April 11, 2018/Cordros Report

• Update: We revise estimates for DANGSUGAR following 2017FY results and call with management. Key change to our model estimates is the downward revision of volume and margin, and consequently, earnings. On net, we revise revenue estimate 5% lower, and EBITDA, EBIT, and net profit estimates by 9% average. Compared to 2017FY, our 2018E EBITDA (7%) and EBIT (4%) estimates are higher while net profit is lower (adjusting for the FX gain recorded in Q4-17) by 11%. The stock’s TP on our revised estimates is NGN17.97 (previously NGN19.03); SELL rating maintained. On our revised estimates, DANGSUGAR trades on one-year (2018E) forward P/E and EV/EBITDA multiples of 7.4x and 4.0x respectively, consistent with both its five-year historical averages of 7.9x and 4.4x, and the 7.4x and 4.6x Middle Eastern peer averages.

• Flattish revenue in 2018E: Our marginal revenue growth forecast of 0.5% is on freight revenue (+18% y/y), which has continued to grow – 18% in 2017FY and 26% average in the last five years – although accounting for barely 2% of gross revenue. We revise sugar revenue growth forecast lower to 0.2%, from 5%, given conservative outlook on sales volume and price, than we previously had. On the recent call, management reiterated some of the volume concerns – although which it expects to improve this year – we had highlighted in previous notes, notably the activities of smugglers and the poor condition of the factory road. 

• Margin revised lower: By our estimate, DANGSUGAR’s per tonne production cost increased 4% in Q4-17, after successive declines between Q1-Q3. The higher cost, combined with lower selling price, produced a gross margin of 23%, below both the 32% rate achieved between Q2-Q3, and our 30% estimate. We have revised our gross margin estimate for 2018E 112 bps lower to 26%. Our estimate remains above the 25% margin achieved in 2017FY, and DANGSUGAR’s five-year historical average of 24%. 

• A step-up in capex: Capex increased to NGN9.8 billion in 2017FY, the biggest in three years. No specific guidance was given for spending in 2018 and beyond, but management reiterated that funding for its BIP will be 20% equity (and noted that this portion can be increased) and the balance via borrowings. 

Click here to download full PDF copy of report