August 25, 2016/Cordros Research
The c.60% adjustment in sugar selling price taken by DANGSUGAR’s management at the beginning of the 2016FY had notable positive impact on H1-16 earnings (+16.4%), considering the magnitude of cost inflation (linked to rising raw sugar prices, weaker currency and negative energy mix) experienced during the period. In Q2-16 precisely, gross margin y/y contraction increased to 623bps (-187bps q/q), after contracting by 376bps in the first quarter. Ahead of H2-16, management has further adjusted selling prices by about 50% from end H1-16 closing to N12,000 ex-factory, in view of potentially bigger threats to margins from higher operating costs. Incorporating the new price into our estimate resulted in an upward revision to 2016FY revenue, EBITDA and net profit. We consequently revise TP to N7.92 (previously N6.13) but maintain HOLD rating.
Despite the hike in selling price, amid the squeeze in consumer disposable income, DANGSUGAR saw relatively stronger volumes (+18%) in H1-16. While noting that BUA (with 0.750MT/yr capacity) may not have been active during the period, the significantly subdued activities of importers (including large corporates’ utilization of glucose) following the liquidity squeeze in the forex market, also supported the volume growth. That said, given the latest price adjustment to record high, how sales volume will be sustained at H1-16 quarterly average of 0.2MTs remains to be seen, considering the largely fragile consumer environment. Hence, we have lowered volume estimate over H2-16 by 16% from our prior estimate. Note that DANGSUGAR’s prices have been quite reactive to costs (notably sugar prices) and competition in recent years. We would expect prices over 2017FY to reflect (1) the return of competition following likely improvement in the macro environment; (2) reduced energy cost pressure on favourable mix; and (3) soft input prices.
On cost, management anticipates further pressure on input materials following the introduction of the new flexible exchange rate regime. Besides the relatively higher official exchange rate, the continued liquidity squeeze in the forex market speaks to the possibility of some of DANGSUGAR’s dollar purchases being passed at premium to the currently unstable official rate (of between N305-N350/USD). The 31% increase in raw materials cost per tonne over H1-16 suggests that inputs may have been funded at premium dollars to the official rate (given that average raw sugar price was slightly above last year’s), despite management claims to the contrary. On the positive however, we expect cost pressure from negative energy mix to abate should the improved gas supply seen thus far in August persist. On the net, we forecast 2016-2018FY gross and EBITDA margins of 19% and 18.6% respectively.
DANGSUGAR’s shares hold the most upside YtD (+12.3%) among our universe of consumer names. The stock is currently trading on a consensus 12M FPE of 6.4x, at discount to SSA peers (8.5x) and Nigerian consumers (13.7x).
