Dangote Sugar Refinery – Q3 Profitability Primarily Driven By Higher Pricing

Culled—Proshare

November 8, 2017/FBNQuest Research 

2017/18E EPS estimates and price target up modestly
As expected, finished year-to-date sugar price reductions have been marginal, down (-3%) to around N15,000/50kg in Q3. In Q4, we continue to believe price changes would remain modest given unit volume sales declines in each of the last three quarters of 2017. We forecast a -25% y/y sales decline in Q4, driven by lower unit volume sales and relatively lower finished sugar prices. 

We expect that construction work at the Apapa evacuation route where the Lagos Refinery is located and relatively weaker industrial demand will keep volumes sales subdued. We have lowered our capacity utilisation estimate for 2017E to 46% down from 49%. 

However, we have raised our gross margin forecast by c.400bps y/y to 27% due to increased gas supply and relatively subdued raw sugar (a key raw material for DSR) prices. We forecast EPS growth of 135% y/y in 2017E. Going forward into 2018, our sales growth estimate of 15% y/y to N204.1bn isprimarily driven by a recovery in unit volume sales (+21% y/y to c.790,000 tonnes) which we expect to offset further potential price reductions over the coming months. 

Dangote Sugar Refinery’s (DSR) Q3 2017 earnings of N9.4bn beat our forecast by c.15%. Overall, we have raised our EPS forecast over the 2017-2018E period by around 3%. Our new price target of N16.0 is up by a similar magnitude. Global raw sugar prices are expected to remain soft in the near term.

Additionally, an improving macroeconomic environment is supportive of the central bank’s recent fx intervention policy which bodes well for DSR’s production costs. DSR shares are trading on a 2017 P/E multiple of 5.5x for an EPS growth of 5% in 2018E. Ytd, DSR shares have gained 153.7% (ASI: +37.8%). We retain our Neutral rating.

Q3 PBT of N14.0bn up 236% y/y, driven by lower production costs

Q3 2017 results showed several positives across the P&L. Although sales were flattish, both PBT and PAT were up significantly, 236% y/y and 244% y/y, respectively. Profitability was driven by a marked gross margin expansion of +2153bps y/y to 32.9%. Although we were expecting a healthy gross margin performance, the magnitude of the expansion surprised positively.

DSR production costs which were substantially lower y/y benefitted from consistent gas supply through the quarter. Opex which came in flattish y/y also helped. Sequentially, sales declined q/q while PBT and PAT both fell by around 24% y/y. Compared with our estimates, while sales missed our estimate by 16%, PBT beat our N12.6bn estimate by around 11%.  

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

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