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Dangote Sugar Refinery PLC FY'16 - Strong topline growth drives earnings higher

• Dangote Sugar Refinery PLC recently released its FY’16 financial results which showed a 68% y/y rise in revenue to ₦170 billion (Vetiva: ₦158 billion). This was following an outperformance in Q4’16 revenue which came in at ₦54 billion – 27% higher than we had expected. Given the relatively flat sales volume of 778,518 MT (FY’15: 778,000 MT) for sugar in FY’16, the topline performance was solely driven by price increases implemented in the year. Following a further surge in costs in Q4’16 (COGS as a % of sales at 92.7% vs Q3’16: 88.7%), FY’16 gross margin came in at a record low of 13.5% (FY’15: 20.3%).
• Overall, FY’16 PAT rose 29% y/y to ₦14.4 billion – 4% above Vetiva estimate. With a payout ratio of 50%, the Board of Directors proposed a dividend of ₦0.60/share (Vetiva estimate: ₦0.50/share). We expect the improvement in FX supply in the official market and moderation in parallel market rate since February to lift margins. In fact, management reported that a ₦20,000/ton price cut was taken sometime in March given the positive development in the FX market and in a bid to aggressively push volumes back up. We believe FY’17 revenue will come in mildly flat y/y at ₦171.6 billion as the effect of lower prices offset an improvement in volume performance. Thus, we estimate FY’17 EPS of ₦1.38 (FY’16: ₦1.20, Previous: ₦1.03) and raise our Target price to ₦9.01, BUY (Previous: ₦8.69).