Culled—Proshare
August 7, 2017/Elixir Research
DANGSUGAR released its H1’17 results, showing a strong year-on-year (y/y) rebound in earnings and revenue growth. Continued cost control resulted in a sharp contraction in cost (including OPEX q/q) and lifted margins.
We revised our target price higher to ₦15.87 (previous ₦8.49). The Board proposed an interim dividend of ₦0.50 kobo, which yields 3.57% at previous market price of ₦14.00. Supported by higher prices following the massive increases in 2016, revenue grew by 68.40% y/y to ₦118.67 billion in H1.
However, revenue was flat (marginally down 0.64%) q/q to ₦59.15 billion, despite a strong season following the festive quarter which should have boosted volume sales. We opine that a marginal price reduction within the quarter in the range of 4% to 6% must have been responsible for the flat movement in sales.
Our suspicion is backed by management’s stance to cut back on earlier price increases as soon as cost and inflationary pressure begin to moderate lower. Away from the leap in revenue, we like the improvement in margins and profitability.
While there has been a general improvement in macro conditions, the stronger appreciation in FX-related costs, moderation in the global price of sugar and the pick-up in gas supply (leading to an efficient energy mix) also accounted for the expansion in margins and profitability.
The improvement in gross margin was stronger in Q2 standalone (32.21% vs. Q1’17: 13.17% vs. H1’17: 22.66% vs. H1’16: 19.75%). Q2’17 EBIT margin rose by 29.88% to ₦17.68 billion— compared with H1’17: 19.91% and Q1’17: 9.99%, driven by the q/q drop in total OPEX by 27.36% (though was up 23.49% y/y).
The 29.8% q/q jump in EBIT already puts H1’17 EBIT ahead of 2016FY of ₦16.81 billion (up 5.17%) and far ahead of our 2017 estimate. H1’17 PAT rose by 131.81% y/y to ₦17.11 billion, despite net finance cost of ₦1.64 billion and the increase in tax expense (up 116.01% y/y— though effective tax rate was much slower at 32.27% vs. H1’16: 33.83%).
With the lift in revenue (though we are mindful of the impact of price reductions as management begins to roll back the price increases of 2016), improvement in cost conditions and the resultant impact on margins and profitability, we have updated our valuation accordingly.
We have lowered our average cost-to-sales ratio to 79.69%, up till 2021, and OPEX-to-sales ratio to average 4.02%. This combo implies that gross profit and EBIT margin would average 29.47% and 16.90% over 2021 respectively.
We assumed a dividend payout ratio of 42.8% over the next 5 years relative to 5-year historical average of 53.5%. For 2017FY, we project ₦227.43 billion in sales and ₦30.60 billion PAT. We expect 2017FY EPS at 2.55 and ₦1.15 DPS, slighlty below 2008FY DPS of ₦1.20.
Based on the above, we revised our target price higher to ₦15.87 (previous ₦8.49). This presents a 13.33% upside from market price of ₦14.00, thus attracts a “HOLD” recommendation. The stock price is up 129.1% YtD.
