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DANGOTE SUGAR REFINERY PLC H1'20 - Topline expansion buoyed by closed borders.

While the COVID-19 pandemic dragged earnings across different sectors, Dangote Sugar Refinery appears to have thrived in the period, reporting a 16.7% q/q and 31.7% y/y turnover growth in Q2’20 to ₦55.6 billion. Overall, H1’20 turnover expanded by 28.5% y/y to ₦103.2 billion, ahead of our modest 16.5% y/y growth expectation. The revenue jump was driven mainly by a 68.8% y/y increase in revenue from retail bags and was complemented by a 30.0% y/y revenue jump in 50kg sugar bags. Although we had anticipated that demand from the now restricted smuggled sugar would flow back to local producers, we had expected a decline in sugar demand from the food and beverage companies to offset this surge and culminate in a slower y/y growth for the half year. That said, we recall that the company had in Q1’20, introduced a c.5.0% increase in sugar prices and we believe that this increase, along with improved y/y volumes, drove revenue higher. In spite of the impressive topline figures, Gross profit fell 36.3% y/y to ₦8.1 billion (margin contracted 12.1ppts to 14.6%), dragged by a 36.0% y/y jump in cost of sales. For the half year period, Gross profit moderated 1.4% y/y to ₦20.8 billion. We attribute the cost increase to inflationary pressures due to the pandemic, a c.15% devaluation in the naira and a consistent rise in out-grower costs – since H1’19, the industry out-grower price for sugar cane has risen by c.19%.

Accounting for the earnings beat so far, we have made some adjustments to our FY’20 estimates and project topline growth of 20.8% y/y to ₦194.7 billion. However, given our expectation for elevated costs and a continued rise in inflationary pressures, we expect Gross profit to print at ₦38.9 billion (+1.7% y/y) weakening gross margin by 3.8% for FY’20. Furthermore, we project an EBITDA of ₦36.2 billion (-0.9% y/y) and a 4.1ppts decline in EBITDA margin to 18.6%). Given Dangote Sugar Refinery’s current strong balance sheet, we believe that the company is in a favourable liquid position for its expansionary and backward projects. However, given its very low debt to equity ratio and the current low interest rate in the economy, we expect the company to issue some debt instrument in the coming year. Thus, we expect a 1.7x spike in finance costs to ₦1.3 billion owing to a possible increase in debt. Overall, we expect the company to post a 2.4% y/y PBT growth to ₦30.5 billion for FY’20. However, adjusting for taxes, we estimate that PAT would decline 7.1% y/y to ₦20.8 billion. We value DANGSUGAR at ₦16.11 and place a BUY recommendation on the stock.