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Dangote Sugar Refinery Q320 - Growth continues strong

• Recently released Q3 results showed that Dangote Sugar Refinery (DSR) recorded an impressive 54.6%YoY increase in revenue to N57.28 billion making it 5 consecutive quarters of YoY revenue growth. This also represents the fastest revenue growth rate since Q317. A slower growth rate for cost of sales meant gross profit came in higher YoY at N13.32 billion. And despite higher OPEX and net finance expense, PBT more than doubled to print at N12.03 billion (Q319: N5.94 billion) while PAT climbed by 300% to N15.05 billion (Q319: N3.73 billion). At the end of Q3, DSR listed additional shares which increased their shares outstanding by 1.2% to 12,146,878,241, EPS for Q320 was N1.24. For the 9M period revenue grew 37% YoY to N160.51 billion while gross profit was up 18%YoY N34.15 billion. PBT climbed higher by 27%YoY to N29.08 billion while lower taxes drove PAT higher by 81%YoY to N26.63 billion which translated to an EPS of N2.19.
• Sugar sales continue to climb:  DSR’s Q320 revenue growth was led by impressive growth in both corporate (+56%YoY) and retail sugar sales (+22%YoY) to N55.47 billion and N1.22 billion respectively. Although the company confirmed that there was a slight price increase in Q320, to reflect higher costs, the main driver for revenue growth was volumes which rose 19%YoY in Q320 going by our estimates. Cost rose 51% YoY to N43.96 billion driven by a 70%YoY rise in raw materials (an expected consequence of the FX devaluation) and a 19% increase in overhead costs. Gross profit came in 69% higher on a YoY basis at N13.32 billion (Q319: N7.9 billion) which translates to a gross margin expansion of 23.3% (Q319: 21.3%). 
• Despite a 23%YoY decline in sales & distribution costs, OPEX still rose 25%YoY to N2.9 billion as admin costs shot up by 29%YoY following a 20% increase in employee costs. Nevertheless, operating profit still rose 86%YoY to N10.48 billion (Q319: N5.62 billion) to give an EBIT margin of 18.3% (Q319: 15.2%).  Net finance expense rose over 1000%YoY, albeit from a low base, on the back of higher interest on lease payments and higher FX losses. PBT came in 103% higher at N12.03 billion (Q319: N5.94 billion) while PAT was boosted by a tax credit of N3.02 billion to come in 300% higher YoY at N15.05 billion (Q319: N3.73 billion).
• Big swings in current assets and current liabilities. DSR’s inventory rose 36%QoQ to N39.85 billion following the addition of a N13.9 billion line item for Raw Materials in Transit. Receivables was up 46% to N52.6 billion led by a 58% increase in Advance Payments to Contractors and a 142% increase in Other Receivables. These increased led current assets higher by 23%QoQ. On the current liabilities side, the big change there was a 59% rise in trade payables to N131.7 billion which brought current liabilities 38% higher QoQ. 
• Looking forward, the performance over 9M20 led to us revising our FY20 revenue estimate upwards by 8.6% to N220.15 billion (from N202.672 billion) which translates to a FY revenue growth of 37%YoY compared to FY19. As a result of this revision, and the knock-on effect on future projections, we have also revised our FVE upwards by 21% to N18.97 (previously: N15.67) with a BUY recommendation.