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DANGOTE SUGAR REFINERY PLC Q1'18 - Modest start to the year, Q1’18 PAT up 11% y/y

Despite the difficult operating environment, Dangote Sugar reported an 11% y/y rise in Q1’18 Profit after tax in spite of a 31% y/y moderation in Revenue to ₦41.1 billion (Vetiva: ₦43.7 billion). Gross Margin came in much stronger y/y at 25% compared to the 13% recorded in the cost-bombarded Q1’17 period (Vetiva: 25%, Q4’17: 23%), supported by lower foreign exchange related costs. According to Management, average cost of raw sugar decreased 23% y/y. As such, Gross Profit came in 31% higher y/y at ₦10.3 billion (Vetiva: ₦10.9 billion). EBIT came in 10% below our estimate, but 35% higher y/y. After recording an ₦880 million fair value adjustment loss and a higher than expected tax rate of 37% (Vetiva: 32%), DANGSUGAR’s PAT rose 11% y/y to ₦5.3 billion, 25% and 22% below Vetiva and Consensus estimates respectively.

Given the weaker Revenue momentum, we revise our FY’18 Revenue estimate marginally lower (₦176 billion, Previous: ₦182 billion) to reflect the weaker than expected run rate in Q1’18. We however highlight the mild q/q improvement and are cautiously optimistic that sustained efforts by regulatory authorities to curb the smuggled sugar menace is proving fruitful. We revise our OPEX to sales ratio estimate higher from 4.0% to 4.2%. Given the aforementioned, and after accounting for the fair value loss reported in Q1’18, we revise our FY’18 profit after tax estimate to ₦26.6 billion (Previous: ₦29.1 billion). However, supported by lower risk free rate, our 12-Month Target Price is revised higher to ₦23.30 (Previous: ₦20.60) and our rating is revised to a BUY based on the 23% upside to current market price.