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Q3 2015 results review: Weaker volumes behind lukewarm outlook

​Weaker volumes behind lukewarm outlook

• Significant cuts to our earnings forecasts: Dangote Sugar Refinery's (DSR) Q3 2015 results came in slightly behind our estimates. A negative surprise on the topline was partially offset by opex coming in –15% behind our N1.5bn estimate. Looking ahead, we have made slight cuts to our sales forecast for the year, largely to reflect lower production volumes and persistent distribution challenges. We expect a capacity utilisation rate of around 50% for the Lagos refinery in 2015E, compared with c.60% in each of the previous two years. We have made no changes to our average finished sugar price estimate for 2015E of N6,600/kg as we believe it already reflects DSR's recent sugar price reduction. As such, we have cut our EPS forecasts by around 2% on average over the 2015-16E period. Our new price target of N7.4 is up by 10% mainly because we have lowered our risk-free rate assumption by 250bps to 13% to reflect the contraction in FGN bond yields. Our new target implies a potential upside of 19.5% from current levels. DSR shares are trading on a 2015E P/E multiple of 6.4x for an 11% growth in EPS in 2016E. Ytd, DSR shares have declined -2.4%, outperforming the NSE ASI's by around 18%. We retain our Neutral rating on the stock.

• Q3 PBT and PAT up 19% y/y and 33% respectively: While sales declined by 9% y/y to N21.9bn, PBT and PAT were both up by 19% y/y and 33% y/y respectively. A 750bp y/y gross margin expansion to 27.7% and a flattish y/y opex more than offset the topline decline and a significant y/y rise in finance charges. Sequentially, sales, PBT and PAT all declined by 23% q/q, 26% q/q and 22% q/q respectively. This time around, the topline decline and a 37% q/q rise in opex more than offset a 255bp q/q expansion in gross margin. Compared with our estimates, sales and PAT came in 13% and 7% behind of our forecasts respectively.

• Raw sugar prices increasingly less supportive: We forecast sales and EPS of N96.0bn and N0.97 in 2015E. Both estimates are flattish y/y. We believe topline growth is likely to be hindered by comparatively lower y/y sales volumes, despite higher prices on average this year. In Q4, we expect to see a moderate q/q contraction in gross margin (to 22.7%) given the reduction in sugar prices to N5,750 per 50kg bag from N8,000 and rising raw sugar prices (a key raw material), which were up 30% over the last three months. Management explained on its Q3 earnings conference call that price reductions are needed to fend off increasing smuggling activity.