April 9, 2019/InvestmentOne Report

§  Mixed top line:  up 2.87% q/q,  down 18.78% y/y

§  Improving Gross profit margin: up 778bps q/q;  557bps y/y

§  Stable OPEX to sales ratio: down 99bps q/q; 41bps y/y

§  Mixed PBT performance: up 33.18% q/q; down 57.24% y/y 

Recently, Dangote Sugar Refinery Plc published its Q4 2018 results which were reflective of the price cut the company took during the year. In the same vein, we believe the lingering challenges faced by the company as a result of security challenges (North East) which created an avenue for low quality sugar could have offset the impact of stability in the foreign exchange market. 

Smuggling Continues to Weigh on Turnover  

The company’s turnover fell by 18.78% y/y to N33.62billion in Q4 2018 which may not be unconnected with the challenges highlighted by the company in terms of illegal importation of low quality sugar due to security challenge in the North East.  

In the same vein, the drop in revenue could be as a result of the reduction in price on account of the stability in foreign exchange market in 2018 relative to 2017 as well as the competition from low quality substitutes. On the average, sugar prices declined by 9.52% y/y to N14,448 per 50kg (wholesale price) in Q4 2018 according to our estimate from daily prices released by the National Sugar Development Council. 

Despite the price cut by the company during the year, the recent fall in raw sugar prices as well as stability in FX market could have supported stronger margin as the company’s gross profit margin increased by 557bps y/y to 28.56% in Q4 2018. 

Gross Profit Margin Weighs on PBT Margin 

Moving down to the P& L line, Dangote Sugar recorded a decline in PBT margin to 24.97% in Q4 2018 compared a PBT margin of 47.43% in Q4 2017. This was due to a fair value revaluation loss of N246million (against a gain of N1.52billion in Q4 2017) and a 95.40% y/y fall in net finance income which offset the impact of the improvement in margin and a 41bps y/y decline in OPEX/Sales.  

We believe the fall in net finance income could be attributed to the lower interest rate environment as well as the company’s lower cash position in 2018 relative to 2017. Overall, the company recorded a 57.24% y/y decline in PBT to N8.39billion in Q4 2018. 

Higher Volume Supports Quarter On Quarter Performance 

On a sequential basis, turnover increased by 2.87% q/q to N33.62billion in Q4 2018 which may be due to higher volume on the back of the festive activities in this period. On the other hand, the company’s gross profit margin improved by 778bps q/q to 28.56% which may be due to better cost management by the firm despite the higher raw sugar prices (+19% q/q on the average) in the global market.  

That said, a combination of the increase in gross profit margin, 99bpsq/q decline in OPEX/ sales and a jump in Other income to N228million (against N33million in Q3 2018) offset the impact of the revaluation loss of N246million (against a gain of N971million in Q3 2018) and a 41.83% decline in net finance income in Q4 2018. Overall, the company recorded a 33.18%q/q increase in PBT to N8.9billion in Q4 2018. 

Lower Volume and Pricing Weigh on Full Year Numbers 

The company’s turnover declined by 26.44% y/y to N150billion in FY 2018 which may be due to the price cut on sugar as well as lower volume sales. We highlight that sales volume decline by 12% to 587,899 while average net selling price fell by 17% to N12, 429 per 50kg bag according to the management. However, the gross profit margin improved by 145bps y/y to 26.39% on the back of better cost management which was supported by lower raw sugar prices (-22% lower on the average).  

That said, a combination of the 151bps q/q increase in OPEX/sales, 68.96% y/y decline in net finance income and Fair Value Loss of N325milion (compared to a Fair value gain of N2.46billion in FY 2017) offset the impact of the improvement in gross profit margin. As a result, the company’s PBT margin fell by 674bpsy/y to 23.01% which drove the PBT down by 43.11% to N34.60billion in FY 2018. 

Summary and Outlook 

Overall, the results were headlined by decline in revenue due to insecurity and price reduction, recovery in margin due to stable FX market as well as lower raw sugar prices. 

Going forward, we believe the recent reduction in sugar prices due to stable FX market as well as the issue of smuggling of sugar through the North East may continue to weigh on the company’s gross profit margin in the near term. We highlight that the impact may be more if low price sugar is able to infiltrate the company’s largest source of sales, Kano State, which accounts for major revenue source. 

Nonetheless, we believe the recovery in the non-oil sector particularly the Consumer Goods sector could trickle down to the company through demand for items like sugar which are used to produce other consumer goods. This could support top line growth of the company in the near term. 

In the same vein, despite the recent increase in raw sugar prices (+3%YTD), we believe the current stability in the FX market may continue to support the company’s cost of sales with about 56% of the company cost of sales incurred in foreign exchange.  

Similarly, the Federal Government’s plans for self-sufficiency in Sugar by 2023 may support the company’s growth going forward with government trying to channel efforts to build plantations and cane-crushing mills. It is expected that these plantations and cane-crushing mills may produce about 2million tons of sugar annually in order to meet the annual demand of about 1.5 million metric tons within a decade. This may support the company’s backward integration programme to boost sugar output from 300,000 to 700,000 tons by 2021 thereby boosting its market share from the current 60% having dropped recently due to influx of sugar from smugglers. 

In the same vein, the company plans to raise about N200billion through right issue and N2.5billion from CBN to boost its backward integration plan and expand its Sugar Plantation in order to produce 1.08million metrics tonnes of refined sugar in the next 6 years. This should be positive for top line and margin expansion. 

Our pricing model is under review. 

Source: Company financials, Investment One Research