September 10, 2021/Proshare

By FBNQuest Research

13% cut to our EPS forecasts over the 21-23f period

DSR’s Q2’21 earnings surprised negatively. As such, we have lowered our EPS forecasts over the 21-23f period by 13%. However, our new price target of NGN18.7 is up 3% because we have rolled over our valuation to 2022. Management mentioned during its Q2 analyst conference call that average realised sugar prices for H1 ’21 rose by 26% y/y to NGN16,978.

This compares with sales growth of 27.8% y/y during the period. Based on this figure, we estimate that prices for Q2’21 were up by only 7.1% y/y vs. Q2 sales growth of 16.1% y/y. We attribute the slowing pace of price increases to tougher competition, as well as the return of smuggled refined sugar via borders in northern Nigeria. This scenario will likely persist through H2’21. As a result, our new sales estimate of NGN266.8bn (increase of 4.1%) for FY’21 is driven by a volume growth forecast of 7.4% y/y vs. a 2.3% y/y increase in pricing over H2’21. We have cut our gross margin estimate to 20.2% for FY’21 (from 27.6% previously).

Our decision is supported by upward trending cost pressures. According to management, as at H1’21, average cost/ton of raw sugar (a key raw material) rose by 41% y/y, driven by a sugar deficit in global markets. Management expects the deficit to persist for the rest of the year. In addition, energy costs were impacted by higher FX rates as average gas prices increased by 16% y/y. All these, alongside the continuous gridlock around Apapa and consequent higher direct distribution costs, have resulted in higher total costs.

Further down the P&L, we have raised our net interest forecast to -NGN7.1bn, based on the uptrend in H1’21 (up 267.2% y/y) following an exchange loss of NGN2.8bn.

However, this new estimate is behind H1’21 run-rate of NGN9.6bn. These changes reduce our PAT forecast for FY’21 by 33%, to NGN25.2bn and average EPS over 21-23f by 12.9%. Our risk-free rate and equity risk premium assumptions are unchanged. These adjustments elevate our price target to NGN18.7 (+3.3% higher), implying a potential upside of around 7.0% from current levels. As such, we maintain our Neutral rating on DSR. Year-to-date, DSR’s shares have shed -0.6% vs. the ASI’s decline of -2.7%. 

Earnings declined by -17% y/y in Q2’21

In Q2 ’21, PBT and PAT improved by 121% y/y and 116% y/y, driven by strong growth sales of 69% y/y to NGN11.1bn. Topline growth, boosted by price increases and production from newly matured acreages, more than offset a 31% y/y rise in opex. On a segmental basis, palm oil sales were up 65% y/y to NGN10.0bn, while rubber exports grew by 125% y/y to NGN1.1bn. For rubber, elevated prices on international markets and the naira devaluation provided support. Compared with our estimates, sales and PAT beat by 14% and 9% respectively.