November 1, 2021/Cordros Report
DANGSUGAR published its 9M-21 results after market close on Friday, reporting an 80.6% y/y decline in EPS to NGN0.24 in Q3-21 (Q3-20: NGN1.23) – the lowest since Q3-16 – affected mainly by a 218.9% y/y surge in finance cost. Likewise, 9M-21 EPS plummeted by 41.8% to NGN1.28 (9M-20: NGN2.20) on weaker margins.
Revenue grew by 10.9% y/y in Q3-21 (9M-21: +21.8% y/y), driven by an increase in the sales of 50kg sugar (+11.9% y/y; 97.7% of total revenue). We believe the growth in this segment was primarily driven by volumes (+18.1% y/y) in the absence of significant price increases in Q3-21, given the substantial price increase of 30.6% y/y implemented in Q3-20. Conversely, revenue from the sale of retail sugar (-11.6% y/y; 1.7% of total revenue) declined as a result of the fading impact of price increases. Meanwhile, a 0.7% y/y reduction in refined sugar produced led to a decline in revenue from the sale of molasses (-37.9% y/y; 0.3% of total revenue).
Gross margin dipped by 10.4ppts to 12.8% in Q3-21 (Q3-20: 23.3%), as cost of sales (+26.0% y/y) grew faster than revenue (+10.9% y/y). The growth in the cost of sales was mainly due to a 21.7% y/y increase in the raw material cost in line with the increase in international raw sugar prices. (Average price: USD12.37/ton in Q3-20 vs USD18.80/ton in Q3-21).
Similarly, EBITDA and EBIT margins declined by 8.7ppts and 10.2ppts to 11.5% and 8.1%, respectively, in Q3-21 (Q3-20: 20.2% and 18.3%) following the contraction in gross margin and a 5.9% y/y expansion in operating expenses.
DANGSUGAR’s earnings were dampened by a 391.1% y/y surge in net finance costs as the jump in finance costs (+218.9% y/y) completely overshadowed the increase in finance income (+46.0% y/y). The surge in finance cost was mainly driven by the rise in foreign exchange loss (+65.8% y/y to NGN2.84 billion), reflecting the impact of the currency devaluation. In addition, the newly incurred finance cost of NGN3.25 billion on the letter of credit facility also contributed to the woes. We hope to get more clarification on the letter of credit in our subsequent engagement with management.
Overall, Q3-21 standalone profit before tax fell sharply by 63.8% y/y to NGN4.35 billion – the lowest in at least 23 quarters (Q3-20: NGN12.03 billion), while profit after tax fell faster by 80.7% y/y to NGN2.91 billion following a tax expense of NGN1.45 billion in Q3-21 compared to a tax credit of NGN3.02 billion in Q3-20.
Comment: DANGSUGAR’s Q3-21 performance surprised negatively given the unanticipated surge in finance cost. We believe the result also reflects a plethora of challenges facing the company ranging from FX constraints, higher energy prices and the Apapa traffic gridlock situation. However, we like that the company has maintained its double-digit top-line growth trajectory for nine-consecutive quarters, despite the reopening of land borders. Nonetheless, the persistent increase in operating and finance costs remains a concern for us. Although we believe the company will still maintain positive performance in 2021FY, we expect earnings to moderate as ballooning operational costs weigh on revenue growth. Our estimates are under review.
