Dangote Sugar Could Offer Investors Inflation-Protected Return -Analysts
Over the last 5-years, only Dangote Sugar Refinery (Ticker: DANGSUGAR) was able to outperform cumulative inflation, says CardinalStone Securities in a review on the company’s performance. According to the investment firm, the company’s inflation-adjusted 5-year total return printed at 42.8%.
Drawing a comparison with the Nigerian Exchange valuable companies, analysts hinted that NESTLE fell slightly short with a negative 6.8% real total return, while GUINNESS offered the least protection to cumulative domestic inflation in the period.
CardinalStone says the sugar refinenery company’s earnings will remain buoyant in the financial year 2021. In the second quarter, the company’s earnings per share dropped 17.6% year on year to N0.35 in comparison with N0.43 in the comparable period in 2020.
This marked its lowest since the third quarter of 2019, according to Cordros Capital, underpinned by a 10.1x surge in finance cost amid higher operating expenses.
However, analysts spotted that in the first half of the same year, EPS grew by 7.6% to N1.04 compare to N0.97 reported in the comparable period in 2020, supported by the impressive earnings in the first quarter of 2021.
The company’s sales expanded 16.1% year on year in the second quarter of the year. On half year basis, sales increased +27.8% year on year. The meteoric growth in sales was driven by an increase in the sales of 50kg sugar and the sale of molasses.
During the period, sales of 50kg sugar which accounts for 97.1% of total revenue saw a 19.9% increased while sales of molasses which represents 0.7% of the company’s turnover jerked up 78%.
“We believe the double-digit growth in 50kg sugar sales was price-driven, given the strong price increase of 19.4% year on year implemented in the second quarter of 2021”, analysts at Cordros Capital said.
Meanwhile, revenue from the sale of retail sugar declined sharply by 59.3% year on year in the second quarter – the highest quarterly decline in at least 18 quarters. But sales from this side accounted for 1.7% of the company’s revenue.
Analysts attribute the decline to a 2.6% year on year decrease in sales volume to 188,097 metric tonnes in the second quarter compare with the comparable period last year 193,193 metric tonnes, reflecting the intensified competition in the sugar industry within the period.
WSTC Securities analysts believe that the volume decline was a reaction by the consumers to the price increases on products.
The average selling price per bag rose by 20% year on year to N17.19k in the second of 2021, WSTS Securities analysts said while noting that in the previous quarter, the average selling price rose by 34% year on year.
“In our view, the combined impact of low household income and heightened inflationary pressure on income resulted in a weak demand during the period”.
In the period, Dangote Sugar gross margin increased by 176 basis points to 16.3%, as the price-driven revenue growth of 16.1% outpaced the 13.7% year on year increase in the cost of sales.
Analysts said the higher cost of goods sold outturn reflects the challenges in the business environment during the period, including foreign currency constraints and the pass-through impact of elevated inflationary pressures on raw material costs, energy cost and other inputs.
In its second half outlook report on industries, CardinalStone projects that DANGSUGAR could grow earnings to N33.7 billion in 2021 from N29.8 billion, and raise the target price to N21.08 from 20.72.
This translates to a potential upside of 19.4% to a reference price of N17.65, as a result, upgrade our recommendation to a BUY from HOLD previously, the firm said.
“Our optimism for DANGSUGAR is reflected in our projected 14.5% year on year top-line growth to N245.2 billion in 2021.
“This projection accounts for stronger volume output and pricing impact. To this point, we note that the firm is likely to continue to benefit from favourable regulation in its market space”, CardinalStone explained.
Analysts said although the borders appear to have been opened, tighter controls against smuggled products, which have been a bane to the company, are likely to portend positively for its market share and product pricing.
It was also noted that the CBN’s recent disclosure restricting FX access for sugar importation to only 3 companies (DANGSUGAR inclusive) presages possible top-line growth.
In its first quarter 2021 result, DANGSUGAR posted a 41.5% growth in revenue, supported by a 5.7% increase in volume sales and higher pricing.
Notwithstanding the robust top-line growth expectation, analysts raised concerns for margins arising from higher global sugar prices and FX challenges -despite its backward integration efforts, DANGSUGAR still exports about 80% of its raw sugar requirement.
Domestically, management laments that the Apapa gridlock remains a logistical constraint, while insecurity continues to hamper some of its efforts at the BIP sites, leading to higher than comfortable operating expenses.
Nevertheless, analysts at Cardinalstone believe that gains from the firm’s top line push can more than offset the pull from other aspects of its operations.
The second quarter result shows that the company’s earnings before interest tax, depreciation and amortisation (EBITDA) and earnings before interest and tax EBIT margins declined by 84 and 20 basis points to 16.0% and 11.8%, respectively following a 62.9% y/y expansion in operating expenses.
In the second quarter of 2020, EBITDA and EBIT had printed at 37.8% and 18.5%.
Analysts said the higher operating expenses was influenced by an expansion in both the administrative which witnessed a 67.4% year on year increase and 11.7% jump in selling & distribution expense lines.
Net finance cost stood at a negative of N1.01 billion in the second quarter relative to a positive of N50.45 million a year ago, following the more than ten-fold increase in finance cost to N1.39 billion from N124.79 million.
The surge in finance cost was mainly driven by a 177.2% increase in foreign exchange loss to N2.79 billion following the currency devaluation within the period.
Overall, Profit before tax declined by 9.7% year on year to NN6.81 billion compared with N7.54 billion in the second quarter of 2020, while profit after tax fell faster by 17.4% following a 7.8% increase in tax expense.
“We like that the company has maintained its double-digit top-line growth trajectory for eight consecutive quarters despite implementing a substantial price increase. In addition, we note that the reopening of land borders did not affect the company’s sales volume adversely, which implies a limited influx of unlicensed sugar into the country”, Codros Capital stated.
However, analysts raised concerns over the persistent increase in operating and finance costs.
Nevertheless, over the rest of 2021, Codros Capital analysts think the company will maintain positive performance given its market leadership position and substantial progress in its backward integration programme despite renewed competition in the sugar industry.
The management decision to de-risk the balance position was met with high debt servicing payment in the first half of 2021. The company’s loans and borrowing declined 12.08% from N1.23 billion in the first half of 2020 to N1.08 billion at the end of the first half in 2021.
However, its finance cost expanded 150.51% after incurring the cost of raising a letter of credit which impacted profitability further negatively, Atlass Portfolios analysts said.
This raised total finance cost from N1.91 billion in the first half of 2020 to N4.79 billion a year after following repayments of loans and borrowings.
Atlass Portfolios analysts said Dangote Sugar Refinery returned only 10.58% to its investors in the first half as return on equity grew marginally from 9.67% last year. Meanwhile, it reported a 4.44% return on assets after growing assets by 23.85% while shareholders funds dip marginally by 0.52%.
Analysts at WSTC Securities rated Dangote Sugar share buy, adding that price return and dividend yield on the stock presents a 28% total potential upside.
Read Also: Dangote Sugar: Analysts Upgrade Estimates, Cite Border Policy
Dangote Sugar Could Offer Investors Inflation-Protected Return -Analysts
