EUR 4.00 For Business Accounts Only

Equity Report - Dangote Sugar Refinery Plc 9M 18: Tough operating environment dim outlook

• Dangote Sugar Refinery (DSR) released its 9M 18 result for the period ended September 2018. Revenue for the period was down 29.2% YoY to N116.7 billion owing to lower refined sugar prices (-19% YoY) and lower volumes (-13.5% YoY). On volumes, pressure stemmed from increased competition from smuggled sugar and unrelenting gridlock in Apapa owing to the bad road condition. As a result, EPS for the period declined 37% YoY to N1.41, below our expectation of N1.55 for the period – 9M 18 EPS is about 61% of our FY 18 estimate.
• For the rest of 2018, we cut our FY 18 revenue estimate by 8.1% to N154 billion to reflect the sustained decline in volumes. We forecast EBIT margin of 19.6% (previous estimate: 21.7%) due to higher operating expense to sales ratio from weaker volumes. Overall, we forecast FY 18E EPS to decline 41.3% YoY to N1.95. Based on historical 50% payout ratio, we forecast DPS of N1.00 for FY 18E which translates to a dividend yield of 7.9% based on current pricing. In 2019, we do not see pressures from smuggling activities abating due to slow action from the authorities to curb the illegal activity. Regarding the Apapa road, repairs are underway, but its completion is taking longer than anticipated. We therefore see gridlock from the bad road persisting into 2019. Consequently, we cut our FY 19E EPS by 13% to N1.75. We also cut our FY 20-22E EPS by 3% on average. Following adjustments to our forecasts, and having rolled forward our model to 2019, we cut our FVE to N14.44 (previous: N17.01) which translates to an OVERWEIGHT rating.