Culled—Proshare

May 16, 2017/FBNQuest Research

2017/18E EPS ests. up by 37%; price target up by 32% to N7.1
Following Dangote Sugar Refinery’s (DSR) Q4 2016 and Q1 2017 results we have raised our EPS estimate over the 2017-18E period by 37% and our price target by 32% to N7.1.

Our earnings forecasts are driven by an improved outlook on raw sugar prices – a key raw material for DSR, management’s ability to source fx at relatively cheaper levels compared with 2016 and improving gas supply on the back of relative calm in the Niger Delta.

While raw sugar prices are down –16% year-to-date, management stated on its Q1 2017 conference call that all fx requirements are now met at the interbank rate. On the back of these factors, we estimate that gross margin for DSR would be better by around +110bps on average over the 2017-18E period.

We forecast a sugar sales volume decline of around -3% y/y to 750,000 tonnes and an average sales price of N12,000 (up +10% y/y) for 2017E. In Q1, sugar sales volumes declined by -17% y/y to 174,981 tonnes, owing to elevated prices which more than doubled to N16,734 per 50kg bag.

At current levels, our price target implies an upside potential of around 5%. Going forward, global raw sugar prices are expected to remain soft for most of 2017.

Additionally, an improving macroeconomic environment is supportive of the central bank’s recent fx intervention policy which bodes well for DSR’s production costs.

DSR shares are trading on a 2017 P/E multiple of 4.4x for flattish EPS in 2018E. Ytd, DSR shares have gained 10.5% (ASI: +2.4%). We retain our Neutral rating. 

Strong sales growth driving profitability in Q4 2016 & Q1 2017
In Q4 2016, DSR delivered strong PBT and PAT growth of 122% y/y and 137% y/y respectively.

Primarily responsible were a sales growth of 95% y/y to N54.5bn, a gross margin expansion of 122bps y/y and a fair value adjustment of N1.8bn.

Sales growth was driven primarily by price increases as sugar volumes were flattish. On a full year basis, both sales and PBT were up 68% y/y and 28% respectively.

In Q1 2017, 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.

Compared with our forecasts, sales were ahead by 23%, while PBT and PAT were broadly in line.