Culled—Proshare

November 3, 2016/Vetiva Research

Strong revenue growth persists, hinged on higher volumes, price
DANGSUGAR maintained the impressive revenue growth run-rate recorded from H1’16 in its Q3’16 results, posting an 18% q/q growth in the period.

Though flattered by a low base from the preceding year (volumes impacted by distribution challenges and higher smuggled sugar volumes), 9M’16 revenue was up 58% y/y to ₦115 billion (Vetiva estimate: ₦102 billion).

This notable growth can be attributed majorly to multiple price increases implemented through the year, up 45% y/y to ₦187,590/ton in 9M’16.

Management has taken this pricing action in order to protect margins from rising input costs emanating from the 55% ytd currency devaluation, uptick in global raw sugar prices, increase in import tariff for raw sugar from 10% to 20%, and higher unit price of both gas and LPFO (alternative fuel).

However, given its lion share of the market, DANGSUGAR has also been able to consistently grow volumes – up 16% y/y to 614,389MT – amidst stronger demand arising from reduced competition from smuggled sugar and an improved distribution network.

Lower margins suppress earnings
Notwithstanding the price increases (16% hike taken in Q3), gross margin recorded a third consecutive quarterly moderation in Q3’16 to 11.3%, down from 18.9% in Q2 and 20.8% in Q1.

We believe the full effect of the initial currency depreciation (effected middle of June) and a further 11% depreciation in Q3’16 are responsible for the sharp dip in margins. Also, management stated that disruption in gas supply persisted in Q3, which led to increased usage of more expensive LPFO.

Margins were further impacted by rise in OPEX (as % of sales) from 3.1% in Q2’16 to 4.3% in Q3’16. With this, Q3’16 PAT declined 32% q/q to ₦2.7 billion (Vetiva estimate: ₦3.0 billion). Overall, 9M’16 EPS at ₦0.84 came in 7% below our estimate.

Downward revision to EPS, TP – BUY rating maintained
We expect revenue growth to remain strong in Q4’16, bringing FY’16 estimate of ₦157 billion – implying a 56% y/y growth.

We believe continued tightness in the FX market and incline in global raw sugar prices will persist in Q4’16.

After updating for our lower margin assumptions, we have revised our FY’16 EPS to ₦1.09 (Previous: ₦1.21, FY’15: ₦0.96) and cut our target price to ₦8.75 (Previous: ₦9.27). We expect FY’16 DPS of ₦0.54 (2015: ₦0.50) – dividend yield of 9%.