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Dangote Sugar Refinery Q4 2015 results review

​Sugar production growth likely in 2016

• Slight increase to our EPS est.; maintaining Neutral rating: Dangote Sugar Refinery’s (DSR) Q4 EPS of N2.2bn was in line with our forecast for the period. Management noted on its Q4 conference call that sales volumes at the start of 2016 are much higher than in corresponding periods of 2014/15. As such, we estimate a higher capacity utilisation rate for the Lagos refinery of around 56% in 2016E compared with c.50% in 2015. We also expect DSR to pass-through rising input costs to customers. Raw sugar (a key raw material) prices are up by around 10% in 2016 as global production goes into deficit for first time in five years. Given this, we have raised our EPS forecasts by around 7% on average over the 2016-17E period. A potential devaluation of the naira is the key risk to our outlook. Our new price target of N6.1 is up 10% and implies a potential upside of 3.3% from current levels. DSR shares are trading on a 2016E P/E multiple of 6.3x for a 2% growth in EPS in 2017E. Ytd, DSR shares have declined -2.2%, outperforming the NSE ASI’s by around 7%. We retain our Neutral rating on the stock

• Q4 PAT declined -12% y/y to N2.2bn: In Q4 2015, while sales and PBT were both up 33% y/y and 79% y/y to N28.0bn and N2.3bn respectively, PAT declined by -12% y/y to N2.2bn. The difference in trends seen for the PBT and PAT is driven by a tax rebate of N1.2bn in Q4 2014 compared with a tax expense of N124m during Q4 2015. Sequentially, while sales were up 28% q/q, PBT and PAT both declined by 47% q/q and 27% q/q respectively. Compared with our estimates, while sales were ahead by 22%, PBT came in 35% behind our estimate due to negative surprises on both the opex and gross margin lines. However, PAT was in line due to a positive surprise on the tax line. DSR proposed a DPS of 50 kobo implying a dividend yield of 8%.
• Sales volumes and prices expected to rise by around 10% y/y: We forecast sugar production growth of around 9% y/y to 806,000 tonnes in 2016E. Additionally, we expect finished products pricing to rise by high-single digits y/y in 2016E to US$701/tonne because we anticipate that DSR is likely to transfer higher raw sugar prices to consumers. For now, we have not factored in a potential devaluation given the federal government’s current position. DSR’s management is targeting a significant improvement in sugarcane yields for Savannah Sugar (DSR’s first backward integrated project), however, we believe the project is likely to only record reduced losses of around -N400m in 2016E vs a loss after tax of –N1.1bn in 2015 given relatively low land utilisation. We forecast an EPS decline of around 2% y/y in 2016E.