Culled—-Proshare
August 14, 2020
by FBNQuest Research
Slight increases to average earnings forecasts
Dangote Sugar Refinery’s (DSR) Q2 2020 results indicate that topline was driven more by pricing than volumes, which were up 8% y/y compared with naira sales growth of 32% y/y. That said, the price increases effected were clearly not strong enough to compensate for fx pressure and a higher VAT, as gross margin contracted by -562bps y/y and was behind our forecast by -742bps.
During its H1 call, management communicated that there will be further price increments over the coming quarters. The other factors that should support earnings include a recent boost in the Savannah plantation volumes and a planned reduction of raw sugar import duty by the authorities from 10% to 5%. However, given softer demand, we expect that some fx inflation will be absorbed by DSR, eroding some of these benefits. As such, we have shrunk our 2020E gross margin forecast by -392bps despite a 25% increase in our sales forecast largely due to price increases. Nevertheless, our 2020E PBT is 14% higher, helped by a 6% reduction to opex following a H1 positive surprise of a similar magnitude.
Although we rolled over our valuation to 2021E, we also modelled the impact of a weaker naira on capex (due to the ongoing backward integration program) and payables given that the majority of raw sugar inputs are imported. Essentially, our average EPS forecast for 2020-22E and price target are 1.1% and 1.2% higher respectively. DSR shares are currently trading on a 2020E P/E multiple of 6.4x for an average EPS growth of 16% in 2020-22E. Year-to-date, DSR shares have shed -13%, behind the broad market index loss of -6%. Our new price target of N14.2 implies a potential upside of 19% from current levels.
Despite the modest upside, the following factors are weak spots for earnings: i) the company’s sensitivity to fx headwinds, and ii) consumers’ subdued purchasing power amid the inflationary environment. We therefore retain our Neutral rating on the stock.
Q2 PBT increased by double-digits y/y
PBT advanced 19% y/y to N7.5bn on the back of a -15% decline in opex and other income of N1.2bn versus a loss of -N610m in Q2 2019. These positives more than offset the gross margin contraction of -562bps y/y. On a sequential basis, sales increased by 17% q/q but gross margin contracted by 1,212bps.
Consequently, PBT was -21% lower q/q. PBT missed our forecast by -7% primarily due to a -742bp negative surprise in gross margin.
