Initial View - Dangote Sugar Refinery Q2 19 - Poor operating performance as cost tilts upwards
- Yesterday, Dangote Sugar Refinery (DSR) released its second quarter 2019 result wherein it reported 46.6% YoY decline in earnings to N4.0 billion, with related EPS at N0.33. The pressure on the bottom-line emanated largely from increased input cost (+12.6% YoY) as revenue fell slightly by 1.7% YoY. Factoring the Q2 19 numbers, EPS over H1 19 dropped by 14% YoY to N11.0 billion (EPS: N0.91).
- Amidst flattish receipts, costs tilts upwards: With sustained competition from smuggled sugar, DSR’s revenue declined slightly by 1.7% YoY to N42.2 billion, due to volume-induced decline in sale of its 50kg bag. Surprisingly cost jumped by 12.6% to N33.7 billion, reflecting a 20% jump in raw materials cost – despite a meagre 3% YoY increase in global raw sugar prices. Though increase in custom duties’ conversion rate which took effect in the second week of June comes to mind as plausible driver, but we saw no hint of these changes in cost for other food producers. Therefore we would have to seek clarity from the company. On that backdrop, gross margin dipped sharply to 20.2% (Q2 18: 30.3%).
- Though operating expense and net finance expense declined over the period, compressed gross margin resulted in 40.6% YoY decline in operating profit to N6.4 billion. To clarify, OPEX declined by 6.2% YoY to N2.1 billion driven by a 50.4% YoY decline in selling and distribution expenses while net finance expense printed at N24.3 million (-52% YoY).
- Overall, DSR operating performance over the second half was very disappointing as we expected cost savings from lower raw sugar prices to tame the impact of competition from smuggled sugar over 2019. Therefore we would have to seek clarity from management and guidance on cost over the rest of the year. That said, on our cost savings assumptions, we currently have a FVE of N15.67, which translates to a BUY rating from last closing price. DSR trades at a 2019 P/E of 5.2x relative to 16.9x for MENA peers.
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