Increase in Selling Price to Cushion Dangote Sugar Plc Cost Pressures


Tuesday, August 16, 2016 11:48am /CardinalStone Research

Dangote Sugar Refinery Plc held a conference call on its H1'16 performance recently. Following revisions to our forecasts, we increase our TP to N6.70 (previous: N6.12) and upgrade our rating to a HOLD. Please see below the group's H1'16 performance update and key highlights from the call.

Topline performance remains upbeat
Dangote Sugar's turnover continued on its upward path as H1'16 revenue grew by 37.9% YoY to N70.5 billion amidst weak volumes in the north and a brief pause in sales due to uncertainties surrounding the review of its import duty concession. The company reported a 16.1% growth in revenue in Q2'16, maintaining a quarterly turnover run rate of 16%.

Management attributed the increase in turnover to increased sales volume during the period; refined sugar sales increased to 434,885 tonnes from 367,283 tonnes in H1'15. According to management, Nigeria's Sugar consumption increased to 1.6 million tonnes in H1'16 compared with 1.4 million tonnes in H1'15 which explains the increase in demand for refined sugar.

Also, the increase in its selling prices to an average of N8,102 from N6,959 per 50kg bag during the quarter contributed to the impressive topline performance.

Higher cost environment pressurize margins
Cost of Sales ratio increased markedly by 510bps to 80.2% from 75.2% as its production costs is affected by three key factors - energy, foreign exchange and commodity price. On energy, gas supply disruptions worsened given incessant pipeline vandalization in the Niger Delta.

Consequently, the company had to rely on Low Pour Fuel Oil - an expensive alternative means of energy which contributed to the increased production costs. Gas to LPFO usage ratio for the period was 53%:47% compared with 80%:20%in Q1'16. Secondly, the liberalisation of the Naira which led to a depreciation of c.40% by end of H1 affected gas prices, raw sugar import and import duty further exerting pressure on input costs.

Dangote Sugar imports over 95% of its raw sugar requirements and is therefore exposed to swings in international raw sugar prices. Management stated that the cost of raw sugar increased by 10.7% to an average of $383 in 2016 from an average of $346 in 2015. These impacted on gross profit margin as it declined to 19.8% in H1'16 from 24.8% in H1'15.

We believe the above factors will exert further pressure on production costs in H2'16 however, the recent 43% increase (to N12,500/50kg bag from N8,750/50kg bag) should help minimize the impact of cost pressures.

Management plans to raise funds for expansion and rehabilitation of Savannah estate
The production of refined sugar from Savannah Sugar has continued to gain traction as volumes increased to 12,695 tonnes in Q2'16 from 6,436 tonnes in Q2'15. Savannah sales volume also increased to 12,397 tonnes in Q2'16 from 6,200 tonnes in Q2'15.

Plans are currently underway to expand existing capacity in Savannah to 100,000MT of refined sugar annually from 50,000MT before the end of 2017.  

Thereafter, the company plans to install a new 200,000MT factory, bringing total capacity in Savannah Sugar to 300,000MT annually. To that effect, Dangote Sugar plans to raise about $200 million (80% via debt and 20% as equity capital contribution) in Q3'16 to fund the expansion and rehabilitation of the factory and estate.

We upgrade stock to "HOLD" rating onaccount of the 43% increase in selling price
We revise our revenue forecast upwards by 9.8% to account for the 43% increase in selling price to N12,500/50kg bag (previous: N8,750).

We also revise our cost of sales projections upwards marginally (+2.4%) to account for further cost pressures as we had factored in significant cost increases (from FX and raw sugar price) in our recent H1'16 report.

Given the upward revision to price, we raise our target priceto N6.70 (previous: N6.12) and upgrade our rating to a HOLD.

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