March 18, 2021/Proshare

By FBNQuest Research 

13% raise to our EPS forecast over the ’21-23f period

We have raised our EPS forecasts over the ’21-23f period by 13% for Dangote Sugar Refinery (DSR) after its better-than-expected Q4 ’20 results. However, our new price target of NGN17.1 is up by only 8% because we have raised our risk-free rate by 100bps to 11% to reflect rising yields. On the back of our new price target, we have upgraded our rating on DSR to Neutral from Underperform.

We expect the announced re-opening of Nigeria’s borders to have a negligible impact on DSR given that the FG will maintain its protective policy on sugar & other agro-related products. On account of this, we expect group sales volumes to increase marginally by 3% y/y in ’21f to 780,299 MT. Secondly, we project that average refined sugar prices will remain high and resilient, irrespective of the decline in 50kg sugar retail prices, down -9.5% ytd (to NGN20,000/bag). We do not expect a drastic fall in sugar prices over the next 3 quarters as local sugar demand remains robust.

On the back of these, we forecast revenue growth of 9% y/y to NGN234.1bn in ’21f. Another positive development is the roll-back in sugar import duty to 5% from 10%, which we see as supportive for CoGs. On the flipside, however, escalating raw sugar (a key raw material) prices, up +3% ytd, alongside a possible fx devaluation poses some concern.

Nonetheless, we expect gross margin to expand by around 94bps y/y to 26.0%. On opex, we forecast growth of around 8% y/y to NGN10.6bn in ’21f. The higher opex estimate is largely influenced by management’s disclosure that it expects sustained inflation pressure through the year. We expect DSR’s balance sheet to remain relatively low on borrowings and therefore project muted finance costs y/y. We forecast PBT growth of 8% y/y to NGN49.1bn.

Unlike in Q4′ 20, we expect a normalised effective tax rate of 32% vs. 81% in Q4 ’20. On the back of these revisions, we estimate an EPS growth of 11% y/y to NGN2.71. At current levels, DSR is trading on a ’21f P/E and EV/EBITDA of 6.5x and 3.2x respectively,  compared with global peers’ average of 16.0x and 14.1x. Year-to-date, DSR shares have shed -0.6% vs. the ASI’s -3.8% decline.

Stellar operating results in Q4 ’20; high deferred taxes from SSC weighed on EPS

In Q4′ 20, DSR reported an EPS of NGN0.23 (-63.6% y/y), impacted by a negative surprise in tax expense (to NGN13.4bn in Q4 ’20). Management revealed that this was due to deferred tax liabilities (DTL) adjustments following the merger with Savannah Sugar Company (SSC).

Stripped of the negative tax surprise, DSR delivered strong underlying results, reporting a 23% y/y increase in revenue and a 131% y/y growth in PBT to NGN16.6bn. DSR has proposed a total dividend of NGN1.50 which implies a dividend yield of 8.6% compared with our forecast of 5.8%.