May 2, 2017/Cordros Research
Dangote Sugar Refinery Plc released Q1-17 result last Friday, recording revenue (82.5% y/y), EBITDA (13.8% y/y), and PAT (42.5% y/y) that are well ahead of Q1-16. Revenue and PAT beat our estimates by 16% and 8% respectively. Annualized, revenue and PAT are above consensus by 30.9% and 1.4% respectively.
The revenue growth was driven by the significantly higher average price (121% y/y), which more than compensated for relatively lower sales volume (17% y/y). Management said it sold 174,981 tonnes of sugar during the period, 7% more than the 164,129 tonnes achieved in Q4-16, and 13% above our estimate. The q/q volume growth is consistent with the encouraging demand the management guided to during the 2016FY conference call. That said, the management’s reported average selling price of N17,010/50kg bag is above our computed N16,775/bag, and is not consistent with the N1,000/bag reduction (implemented in March) from the N17,000/bag as at end of 2016.
Also positively impacting PAT was the significant increase in investment income (N971.4 million vs. N7.1 million in Q1-16), enabled by growing cash generation, and consequent investments in short term money market instruments (N40.3 billion). Management said it earned 11.5% (vs. 7% in Q1-16) average interest on its bank deposits. We also note that the yields on shorter maturing T-bills are significantly above Q1-16 (by over 1000 bps).
In addition, an amount of N122.5 million was reported as fair value adjustment on biological assets, compared to –N80.3 million in Q1-16. And while operating expenses increased by 29.1% y/y, it fell by 136 bps y/y as a proportion of revenue.
Although gross margin improved from the trough of 7.3% in Q4-16, the 13.2% realized during the period was significantly shy of the 20% guided by management, and lower than our 14.7% estimate. Management had cited the (1) purchase of forex at a relatively lower average rate (compared to Q4-2016) and (2) higher output from Savannah where margins are higher, as the potential enablers of margin recovery.
Overall, DANGSUGAR’s Q1-17 PAT is consistent with our strong growth expectation (22%) for 2017F. We look for lower PAT growth in subsequent quarters as narrowing y/y price differential (with sales volume unlikely to improve significantly from current level) forces revenue growth to taper. We maintain HOLD rating on the stock. A conference call for analysts and investors will be held Thursday this week.
