April 13, 2018/Vetiva Research
• FY’17 revenue up 20% y/y despite smuggled sugar menace
• EBIT margin expands 13ppts y/y to 23% in FY’17 (Vetiva: 25%)
• FY’17 PAT up 176% y/y, supported by exchange rate gains
Stronger Prices Support 20% YoY Sales Growth
Dangote Sugar’s FY’17 financial results showed a 20% y/y rise in Revenue for the period as a 43% y/y increase in average selling prices offset a 16% y/y decline in sugar volumes sold. Particularly, the top line figure came in at a record high of ₦204 billion – marginally below our expectation. The deviation was largely driven by lower than expected volume rollout in Q4’17 (3% q/q rise vs 11% Vetiva estimate) as well as some price cut recorded within the quarter. Management alluded to the fact that competition from less expensive smuggled sugar intensified significantly during the quarter – thus eclipsing the historical festive boost and reducing the firm’s market share to 60%. Whilst management noted that government’s effort to curtail smuggling has been somewhat impactful, the company has had to take further price cuts in 2018 amidst intense competition (Current price: c.₦280,000/ton vs. FY’17 average: ₦312,720/ton).
Also worthy of note is the shift in regional sales breakdown with percentage of volumes to Lagos and other Western region moderating significantly to 37% (FY’16: 59%, FY’15: 56%). We specifically highlight that the terrible road conditions around the Apapa environs in Lagos continue to impact business negatively.
FY’17 Earnings Leapfrog On Stronger Margins – PAT Up 176% YoY
Supported by well contained Operating Expenses, stronger (y/y) selling price, as well as moderation in FX related production cost, FY’17 EBIT margin rose to 23% (FY’16: 10%). With this, EBIT rose 171% y/y to ₦47 billion, albeit 12% lower than we had expected as price cuts in Q4’17 drove a 970bps q/q moderation. Bottom line was further supported by an extraordinary Finance Income of ₦4.3 billion in Q4’17 (attributed to exchange rate gains) as well as ₦3.3 billion Investment Income recorded for FY’17 (FY’16: ₦601 million). Overall, FY’17 PAT came in 8% above our estimate at ₦39.8 billion, a significant leap from ₦14.4 billion recorded in FY’16. The Board proposed a final dividend of ₦1.25 (Total dividend: ₦1.75, Dividend yield: 13%).
FY’18 Estimates Revised, HOLD Rating Maintained
Given improved FX liquidity and porous borders, we expect threat from smuggled sugar to remain pronounced in 2018. As such, we revise our Revenue forecast lower to ₦189 billion amidst lower y/y prices and volumes – particularly given previous year’s high base. Though sustained stability in gas supply and benign global raw sugar prices are expected to support margins, we revise our FY’18 EBIT margin estimate 100bps lower to 22% (Previous: 23%; historic average of 20%) amidst lower selling prices. Also driven by our expectation of normalization in FX related gains, we estimate a ₦29 billion PAT for FY’18. We revise our 12 Month Target Price to ₦20.60 and maintain a HOLD rating on the stock. Dangote Sugar trades at a forward P/E of 9.0x vs Consumer Goods Coverage P/E of 22.0x.
We note that the medium term outlook for Dangote Sugar remains largely positive – supported by the company’s backward integration project “Sugar for Nigeria” where 1.08 million MT/PA of refined sugar is expected to be sourced from locally grown sugarcane across five sugar factories.
Ifedayo Olowoporoku of Vetiva Capital Management Limited can be reached vide firstname.lastname@example.org
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