Analysts Downgrade Dangote Sugar to Hold, Cite Pressure on Margin
In the first quarter (Q1) of 2020, Dangote Sugar Refinery Plc (DANGSUGAR) recorded an improved sales across regions.
At the current price of ₦15 to a share, Dangote Sugar market capitalisation, the amount investors placed ₦180 billion on the company yesterday.
The sugar refinery reported a 7.12% growth in its 2019 topline to ₦161.09 billion compare to ₦150.37 billion in 2018.
The performance was supported by improvements in both sugar production volumes.
It increased by 13.33% to 654,072 tonnes and sales volumes surged 17.71% to 684,487 tonnes during the period.
But its costs were fast rising, steeply such that margin thinned down.
On every ₦100 sales made, Dangote Sugar expended ₦73.30 as direct cost before considering other overheads.
What analysts say:
Meristem’s equity research analysts explained that so far in 2020, DANGSUGAR has sustained the momentum, beginning the financial year on a strong footing.
The Q1 revenue surged by 24.90% to ₦47.64 billion. This hinged on a 19.46% growth in sales volume to 189,724 tonnes.
The firm reported an improvement in regional performance across board, with the Lagos and Northern markets seeing the most expansion.
Both rose by 27.06% and 33.11% respectively.
Meanwhile, the Western and Eastern markets also grew, although marginally, by +4.21% and +1.17% during the period.
Analysts explained that the near-term outlook seems promising with scope for further topline growth.
This was driven by increased demand on account of consumer spending on essentials and the continued closure of the land borders.
However, Meristem stated that a downside to this outlook would be the impending economic contraction due to economic lockdown.
Also, weakened purchasing power of consumers as a result of the incessant rise in inflation plus slowdown in industrial activities.
Thus, analysts project a 13.55% growth in 2020 revenue to ₦182.91 billion compare to ₦161.09 billion in 2019.
Enhanced Top line Fails to Trickle Down to Earnings:
Meanwhile, during the review period, the growth in topline of +24.90% was outpaced by the 34.64% surge in cost of sales to ₦34.92 billion.
Raw material costs which accounted for 76.05% of total costs advanced by 43.47%, followed closely by an increase in other items of direct costs.
As a result, cost to sales expanded to 73.30%, from 67% in Q1:2019.
The company’s operating expenses towed the same line, pegging at ₦2.01 billion compare to ₦1.76 billion as both administrative (+14.86%) and distribution costs (+4.61%) grew to accommodate the increased demand volume.
A combination of the increase in direct and indirect costs wiped out the improvement in revenue.
This resulted in a contraction in operating margin to 22.56%, from 28.46% in Q1:2019.
In the period, Dangote Sugar recorded a significant increase in finance costs to ₦1.35 billion from ₦41.43 million in the same period last year.
The spike was hinged on an exchange loss on ordinary course of business which went from ₦256,000 in Q1:2019 to ₦1.31 billion in Q1:2020.
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Although effective tax rate dropped to 32.99% from 34.55% in the previous period, profit after tax eventually succumbed to cost pressures.
The bottom line contracted by 9.02% to ₦6.37 billion as against ₦7 billion in Q1:2019.
“Given the observed moderation in global sugar prices which we expect to linger due to supply chain disruptions, we expect cost to sales to temper slightly to 69.34% in 2020 from 76.32% in 2019”, Meristem explained.
Deterioration of Net Margin:
Meristem stated that as at Q1:2020, return on equity (ROE) pegged at 5.57% compare to 6.61% in Q1:2019 owing largely to a deterioration in net margin.
The company’s working capital position came under constraint, settling at ₦28.52 billion, from ₦41.73 billion as current liabilities -fueled by a 72.36% growth in trade & other payables – outpaced current assets.
Thus, both current and quick ratios worsened to 1.26x and 0.71x from 1.58x and 0.97x as at Q1:2019.
Premised on an expected earnings per share (EPS) of ₦1.92 and a target price earnings ratio of 7.00x, Meristem stated that the firm arrived at a 2020 target price of ₦13.44.
“This represents a downside potential of 5.02% from its current price of 14.05. Hence we recommend a HOLD on the counter”, the firm stated.
Analysts Downgrade Dangote Sugar to Hold, Cite Pressure on Margin
