March 11, 2022/Cordros Report
In this update, we revise our previously positive view on DANGSUGAR. We are now neutral on the stock, as we expect margins to be pressured by (1) elevated costs, specifically from its key input raw sugar, with a lower supply expected from key producer Brazil, and (2) existential issues like weak consumer wallets and the challenging business environment. However, we highlight that the company’s solid market share, strong distribution network, and progress on its Backward Integration Programme remain strong upsides over the medium term. Balancing all factors, we still see some respite for earnings, as we project EPS growth of 35.7% y/y for 2022FY, driven by our expectations for a higher revenue outturn. Following the revisions to our forecasts, we have lowered our price target to NGN17.75/s (previously: NGN23.51/s) and revise our rating downwards to “HOLD”. We estimate DPS of NGN1.42 in 2022E, translating to a dividend yield of 9.0%. On our estimates, the share trades on a 2022E P/E multiple of 6.4x, a discount to its 5-yr historical average and EM peer average of 7.7x and 9.1x, respectively.
Revenue growth on higher prices: DANGSUGAR recorded a 28.8% y/y revenue growth in 2021FY, driven primarily by substantial increases in its 50kg Sugar (+30.3% y/y | 97.5% of revenue) business segment. Specifically, the growth in the segment was driven by a favourable price/volume mix. During the earnings call, management alluded to a 21.9% increase in net selling price, as well as a c. 6.0% increase in volumes. On the price increase, management noted that the increase was instituted to offset the impact of inflationary pressures, FX challenges, and the rise in raw materials prices, specifically raw sugar. We attribute the surge in the price of raw sugar (+18.1% y/y to USD497.10/tonne in 2021FY) to lower supply following unfavourable weather conditions in Brazil and as producers switched focus to ethanol production in the face of higher energy demand amid rising crude oil prices. For 2022E, we forecast a 26.0% y/y growth in topline, majorly driven by sustained price increase in the year, with the company expected to pass down higher costs to consumers to protect margins. We expect a minimal increase in volumes, factoring the possibility of a demand dip from price-sensitive consumers. Over the medium term (2023 – 2026E), we model annual revenue growth of 11.4%.
Lower margins on cost pressures: We expect sustained cost pressures in 2022E, driven by a sustained increase in raw sugar, FX constraints and the pass-through impacts of elevated inflationary pressures on energy costs and other inputs. Thus, we expect margins to remain pressured in the near term. Pertinently, we estimate gross margin to decline by 200bps to 16.2%. Based on the preceding and an 11.3% y/y expected increase in operating expenses, we expect EBITDA margin to decline by 108bps to 15.0% in 2022E. Notwithstanding, we forecast EPS of NGN2.46 in 2022E, implying a 35.7% y/y growth compared to the decline in 2021FY (-25.9% y/y). Our EPS forecast tracks below Bloomberg’s consensus estimate of NGN2.62 for 2022FY.
Valuation: Following the revisions to our forecasts, we have lowered our price target to NGN17.75/s, implying a 10.9% potential upside. Our TP points to a 2022E P/E and EV/EBITDA of 7.2x and 2.1x, respectively; a discount to MEA peers of 9.1x and 6.1x, respectively.
