November 7, 2019/InvestmentOne Report

§  Mixed top line:  down 12.21% q/q,  up 13.41% y/y

§  Higher Gross profit margin: up 113bps q/q; 55bps y/y        

§  Rising OPEX to sales ratio: up 119bps q/q; 44bps y/y

§  Lackluster PBT performance: down 6.23% q/q; 5.81% y/y 

Recently, Dangote Sugar Refinery (DSR) Plc published its Q3 2019 results which were reflective of the higher volume which offset the impact of the fall in refined sugar prices in the local market. We highlight that there was a 9.06% y/y decline in refined sugar prices to N13, 321.33 per 50kg (wholesale price) in Q3 2019 according to our estimate from daily prices released by the National Sugar Development Council. Nonetheless, revenue improved by 13.41% y/y to N37billion in Q3 2019. In our view, we believe recent border closure, which started during Q3 2019, could have supported volume as the company has always been battling with smugglers who have taken part of DSR’s market share. Despite the rise in raw sugar prices and fall in local prices, gross profit margin rose marginally by 55bps to 21.33%, we think investment in the Backward Integration Programme could have started to support margin.

Lower Finance Income Drags Earnings Down 

Moving down to the P& L line, a combination of the 44bpsy/y rise in OPEX/Sales, a 76.85%y/y decline in Other income and the net finance cost of N13.9million (vs net finance income of N417million in Q3 2018) offset the impact of the rise in gross profit margin. 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 2019 relative to 2018. Overall, the company recorded a 327bpsy/y decline in PBT margin and a 5.81%y/y decline in PBT to N5.94billion in Q3 2019.  

Weak Quarter On Quarter Performance 

On a sequential basis, turnover declined by 12.21% q/q in Q3 2019, which may be due to lower prices in the quarter. However, the company’s gross profit margin improved by 113bpsq/q which may be due to better cost management. That said, a combination of an 119bpsq/q rise in OPEX/sales and the net finance cost of N13.9million (vs net finance income of N249million in Q2 2019) offset the impact of the rise in gross profit margin. As such, PBT fell by 6.33% q/q in Q3 2019. 

9M Performance Remains Weak 

The company’s turnover was somewhat flat rising marginally by 0.57%y/y to N117billion in 9M 2019, which may be due to the strong volume recovery in Q3 2019 despite the fall in prices so far this year. We highlight that average selling price fell by 9.10% to N13, 531.56 per 50kg bag according to our estimate from daily prices released by the National Sugar Development Council. In the same vein, the gross profit margin declined by 106bps y/y to 24.71% due to fall in prices as highlighted above. That said, a combination of the fall in gross profit margin, a 74.56% y/y drop in net finance income, a 5bps rise in OPEX/Sales ratio and a jump Fair Value loss (443million in 9M 2019 vs 78million in 9M 2018) drove the PBT margin down by 460bpsy/y to 19.56%. As a result, PBT fell by 18.57%y/y to N22.97billion in 9M 2019.   

Summary and Outlook 

Overall, the results were headlined by decline in revenue due to price reduction which weighed on margins and total earnings.

Going forward, with the border closure expected to remain till 31st January 2020, we believe it should support volume performance in Q4 2019 and early part of 2020. In the same vein, we believe festive activities as well as implementation of the new minimum wage should support demand in the near term.

While the recent increase in raw sugar prices (+4.32%YTD) may be negative for margin, stability in 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. 

  Sources: Company financials, Investment One Research