EUR 53.02 For Business Accounts Only

DANGOTE SUGAR PLC - Earnings beat as volumes, price increase

Amidst stronger volumes and further increases in retail prices, DANGSUGAR outperformed Vetiva and Consensus estimates for the second consecutive quarter, posting an impressive 32% y/y and 16% q/q revenue growth in Q2’16. We believe the ramp up in volumes (up 9% q/q) was driven by sustained demand from both industrial and trade sugar consumers, constrained smuggled sugar volumes (given the currency conundrum), and improvement in cross-country distribution. Separate from this, prices were also progressively raised through the quarter, up 7% q/q to N162, 047 per ton. Management has stated that the hike in prices was prompted by higher costs arising from LPFO usage (alternative fuel supply) due to gas supply shortages, and 42% currency devaluation in June.

Gross margin for the half contracted 510bps y/y to 20% (tracking below Vetiva’s 21% estimate) as the 16% y/y price increase in H1’16 could not offset the higher production costs from using alternative fuel (LPFO: 1.5 times more expensive than regular gas), impact of a weaker naira and an 11% y/y rise in global raw sugar prices. With a 21% y/y decline in net interest expense, Profit after tax improved 17% y/y to N7.4 billion (8% above Vetiva’s estimate) – the highest H1 net earnings figure recorded in 8 years. We have updated our model to reflect the strong H1'16 sales revenue, raising our FY’16 revenue forecast to N133 billion (Previous: N117 billion). We revise our EPS forecast upwards to N1.21 (Previous: N1.13) to reflect lower interest charge amidst reduced borrowings. Consequently, our 12-month target price is also revised upwards to N9.13 (Previous: N8.36).