Dangote Sugar Scores Hold Rating despite Dividend Raise
Equity research analysts at WSTC Securities Limited have rated Dangote Sugar Refinery Plc hold despite 36% increase in proposed dividend for financial year 2020.
Investors valued Dangote Sugar at N218.036 billion on Friday on 12.147 billion shares outstanding.
In the Nigerian Stock Exchange, Dangote Sugar (Ticker: DANGSUGAR) closed the week at N17.95 per share as against WSTC fair value estimate of N15.93, a downgrade from previous estimate of N18.85.
In its financial year 2020 audited result, Dangote Sugar Refinery closed the year on an impressive note, attributed to a double-digit price and volume growth.
Basically, despite the fact that the company adjusted price upward, volume sold also increase on account of border closure policy.
Nigeria’s border were locked between August 2019 and fourth quarter of financial year 2020, thus limit availability of competition brands.
Being major producer in the segment, the sugar company recorded 33% year on year growth in revenue; from N161.09 billion in 2019 to N214.29 billion in 2020.
Operating profit grew by 48% from N29.93 billion in 2019 to N44.44 billion, while profit after tax expanded 33% from N22.36 billion in 2019 to N29.78 billion in 2020.
As a result of the stronger operating performance, the Group declared a N1.50 dividend for 2020, representing a 36% increase relative to N1.10 dividend declared in 2019.
Improved Access to Market Drive Topline Growth
WSTC Securities recognised that efforts of the regulators to curtail smuggling activities, which was a major factor in the Group’s market share erosion in recent times, improved access to market.
“Following the land border closure policy by the government, the Group was able to supply more of its products to the market”, analysts said.
As a result, the Group recorded a 14% growth in production volume from 13.10 million bags in 2019 to 14.9 million bags in 2020.
However, WSTC stated the COVID-19 induced contraction in national sugar consumption limited the sales volume growth to 7% from 13.70 million bags in 2019 to 14.60 million bags.
The Group raised prices during the period, to reflect increased cost pressures induced by exchange rate volatilities and shortage. Energy costs also increased during the period.
Analysts think the combination of price and volume increases culminated in the strong topline growth in 2020.
They added that crop yield, and injection of new trucks to strengthen distribution capacity were among other developments that positively impacted on the Group’s topline.
FX Scarcity Drive Input Costs Upwards
Following devaluation of Naira, Dangote Sugar was forced to pay more in naira terms for its imported raw materials.
This raise the company’s cost due to foreign exchange scarcity amidst weak foreign investors’ participation in the Nigerian economy.
Resultant effect was that Dangote Sugar Refinery’s cost of sales grew by 31% in 2020 from N122.80 billion in 2019 to N160.55 billion.
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Analysts recognised that the movement in cost of sales was driven by the impact of FX scarcity during the period.
“We note that the Central Bank of Nigeria adjusted the exchange rate, driven by COVID-19 induced collapse in crude oil prices”, WSTC Securities stated.
In addition to that, there was adjustment made to the nation’s value added tax as government strives to raise non-oil revenue.
Analysts said the increase in VAT added pressure to the company’s cost profile during the period.
Cost margin, however, lowered by 100 basis points from 76% in 2019 to 75% in 2020, resulting from an effective transfer of cost burden to the consumers in the form of higher prices.
The company’s settled with 40% increase in gross profit in the period from N38.29 billion in 2019 to N53.75 billion.
Margin
Dangote Sugar’s operating expense margin declined by 100 basis points from 6% in 2019 to 5% in 2020, due to a 14% increase in operating expenses relative to a 41% growth in operating income.
Then, the operating efficiency resulted in a 48% increase in operating profit from N29.93 billion in 2019 to N44.44 billion.
Non-operating Income Drives Profit
The Group recorded an 871% increase in fair value adjustment gain from a loss of N313 million in 2019 to N2.42 billion.
WSTC Securities explained that the fair value adjustment gain was related to the Group’s biological assets.
Although net finance cost stood at N1.23 billion in 2020, from a net finance income of N204 million in 2019; analysts noted the fair value adjustment gain offset the net finance cost during the period.
Hence, profit before tax grew by 53% from N29.82 billion in 2019 to N45.62 billion in 2020.
However, a higher effective tax rate – 34% in 2020 compare with 25% in 2019- lowered the net bottomline growth to 33%.
Strong Cash Flow
In the period, Dangote Sugar’s operating cash flow jerked up 42% from N50.64 billion in 2019 to N71.68 billion, driven by a combination of price and volume growth.
In addition, analysts noted that a 38% year on year improvement in working capital helped cash flow position.
So, free cash flow surged by 103% from N16.58 billion in 2019 to N33.61 billion. In a similar direction, cash distributable to shareholders rose by 111% from N15.51 billion to N32.76 billion.
Outlook
“We expect to see a continued volume growth in 2021, on the back of sustained market share and increased demand for the products amid an economic recovery”, WSTC Securities said.
However, analysts said they are also expecting to see persistent cost pressures due to rising crude oil prices.
According to the management, a rising crude oil price tend to drive raw input prices upwards due to the preference to produce ethanol from sugar cane instead of raw sugar.
“We maintain a positive business outlook for DSR, on the back of the strong industry fundamentals and the Group’s continued investments in Backward Integration”, the firm stated.
It was noted that the company’s backward integration is expected to drive value for the Group, in the form of lower cost pressures, and a higher scale.
Analysts at WSTC Securities estimated a N15.93 fair value for the stock, representing a downgrade from previous estimate of N18.85.
Compare with current market price of N17.95, the stock offers a -1% total return which comprises price return: -12%, dividend yield: 10%.
Dangote Sugar Scores Hold Rating despite Dividend Raise
