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DANGOTE SUGAR PLC 9M'17 - Stronger margins support earnings momentum

Stronger margins support earnings momentum                                                                                               

In its recently released 9M’17 earnings results, Dangote Sugar recorded a 41% y/y rise in revenue to ₦163 billion, 4% below Vetiva’s estimate. The marginal top line miss was driven by a shortfall in the Q3’17 revenue figure of ₦44 billion – 13% below Vetiva estimate albeit flat y/y. Given that average selling prices are still much stronger y/y, lower volume roll-out remains the major pressure point for quarterly performance (volume down 17% y/y to 507,184 MT). We marginally lower our q/q revenue growth for Q4’17 to 15% and as such revise our FY’17 revenue estimate 7% downward to ₦214 billion – 26% y/y growth.                                                                                      

9M’17 gross margin expand to 25%, above the 17% recorded in prior year and our 23% expectation. The 9M'17 trend was supported by further margin expansion in Q3’17 to 33% after the spike recorded in the prior quarter to 32% (Q1’17: 13%) – much higher than pre-recession average of 24%. Earnings were further boosted by fair value gains of ₦950 million and investment income of ₦2.4 billion (9M’16: ₦308 million). Overall, profit after tax in 9M’17 rose to ₦27 billion (Vetiva: ₦25 billion) from ₦10 billion in 9M’16. With our OPEX estimate unchanged, and a mild upward review to investment income estimate, we revise FY’17 PAT to ₦37 billion (Previous: ₦33 billion, 2016: ₦14 billion). Overall, with a WACC of 22.56%, our 12-Month Target Price is revised  higher to ₦16.75, and as such we upgrade DANGSUGAR to a HOLD.                                                  

Dangote Sugar Refinery PLC (DANGSUGAR) is the largest sugar refinery in Sub- Saharan Africa with installed capacity of 1.44 million MT. DANGSUGAR is listed under the Consumer Goods sector, in the Food Products subsector on the Nigerian Stock Exchange. Following the acquisition of Savannah Sugar in Q1 2013, the group’s operations now comprise of three key areas which include: i) Planting and milling of sugar cane ii) Refining of granulated white sugar; iii) Marketing and Distribution. DANGSUGAR is majority owned by Dangote Industries Limited.