Dangote Sugar: Analysts Upgrade Estimates, Cite Border Policy Advantage
A slew of optimistic analysts have raised Dangote Sugar Refinery (DSR) Plc.’s estimate for financial year 2020 and 2021, cited improved fundamentals derived from sustained border restriction.
As a result, analysts’ expectations on the company’s earnings performance increased, thus projected sharp increase in the company’s stocks target price.
Dangote Sugar share price printed at N20 on Friday as investors valued the company at N242.937 billion on 12.146 billion shares outstanding.
In a research report, Chapel Hill Denham hinted that Dangote Sugar that the company’s estimate is upgraded on account of earnings beat in the third quarter of 2020.
Analysts are optimistic that land border restrictions is expected to support volume and price mix strongly in 2020.
In the third quarter 2020 earnings, Dangote Sugar revenue rose significantly as the company was able to raise price and volume altogether due to lack of competing alternatives.
Due to this, analysts at Chapel Hill Denham are projecting increased turnover in financial year 2020 to ₦214.44 billion from ₦183.27 billion.
Specifically, analysts said the increased turnover projection is due to better than expected results in 9-month of financial year (9M) 2020.
Given the border restriction policy in Nigeria which has locked in about 400,000 MT of prior refined sugar imports, analysts said they now expect DSR to deliver a robust revenue in Q4-2020.
“In 2021, we are projecting turnover at ₦241.30 billion, driven by a conservative assumption of a 5.0% increase in sugar price/MT and a 7.2% year on year increase in sugar sales volumes (to 800,740 MT)”, Chapel Hill Denham stated.
From a pricing perspective, Chapel Hill Denham cited that market survey indicates that the retail price of a 50KG sugar bag has further increased to ₦21,350 as of November 2020 (from ₦19,500/50KG in September 2020).
“We note that 2020 turnover estimate indicates that group sales volumes will increase by 9.2% year on year to 747,178 MT (569,079 as at 9M-2020”, analysts stated.
Chapel Hill Denham is forecasting earnings before interest tax depreciation and amortisation (EBITDA) to come at ₦45.66 billion in 2020 as against ₦43.43 billion previously estimated.
After an upgrade, the investment firm projects that the company’s profit after tax will come at ₦34.99 billion from prior estimate of ₦26.40 billion.
Explaining the estimate further, analysts stated that the increase in 2020 turnover estimate for DSR prompted the corresponding rise in EBITDA to ₦45.66 billion.
However, the firm highlighted that the new estimate indicates an EBITDA margin of 21.3%, which is lower than its prior projection of 23.6% and 22.3% recorded in 2019.
Chapel Hill Denham explained that this is due to persistent cost pressures tied to FX devaluation and scarcity.
The firm stated that its projects cost of sales to rise by 35.3% year on year to ₦166.19 billion, which is ahead of projected 3.1% increase in revenue.
In 2020, analysts are projecting EBITDA at ₦55.63 billion, which indicates that EBITDA margin will increase to 23.1% from 21.3% projected for 2020 as DSR benefits from the reversal in raw sugar import tariff to 5% (from 10%).
Analysts are seeing strong cash improvement in 2020.
In the research note, Dangote Sugar free cash flow to equity (FCFE) or distributable cash is expected at ₦33.94 billion in 2020 from prior estimate of ₦9.87 billion and ₦29.29 billion in 2021.
“We expect higher free cash flow to equity in 2020 to be driven by the stronger earnings and positive net working capital estimated at ₦10.87 billion.
“As a result, we expect net operating cash flow at ₦52.64 billion, representing +37.2% uptick year on year in 2020.
“This will drop to ₦49.19 billion in 2021 due to weaker working capital amounted to ₦3.37 billion”, analysts detailed.
On capital expenditure (CAPEX), Chapel Hill Denham retains DSR’s capex intensity at 8.5% for both 2020 and 2021 respectively, as the company continue to invest in its backward integration projects.
This indicates a net capex forecast of ₦18.15 billion in 2020 and ₦20.24 billion in 2021.
Read Also: Dangote Sugar Refinery’s Better-than-expected Earnings Excites Broadstreet
Equity research analysts at Chapel Hill Denham retained BUY rating with 12-month target price raised to ₦30.81 from ₦16.77.
This implies a potential total return of 53.5% (46.7% capital gain and 6.8% dividend yield).
Analysts said the steep increase in target price is driven by the better than expected improvement in the company’s fundamentals over 9M-2020 as well as adjustments to the risk free rate for valuation estimate.
Dangote Sugar: Analysts Upgrade Estimates, Cite Border Policy Advantage
