12 June 2018 ( Lagos )
Neutral rating maintained:
Dangote Sugar Refinery’s (DSR) Q1 2018 PAT of N5.3bn was behind analyst’s estimate by -37%. Both pricing and sales volumes disappointed, down –22% y/y and –13% y/y to N13,054 per 50kg bag and 153,463 tonnes respectively. While analysts expected relatively softer sales volumes due to constraints on the main evacuation route at Apapa, smuggling of finished sugar across the northern border of the country had a much bigger impact. The double-digit cut in sales prices in Q1 was a direct response to increased competition. Going forward, analysts understand that DSR’s finished sugar sales prices are likely to track global raw sugar (a key raw material) prices, which have declined by c.-16% to US$270/tonnes this year. They forecast an average retail sales price of N13,000 per 50kg bag for 2018E. Additionally, analysts have cut their sales volumes estimate for 2018E by -18% to c.634,000 tonnes, given the weak Q1 performance. While road construction works along the Apapa route are on track, analysts believe competition, largely smuggled finished sugar, is likely to weigh on sales volume growth this year.
Backward integration - Top Priority!
Analysts continue to believe funding requirements for backward integration projects would be prioritized in decisions going forward. Within the next five years, management expects to locally produce 1 million tonnes of sugar annually from projects in Adamawa, Taraba and Nassarawa States. The combined impact of the downward adjustments to analyst’s pricing and sales volume forecasts is an average reduction of -35% to their EPS forecast over the 2018-2020 period. Analyst’s new price target of N18.0 is also down -26%, implying a potential downside of -9.5% from current levels. They retain their Neutral rating on the stock. DSR shares are trading on a 2018 P/E multiple of 9.1x for an EPS decline of -6% y/y on average over the next two years. Ytd, DSR shares are flattish compared with the broad market’s gain of +1.6%.
PBT up 19% y/y reversing double-digit y/y topline decline:
In Q1 2018, although sales declined -31% y/y to N41.1bn, both PBT and PAT grew by double-digits y/y. While PBT was up 19% y/y to N8.4bn, PAT grew 11% y/y to N5.3bn. Sales came in weaker y/y across all key regions, declining -46% y/y, -28% y/y and -27% y/y in the North, West and Lagos respectively. A gross margin expansion of +1,183bps y/y to 25.0% completely offset the topline decline and relatively weaker other income line to lead to the PBT growth. Sequentially, sales came in flattish q/q while PBT and PAT both declined by -42% q/q and -60% q/q respectively. Compared with analyst’s estimates, sales and PBT both came in behind by -23% and -32% respectively. The variance on the PBT line was driven by negative surprises on the sales and other income lines.
Source: Uwadiae Osadiaye, CFA from FBNQuest Capital Limited.
Reporting for EasyKobo on Tuesday, 12 June 2018 from Lagos, Nigeria
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