Analysts Maintain Positive Outlook as Dangote Sugar Boosts Profit

Analysts Maintain Positive Outlook as Dangote Sugar Boosts Profit

Analysts have maintained a a positive outlook for Dangote Sugar Refinery (DSR) Plc as the company leverages on advantages from border closure.

Due to border closure which limit external infiltration of cheaper competing brands, Dangote Sugar was able to raise price for its product, and this lifted the company’s earnings.

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Effectively, the closure of border by the Nigerian government increased the industry’s profitability and key producers are enjoying the moment as competition has been reduced.

In its recently published unaudited financial statement for the first half of 2020 (H1), Dangote Sugar Refinery Plc (DSR) recorded a 5.5% year on year growth in profit after tax to ₦11.58bn.

Equity analysts at Chapel Hill Denham in a note stated that this was underpinned by volume growth of 13.6% year on year and price growth, which lifted revenue by 28.5% to ₦103.23bn in H1-20.Analysts Maintain Positive Outlook as Dangote Sugar Boosts Profit

The investment opportunities in DSR:

Chapel Hill Denham forecasted a price target of ₦15.06 for the stock as analysts’ advice investors to “BUY” at market price of ₦11.95.

The firm recognised that the stock is a pure equity play, without any debt securities in issue for investors.

“We expect the company to record sustained growth in top-line in 2020, underpinned by steady demand for the products and price increases”, analysts stated.

Broadly speaking, Chapel Hill Denham said it expects demand for sugar to maintain an uptrend, given the pass-on benefit of the border closure, which has limited sugar supply in Nigeria.

Chapel Hill Denham said: “We see turnover growth of +13.8% year on year and earnings per share raise of +18.3% in 2020 as compelling factors for investing in DSR”.

Although analysts stated that they do not see DSR declaring an interim dividend.

However, Chapel Hill Denham highlights that the full year dividend yield of 12.6% for 2020 is higher than its consumer coverage average dividend yield of 5.8%.

“We also note that DSR is the only consumer company that has recorded revenue and PAT growth in Q2-20, among our consumer coverage”, the firm stated.

Explaining what analysts like about the results, Chapel Hill Denham said sustained revenue growth in Q2-20 indicates stable demand.

In Q2-20, DSR’s revenue expanded by 31.7% year on year to ₦55.59bn, largely driven by 50KG sugar sales which rose +46.4% as well as retail sugar that grew by +134%.

These also include 33% increases in sales of molasses sales.

Turnover followed a similar trend in H1-20 with 50KG sugar sales expanding by 30.0% to ₦98.33bn, alongside growth in retail sugar sales by 68.8% to ₦3.88bn with molasses sales growing marginally by 1.4% to ₦390mn.

However, freight income fell by 68.8% to ₦634mn and 67.5% year on year respectively.

Notably, group sales volume rose by 13.6% to 382,917 MT in H1-20, largely supported by Apapa volumes of 355,233 MT which grew +7.1% and 393% in Savannah volumes of 27,684MT.

Chapel Hill Denham stated that DSR management noted that price increase in H1-20 supported turnover, and this was largely reflective in the increase in the price of 50KG sugar to about ₦19,000, based on our market survey from an average of ₦13,500 in 2019.

Meanwhile, the company’s operating expenses (OPEX) fell by 14.9% in Q2-20 to ₦1.83bn.

Analysts explained that the decline in OPEX was due to the combined impact of lower administrative expenses which dropped 12.9% to ₦1.68bn and 32.7% declined in marketing & promotion expenses to ₦147mn.

In H1-20, OPEX declined by 2.0%, reflecting the pass-on impact of the decline in Q2-20.

“We recall that OPEX rose by 13.8% in Q1-20”, Chapel Hill Denham stated.

Accordingly, earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 19.3% to ₦9.36bn in Q2-20 – thus translated to EBITDA margin of 16.8% from 18.6% in Q2-19 -and by 10.0% year on year to ₦22.01bn in H1-20.

This translated to EBITDA margin of 21.3% from 24.9% in H1-19.

In the period, DSR’s net operating cash flow (NOCF) improved to ₦46.12bn in H1-20 from ₦5.96bn in H1-19.

Chapel Hill Denham said it believes this reflects DSR’s efficient cash management, as indicated in the working capital.

Analysts noted a decline in inventories, indicating higher inventory turnover, by 24.3% year to date to ₦29.41bn.

Meanwhile trade & other payables rose by 30.9% year to date to ₦82.74bn. Also, trade & other receivables rose by 6.8% from the beginning of the year to ₦36.07bn.

Net capital expenditure rose by 13.3% to ₦5.83bn, though capex intensity dropped off to 5.6% from 6.4% in H1-19.

Nonetheless, analysts observed a jump in cash and cash equivalents to ₦65.16bn, reflecting the benefits of a largely deleveraged balance sheet, amid improved operating income.

Explaining its concerns about the results, Chapel Hill Denham review pointed to rising cost of sales.

Specifically, the unaudited statement revealed that DSR’s cost of sales expanded by 40.9% in Q2-20, thus slowed gross margin to 14.6% in Q2-20 from 20.2% in Q2-19.

The Sugar Refinery Company ascribes cost growth to FX losses, increases in cost of input materials and the impact of the increase in VAT rate to 7.5% from 5.0%.

Chapel Hill Denham said based on the results, cost-to-sales ratio increased by 562 bps to 85.4% in Q2-20 from 79.8% in Q2-19.

“We also think that the increase in the import duty on raw sugar to 10% from 5% in 2019, contributed to the higher cost expansion”, analysts explained.

However, this impacted margins in Q2-20 and H1-20.

“We highlight that DSR’s annualised EPS of ₦1.93 is tracking behind our financial year 2020 estimate of ₦2.20”, Chapel Hill Denham stated.

Analysts Maintain Positive Outlook as Dangote Sugar Boosts Profit

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