Culled—Proshare
May 2, 2017/FBNQuest Research
Event: Dangote Sugar Refinery reports Q1 2017 results
Implications: Positive reaction by the market likely
Positives: Q1 sales of N59.5bn grew 83% y/y and 9% q/q respectively
Negatives: Gross margin contraction of -758bps q/q to 13.2%
Late last week, Dangote Sugar Refinery (DSR) published its Q1 2017 results which showed that sales were up by 83% y/y to N59.5bn while PBT and PAT both grew by 38% y/y and 43% y/y respectively.
The strong sales growth more than offset the negative impact of a gross margin contraction of -758bps y/y to 13.2% and opex growth of 29% y/y, leading to the y/y improvement in profitability.
To a lesser extent, other income, which was boosted by investment income on bank deposits and fair value adjustments on biological assets, supported PBT growth. PAT was up by 43% y/y due to a comparatively lower effective tax rate of 32.4% compared with 34.7% in the corresponding quarter of 2016.
Sugar price increases over the last 12 months were the primary driver behind the sales growth recorded during the quarter as the company pushed through increasing production costs. We estimate that prices were raised by around 75% over the period from c.N7,500/50kg of finished sugar. Higher imported raw sugar (a key raw material) prices were the primary driver behind the gross margin contraction.
On a sequential basis, while sales were up 9% q/q, PBT grew by 64% q/q due to a gross margin expansion of +585bps q/q and a -14% q/q decline in operating expenses. PAT growth came in at 11% q/q due to a relatively higher effective tax rate compared with Q4 2016.
Compared with our forecasts, sales were ahead by 23%, while PBT and PAT were broadly in line. A negative surprise on the gross margin line was completely offset by positives on both the opex and other income lines.
DSR’s sales and PBT are tracking ahead of consensus’ sales and PBT estimate of N181.9bn and N22.5bn respectively, as such we expect upward adjustments to consensus 2017E estimates.
Looking ahead, DSR’s focus remains its backward integration projects. According to management, around N100bn would be invested in various farm-to-table projects across the country. The firm retains its local sugar production target of 1.5 million tonnes of refined sugar within the next six years.
Year to date, DSR shares have gained +1.5%, outperforming the All Share Index by around 6%. At current levels, on our published estimates, DSR shares are trading on a 2017E P/E multiple of 5.5x for flattish EPS in 2018E.
We rate the stock Neutral.
Our estimates are under review.
Dangote Sugar Refinery Q1 2017 results: actual vs. FBNQuest Research estimates (N millions)
| Q1 2017 | |||||
| Actual | Y/y | Q/q | FBNQuest est. | Actual vs FBNQuest est. (%) | |
| Sales | 59,527 | 82.5% | 9.3% | 48,360 | 23.1% |
| cost of sales | -51,687 | 100.0% | 2.4% | -38,772 | 33.3% |
| Gross profit | 7,840 | 15.8% | 96.6% | 9,588 | -18.2% |
| -gross margin | 13.2% | -758bps | 585bps | 19.8% | -666bps |
| Operating expenses | -1,966 | 29.1% | -14.0% | -2,558 | -23.1% |
| Other operating income | 1,167 | 9091.1% | -47.1% | 174 | 571.4% |
| Operating profit | 7,041 | 33.9% | 80.3% | 7,203 | -2.3% |
| Net int. and similar chgs | 0 | n/a | n/a | -59 | n/a |
| PBT | 7,041 | 37.7% | 63.9% | 7,145 | -1.4% |
| -PBT margin | 11.8% | -385bps | 394bps | 14.8% | -295bps |
| Tax | -2,283 | 28.7% | 13469.2% | -2,598 | -12.1% |
| Tax rate | 32.4% | -227bps | 3282bps | 36.4% | -393bps |
| PAT | 4,758 | 42.5% | 11.2% | 4,547 | 4.6% |
| -PAT margin | 8.0% | -224bps | 14bps | 9.4% | -141bps |
| other comprehensive income | 0 | n/a | n/a | 0 | n/a |
| PAT after comprehensive income | 4,758 | 42.5% | 11.2% | 4,547 | 4.6% |
Source: NSE, FBNQuest Research estimates
