EUR 3.48 For Business Accounts Only

Initial View: Dangote Sugar Refinery Plc. FY 17 - Improved margins underpin solid earnings growth

• Dangote Sugar Refinery (Dangsugar) finished its financial year 2017 on a high note with its recently released full year results revealing impressive earnings of N8 billion which almost tripled its performance in 2016 and translates to earnings per Share (EPS) of N3.31 (FY 16: N1.20). The company declared a final dividend per Share (DPS) of N1.25 which in addition to the interim of N0.50 amounts to total DPS of N1.75, representing a payout ratio of 53% (vs. 50% in 2016) and 191.7% YoY higher than 2016 total DPS of N0.60. Proposed final DPS translates to a yield of 5.7% based on current pricing. 
• Higher product pricing support revenue. The step up in earnings stemmed principally from revenue which rose 20% YoY to N4 billion underpinned by higher product pricing. Precisely, average pricing per ton over 2017 was higher 43.4% than 2016 following price hikes to pass-through input price pressures in a bid to protect margins. On the flipside, sales volume declined 15.5% to 657,775MT which we attribute to higher product pricing, smuggling of unlicensed sugar as well as reduced industrial demand from major corporates whose production levels were challenged by the inability to source FX for the importation of needed raw materials.
• Energy pressures offsets gains from lower raw sugar prices. Over 2017, raw material cost declined 2.1% YoY to N9 billion driven by lower raw sugar prices and naira appreciation from improved dollar liquidity as well as currency stability. However, the company faced energy pressures during the year from a 42% increase in Low Pour Fuel Oil (LPFO) with more usage of expensive LPFO (25% in 2017 vs. 10% target of total energy) due to gas instability in the first three quarters of 2017. Consequently, energy pressure masked gains from lower raw sugar prices with a resultant 4.6% YoY increase in Cost of Goods Sold (COGS) to N153.4 billion. Irrespective, the faster rise in revenue relative input cost, drove a 121.8% YoY increase in gross profit to N51 billion with gross margin expanding 11.4ppts to 24.9%, above past 5-year trend level of 19%.
• Finance Income provides further boost to earnings. Over 2017, finance income of N5 billion was 12.5x ahead that of 2016. Firstly, the increase stemmed from investment income of N3.4 billion given its robust cash position (2017 average cash at N38.2 billion vs. N22 billion in 2016) and favorable deposit interest rate of 13.5% (versus 11.5% in 2016). Secondly, the company recorded exchange gain of N3.9 billion which, in our view, might be related to gains on its short-term dollar credit position. Given the foregoing, profit before and after tax rose 173% YoY and 176% YoY to N53.6 billion and N39.8 billion respectively.
• DANGSUGAR trades at a P/E of 8.5x compared to Bloomberg Middle and East Africa Peers at 14.4x. Our last communicated FVE on the stock is N16 which translates to an OVERWEIGHT rating on the stock. We will revisit our numbers after further analysis and discussion with management.

See attached for full report.