October 28, 2016/Cordros Research
DANGSUGAR released results for nine months and third quarter ended September 2016. The key features of the third quarter result are (1) robust y/y and q/q revenue growth; (2) significant y/y and q/q gross margin contraction; (3) high double-digit y/y and q/q increase in opex; (4) y/y reduction in finance charges; and (5) decline in PBT (5.9% y/y and 31.1% q/q) and PAT (9.5% y/y and 32.3% q/q).
Over the nine months of 2016, revenue was up 57.8% while net profit grew by 8.4%.
Revenue in Q3 grew 104.2% y/y and 18.3% q/q. Growth over 2015 came through a combination of volume (c.10%) and pricing (86.7%) while growth over Q2-16 was strictly on pricing (47.3%). DANGSUGAR’s management has increased prices in every quarter of this year, with its per tonne price of refined sugar averaging N187,590 (vs. N137,640 in 9M-15). Volume during the period is the lowest so far this season, conforming with seasonality, and also because of the significant upward price adjustment. What is interesting, however, is that despite the high inflationary and weak consumer demand environment, volumes have been higher than 2015 quarterly comparatives. Our routine check revealed that sugar price has been a major contributor to the high input costs experienced by manufacturers in the food and beverage subsector over 2016.
Gross margin contracted by 1631bps y/y and 754bps q/q as costs (cost per tonne increased by 127.6% y/y and 60.7% q/q) outpaced price increase. As stated in most of our recent commentaries, Nigeria’s manufacturing sector broadly experienced cost pressure from continued depreciation of the local currency and high energy conversion costs. For sugar producers, weak gross margin also tracks global raw sugar prices which rose 2% during the quarter and are about 15% higher than a year ago.
Operating expenses were an upside surprise, rising 51% y/y and 62.2% q/q. Meanwhile, finance charges fell by 79.2% y/y and 20.9% on q/q basis, following declines in charges on bank and inter-company loans.
Overall, DANGSUGAR’s 2016 earnings have benefitted from management’s timely response to cost inflation, with strong first half earnings helping to absorb the weakness in the third quarter. We still look for higher 2016F net profit, but now at a lesser growth rate.
We are Neutral on DANGSUGAR. Estimates are under review.
Income Statement (N’bn) | 30-Sep-16 | 30-Sep-15 | y/y | Q3:16 | Q3 y/y | Q3 q/q |
| Revenue | 115.25 | 73.05 | 57.8% | 44.78 | 104.2% | 18.3% |
| Cost of Sales | 96.25 | 54.28 | 77.3% | 39.70 | 150.3% | 29.3% |
| Gross profit | 19.00 | 18.77 | 1.2% | 5.08 | -16.2% | -28.9% |
| OPEX | 4.64 | 3.91 | 18.7% | 1.93 | 51.0% | 62.2% |
| Other income | 0.36 | 0.25 | 46.5% | 0.25 | 52.3% | 707.3% |
EBIT | 14.72 | 15.11 | -2.5% | 3.40 | -31.3% | -43.2% |
| Investment income | 0.31 | 0.01 | 3039.9% | 0.18 | 7591.3% | 52.0% |
Fair value adjustments | 0.68 | 0.00 | 0.69 | 849.9% | ||
| Financial charges | 0.40 | 0.89 | -55.6% | 0.11 | -79.2% | -20.9% |
Profit before tax | 15.32 | 14.22 | 7.7% | 4.16 | -5.9% | -31.1% |
Taxation | 5.20 | 4.89 | 6.4% | 1.43 | 2.1% | -28.6% |
| Profit after tax | 10.12 | 9.34 | 8.4% | 2.74 | -9.5% | -32.3% |
Ratios | 30-Sep-16 | 30-Sep-15 | ||||
| Gross margin | 16.5% | 25.7% | ||||
OPEX margin | 4.0% | 5.4% | ||||
| EBITDA margin | 14.8% | 23.4% | ||||
| EBIT margin | 12.8% | 20.7% | ||||
| PBT margin | 13.3% | 19.5% | ||||
| PAT margin | 8.8% | 12.8% | ||||
| Cost of sales margin | 83.5% | 74.3% | ||||
| Tax rate | 34.0% | 34.4% | ||||
| *RoAE | 20.9% | 27.0% | ||||
| *RoAA | 11.5% | 16.2% | ||||
| EPS (N) | 0.84 | 0.78 | ||||
| *EPS (N) | 1.03 | 1.44 | ||||
| *PE | 6.1x | 4.2x | ||||
| PBV | 1.2x | 1.3x | ||||
| *Trailing |
