November 11, 2016/Cordros Research
We upgrade recommendation on DANGSUGAR to BUY (previously HOLD), with 2017 TP of N8.31. The company’s dominance in the sugar industry — more so considering that unofficial imports have been significantly constrained by FX scarcity — has allowed management to boldly respond to cost pressures via price increases (70% recovery over 2016F to N213, 899/tonne). Despite the downward revision following the below expected performance in Q3, we still look for 2016F net profit growth of 25% (previously 37%).
While demand is set to ease by 28% in 2017 (with price per tonne now at N342, 000 ex-VAT), the decline will be more than compensated for by significantly higher average price, suggesting potential growth in topline (we estimate 15%).
Our volume forecast is based on expected decline in national consumption, especially by large corporates/industrial users (accounting for 30% of DANGSUGAR’s sale).
Costs are likely to peak at 2016 levels, though risk is to the upside. Key risks are unresolved FX issues and high energy costs.
Overall, we forecast 34% net profit growth in 2017. Risks to the forecast are (1) lower than expected sales volume, or price reduction, or both and (2) significant cost inflation.
DANGSUGAR’s stock is up 4% YtD, and is trading on a forward PE of 5.2x, at 40% and 63% discount to Bloomberg’s SSA and Nigerian comparables.
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