Dangote Sugar Refinery Plc: Outlook Reiterated Despite Negative Margin Surprise

August 9, 2019/Cordros Report

Results Summary (Q2-19): DANGSUGAR’s reported EPS of NGN0.34 (-46.3% y/y) in Q2-19, taking YtD EPS to NGN0.92 (-13.8% y/y). Annualised, H1-19 EPS is 7.6% ahead of Cordros’ (NGN1.71) 2019FY estimate, but 3.0% below Bloomberg consensus’ (NGN1.90) estimates. While revenue (-1.7% y/y) dipped marginally in the review period, gross margin bowed to COGS pressure (+12.6% y/y), shedding 10.1 ppts to 20.2%. We estimated that volume grew by 11.5% y/y, helped by a 9.8% y/y decline in per tonne price. Amid the unrelenting influx of illegal sugar imports, we understand that management maintained its low-price strategy in a bid to defend its market share. Meanwhile, the renewed COGS pressure was driven by higher raw material cost (+19.9% y/y) and input cost-related depreciation (+38.0% y/y), both of which neutered the impact of lower overheads cost (-17.2% y/y).

Revenue Estimate for 2019E Revised Higher on Impressive Run-Rate: Achieved revenue outperformed our Q2 19 estimate by 8.5%, on account of management’s continued price discounting strategy which supported volume growth. We had argued in our sector report (see reportWeak Momentum, Undemanding Valuations) that management would have to consider lowering prices to (at best) maintain current market share, especially in the light of the intensifying competitive landscape. In line with our expectations, management cut prices, albeit deeper than our expectation. For the rest of the year, we are now more cautious on refined sugar prices than we were in our last report, no thanks to (1) the still porous border which continues to enable illegal sugar importation, and (2) the launch of BUA Sugar Refinery’s new plant in H2-19 which looks set to deepen competition.

Estimates and Valuation: We like management’s continued commitment towards keeping a tight lid on OPEX. At NGN3.91 billion over H1-19, gross OPEX is at c.51% of our 2019FY estimates. As such, we have left our OPEX forecast unchanged. Overall, our revised estimates translate to downward revisions of 3.6% and 4.6% to our 2019E EBIT and EBITDA forecasts, respectively. The net impact of our adjustments is a 4.4% downward revision to our 2019E EPS to NGN1.64 (previously: NGN1.71). Consequently, we retain our ‘BUY’ rating on DANGSUGAR with a revised TP of NGN12.27/share (NGN12.55). DANGSUGAR trades at forward (2019E) P/E and EBITDA multiples of 7.6x and 4.0x respectively. 

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