeze on Q1 earnings came from an fx loss of -N1.3bn grouped under interest expense. Although we see DSR dealing with the COVID-19 disruptions better than peers on the back of its price pass-through ability, the prolonged gridlock situation in Apapa as well as the poor state of road infrastructure pose key barriers to growth. We also do not expect additional inflationary pressures over coming quarters to be fully passed on via price increases given the strain on consumer wallets.


We have therefore cut our gross margin forecast by for 2020-22E by an average of 198bps. This, along with other changes translate to an average EPS cut of around -12% for 2020-22E and consequently, a -15% reduction to our price target to N14.0. Our upward revision in equity risk premium by 150bps to 7.5% also contributed to the price target reduction. DSR shares are currently trading on a 2020E P/E multiple of 9.3x for an average EPS growth of 22% in 2020-22E. Year-to-date, bullish sentiments have fueled a 7% rally in DSR shares; they have outperformed the broad market index by 14%. Our new price target implies a potential downside of -5% from current levels. We therefore retain our Neutral rating on the stock.


Q1 PBT down by low-double digits y/y

The 25% y/y growth in Q1 sales was wiped off by a -630bp contraction in gross margin. Earnings were also pressured by a 14% y/y and 30x y/y increase in net interest expense to N2.0bn and -N1.3bn respectively, with the latter's increase caused by the fx loss.


Consequently, PBT was down -11% y/y to N9.5bn. Sequentially, sales plunged by -60% q/q whereas gross margin expanded by 199bps q/q. Opex decreased by -69% q/q but net interest expense was 14x higher q/q. As such, PBT was -59% lower q/q. Relative to our forecasts, PBT missed by -10%, largely due to a negative surprise in net interest expense (3x higher than forecast).


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