Dangote Sugar: Investors soft-pedalling, but still beat analysts’ target price


…What the future portends

By Emeka Anaeto, Business Editor

THE Renewed bull-run on the stock of Dangote Refinery Plc, appeared to have placed it on a comfortable lead ahead of analysts’ projections despite the 1.14 percent decline it recorded towards end of last week. The two-day loss last week was signalling a profit taking amidst fears of year-end stock price re-balancing.

Alhaji Aliko Dangote

Stock analysts at Cordros Capital Limited, a Lagos based investment house, had, mid-last month, projected a target price (TP) of N19.03 at full year 2017 (FY’17), while analysts at Cardinal Stone Finance, another Lagos based investment house, in the third week of last month, put their TP for Dangote Sugar at N16.29.

But both projections were beaten by huge margins well ahead of year end with the stock closing last weekend at N21.70.

However, analysts at both institutions as well as other investment commentaries had given a bullish perspective to the nine-month 2017 (9M’17) financial results and other business facts of the sugar giant, a major factor in stimulating the ensuing bullish position on the stock by investors in the last one month.

Recent financial result

Dangote Sugar reported impressive earnings of  N  26.5 billion in 9M’17 results which is already 1.8x higher than  N10.1 billion reported in FY’16. Reflecting on this performance, analysts at CardinalStone had stated: “Given this run rate, we believe the company is on track to deliver its strongest earnings in FY’17.”

Focusing on the third quarter, despite a 0.95% year-on-year (YoY) decline in revenue, earnings rose by 244.3 percent YoY as a result of a faster decline in cost of sales (-25.0%).

Engr. Abdullahi Sule is the Acting Group Managing Director, Dangote Sugar Refinery Plc.

This largely steered the 2153 bases points (bps) YoY increase in third quarter 2017 (Q3’17) gross margin. Likewise, on a quarterly basis, gross margin expanded albeit modestly by 68bps, also driven by lower production costs.

Industry commentators had noted that Dangote Sugar continues to benefit from easier accessibility to foreign exchange (for its imported inputs), relatively improved gas supply as well as currently soft raw sugar prices in international markets.

Giving huge value to these upsides analysts at CardinalStone stated: “Given the company’s increasing ability to source FX at favourable rates, coupled with still soft raw sugar prices (-32.1% year-to-date, YtD), we cut our FY’17 cost of sales estimate by 8.7% to  N162.0 billion.

“We expect this line item to drive gross margin expansion in the near term, particularly in Q4’17, as we foresee further declines in the pace of revenue growth owing to the ~4% price decrease effected in Q3’17.”

However, they also factored in the challenges being faced by the sugar giant thus: “We expect further price cuts in Q4’17 – in the wake of high influx of smuggled refined sugar in key markets and revise our FY’17 revenue estimate lower by a modest 4.8% to  N220.0 billion. This implies a 29.7% YoY growth from the previous year (FY’16), driven by price (+41.8% YoY) as we estimate sales volume to decline by 11.6% YoY.”

Further forecasts

Analysts at Cordros Capital, while factoring in the challenges to growth gave an upside to the near future thus: “Despite cuts to sales estimates, we raise Dangote Sugar’s 2017F EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) and net profit by 50% each, and for 2018-2019F by 55% and 56% respectively. “The upward revision follows better margin outlook on declining per tonne production cost, which we expect will offset price cuts. Our revised estimates translate to EBITDA and net profit growth of 158% (+131% in 9M-17) and 155% (+162% in 9M-17) respectively in 2017F, and 3% and 5% average growth in 2018-2019F.”

But Cordros analysts had their own worries too, and they stated: “We cut revenue estimates for 2017-2019F by 10% average, on downwardly revised volume (for 2017F only) and selling price estimates.

“Sales volume (-17% in 9M-17) has been hit by weakened demand, and more recently, by both the influx of smuggled sugar and the terrible condition of the road to the Apapa factory. And since reaching N17,010 average per bag in Q1‘17, we estimate that average selling price is down by 12% based on Q3-17 price of NGN14,912/bag.

“Compared to 2017F, we estimate Dangote Sugar’s selling price over 2018-2019F will be lower by 4% average as management focuses on market share growth (we estimate average 7% volume growth), having more than surpassed the gross margin target of 20% (by 120 bps) between Apr-Sep 2017 following significant decline in per tonne production cost. “While retaining average growth of 10% in freight income, net impact is for 2% growth in gross revenue over our forecast period.”

However, they see more positives in the business and stated: “We raise gross margin estimate for 2017F by 983 bps to 27%, following the significant formation over 9M-17 (+895 bps vs. 9M-16), particularly the last two quarters (33% average).

“We also raise estimates for 2018-2019F by about 1,000 bps average, on the assumption that the expected cut in selling price will trail decline in per tonne production cost.

“Upside risks to our per tonne production estimate (down consistently QoQ to -34% between Q3-17 and Q4-16) include: A better energy efficiency and stronger exchange rate; A stable outlook of global raw sugar prices, and; A positive mix from growing contribution of higher margin Savannah.

But they also posited some downside risks to the margin estimate, as follows: “A deeper-than-expected cut in selling price, and; An upturn in global prices of raw sugar (sugar prices for 2019 delivery are higher by 4% for November contracts).”

Further financial projections

A further financial analysis and forecast by CardinalStone gives more investor information on positioning in   the sugar giant’s stock in the short-to-medium term. The analysts had stated: “Dangote Sugar continues to carry a modest debt balance sheet thus, in the absence of finance cost pressures as well as sustained efforts to contain operating expenses, we expect the benefits of expanded gross margin to filter through to earnings, and project FY’17 EPS (earnings per share) at  N3.14, representing a 161.7% increase over FY’16.

“In the last three years, Dangote Sugar has on average paid 48% of its earnings as dividend. “Given this, we estimate a final dividend of  N1.00, bringing our estimated total dividend to  N1.50 (the company paid an interim dividend of  N0.50 following the release of its first half 2017, H1’17, earnings).

“In 2018, we expect the impact of lower production costs to reinforce earnings on the back of sustained FX stability, strengthened by improved crude oil output and higher crude oil price and favourable raw sugar prices which, according to industry experts, is expected to remain lower in the near term on improved harvest in Brazil and India. “Given the need to effectively compete in the marketplace, we foresee gradual roll backs to its refined sugar selling price which bodes well for volume recovery.

“On the back of the above, we raise our FY’2018-2020E gross margin and EPS estimate by 294bps and 5.2% on average.”

Stock’s recommendations

On the Dangote Sugar stock valuation and recommendations the analysts at Cordros Capital stated: “On net, we raise TP for the stock by 39% to NGN19.03 per share and upgrade our rating to ‘BUY’. We roll forward our estimates and valuation by one year.”

In its updated valuation and recommendations, the analysts at CardinalStone stated: “Following adjustments to our projections, we have revised our target price (TP) to  N16.29 and retain our ‘HOLD’ rating on the counter.”



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