Dangote Sugar Refinery’s Better-than-expected Earnings Excites Broadstreet

Dangote Sugar Refinery Plc.’s share price has maintained vertical trajectory after a better-than-expected earnings result in the third quarter of financial year 2020.

In the last 7-trading session on the local bourse, the company share price has maintained uptrend, rising from ₦13.70 to ₦15.50 on Thursday.

A number of Broadstreet analysts rated the stock buy, while some projected strong performance scorecards for financial year 2020.

In its 9M-2020 unaudited result, Dangote Sugar Plc reported a revenue growth of 36.7% year on year to ₦160.5 billion from ₦117.4 billion in 9M-2019.

Revenue performance in Q3 2020 was also impressive, up 54.6% year on year to ₦57.3 billion from ₦37.1 billion in Q3 2019.

In its equity note, analysts at ARM Securities Limited said this represents the fastest revenue growth rate since Q3-2017.

However, given the impressive recovery in revenue in prior quarters of 2020, quarter on quarter growth was slow at 3.0%

In its equity note, CSL Stockbrokers Limited said across business segments, performance was broadly positive as all recorded accelerated growth.

The breakdown showed that revenue from 50kg SKU expanded +38.3% year on year to ₦153.8 billion.

Retail packs increased 54.7% to ₦5.1 billion, Molasses rose 46.6% to ₦0.7 billion

However, analysts observed that freight income continues to maintain a downward trend, down 62.1% year on year.

“We note the strong growth in revenue reflects the strong recovery in volume growth combined with increase in price (evident in the fact that volume grew slower than revenue) as the company now has more flexibility on price control with discount smuggled sugar out of the market”, CSL Stockbrokers stated.

The company’s financial shows that Dangote Sugar Refinery reported 24.2% year on year in volume growth to 569,043 tonnes in 9M 2020.

Meanwhile, cost of sales adjusted for depreciation grew ahead of revenue growth, up 41.7% year on year to ₦120.9 billion in 9M-2020 from ₦85.4 billion in 9M-2019.

That said, analysts noted that cost of sales declined 2.1% quarter on quarter in Q3-2020 compared with revenue growth of 3.0%.

“This falls in line with our expectations that the reversal of the increase in import duties would support cost going forward”, CSL Stockbrokers explained.

It was however noted that while the impact was felt in Q3 2020, it was inadequate to reverse the already high cost base from H1-2020.

A slower growth rate for cost of sales meant gross profit came in higher year on yea, analysts at ARM Securities explained.

As expected, Dangote Sugar Refinery’s gross profit increased by 23.5% year on year to ₦39.6 billion from ₦32.1 billion in 9M-2019.

Dangote Sugar’s gross profit grew 23% on quarter on quarter and 55.9% year on year to ₦14.1 billion from ₦11.5bn in Q2-2020 and ₦9.0 billion in Q3-2019.

Meanwhile, gross margin contracted 2.6 percentage points year on year to 24.7% in 9M-2020 but recovered by 4 percentage points to 24.6% in Q3-2020.

Amidst rising inflation rate, Dangote Sugar Plc.’s operating expenses adjusted for depreciation grew 6.1% y/y to ₦5.3 billion in 9M-2020 from ₦5.9 billion in 9M-2019.

Thus, tracking below gross profit growth rate.

Analysts said the growth in operating expenses largely reflects uptick in administrative expenses adjusted for depreciation, which surged 8.9% year on year to ₦5.8 billion.

On the other hand, selling and distribution expenses fell 18.2% year on year to ₦0.5 billion in 9M 2020.

As a result, CSL Stockbrokers stated that earnings before interest tax depreciation and amortisation (EBITDA) grew significantly.

EBITDA jerked up 27.4% year on year to ₦33.3 billion in 9M-2020 from ₦26.1 billion in the comparable period in 2019.

The company’s financial shows that depreciation and amortisation charged against income statement surged 75.6% year on year to ₦5.9 billion in 9M-2020 from ₦3.4 billion.

Nevertheless, operating Profit remained sturdy as it expanded by 20.3% year on year to ₦27.4 billion from ₦22.8 billion in 9M-2019.

It was also noted Dangote Sugar recorded a fair value gain on biological asset of ₦2.6 billion in 9M-2020 compared with a Loss of ₦0.4 billion in 9M-2019.

In addition, other income surged 280.9% year on year to ₦0.5 billion.

Overall, CSL Stockbrokers explained that this supported growth in EBIT, which was up 34.6% year on year to ₦31.0 billion in 9M 2020 from ₦23.1 billion.

In the period however, the company’s net finance cost climbed to ₦1.9 billion in 9M-2020 result from ₦0.09 billion in the comparable period in 2019.

Analysts said the huge climb in net finance cost was driven by FX loss of ₦1.7 billion booked during the period.

Nevertheless, it was not enough to dampen the strong growth in profit lines with pretax profit 26.6% year on year growth to ₦29.1 billion from ₦23.0 billion in 9M-2019.

Meanwhile, Dangote Sugar Plc reported a tax credit of ₦3 billion in Q3-2020 which drove overall effective tax rate for 9M-2020 lower to 8.4% compared with 36.0% in 9M-2019.

Thus, tax expense declined 70.4% year on year to ₦2.4 billion from ₦8.3 billion in 9M-2019.

Consequently, net income surged 81.1% year on year to ₦26.6 billion in 9M-2020 from ₦14.7 billion in 9M-2019.

“We note that earnings per share calculation included the impact of newly issued shares to Savannah Sugar Company Limited shareholders”, Analysts stated.

Nevertheless, earnings per share was ₦2.19/s compared with ₦1.24/s in 9M-2019, as CSL Stockbrokers rate stock a buy.

Analysts at ARM Securities Limited spotted a big swings in current assets and current liabilities.

It was observed that Dangote Sugar Refinery’s inventory rose 36% quarter on quarter to ₦39.85 billion following the addition of a ₦13.9 billion line item for raw materials in transit.

Receivables jerked up 46% to ₦52.6 billion led by a 58% increase in advance payments to Contractors and a 142% increase in other receivables.

Analysts said these increased led current assets higher by 23% quarter on quarter.

On the current liabilities side, the big change there was a 59% rise in trade payables to ₦131.7 billion which brought current liabilities 38% higher quarter on quarter.

Looking forward, ARM Securities said the performance over 9M20 led to a revise on 2020 revenue estimate upwards by 8.6% to ₦220.15 billion from ₦202.672 billion.

This translates to a full year revenue growth of 37% compared to financial year 2019.

As a result of this revision, and the knock-on effect on future projections, ARM Securities also revised our fair value estimate upwards by 21% to ₦18.97.

This was against ₦15.67 previously estimated as the firm also rate Dangote Sugar Refinery stock buy.

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Dangote Sugar Refinery’s Better-than-expected Earnings Excites Broadstreet