March 16, 2022/Proshare

by FBNQuest Research

26% cut to earnings over ’22-23f period

We believe DSR’s fundamentals will be under pressure this year despite the company publishing better-than-expected Q4’21 results. We expect (1) higher raw sugar (a key raw material) costs in FY ’22 brought on by supply shortages in international markets. Raw sugar prices are up around 5% ytd and 28% y/y to USD0.19/lb, (2) higher energy costs in FY ’22, with knock-on impact on CoGS and operating expenses. Diesel (AGO) prices have doubled ytd to around NGN800/litre as of March ’22, (3) weak growth in DSR’s sales volumes, which expanded by only 2% in FY ’21, and (4) slowing momentum in DSR’s ability to raise prices due to increased sugar smuggling in the north and tougher competition across B2C & B2B market categories in Lagos and other markets in the South.

As such, we have lowered our EPS forecasts over the ’22-23f period by 25.7% and cut our price target by -21.9% to NGN13.2. In FY’22, we project average net sales prices to increase by 10% (vs. 21.9% y/y growth in FY ’21) and volume growth of 2% y/y to 791,330 tonnes (same as 2% in FY ’21). These forecasts imply an 11.5% y/y increase in our topline estimate for FY ’22 to NGN310.7bn. Elsewhere, we have lowered our gross margin estimate by -533bps to 17.0%, due to expected costs pressures as previously noted. During its FY ’21 conference call presentation, management stated that it aims to improve operational efficiency as a measure to improve margins.

We believe this may prove difficult because growth in most cost elements may be beyond management’s control. For example, management has little leeway in limiting exposure to escalating raw sugar prices, so and energy costs. Down the P&L, we have raised our opex and net interest forecasts to NGN12.4bn (+11.5% vs prior forecast) and NGN6.3bn (+366.4% vs prior estimate) respectively. The steep increase in net interest expenses is driven by interest on letters of credit and fx losses. We have reduced our FY ’22 PAT forecast by -35.3% to NGN22.6bn and average EPS over 22-23f by -25.7%. With these adjustments, we have a new price target of NGN13.2 (-21.9% lower). This indicates a potential downside of -17.4% from current levels. As a result, we maintain our Neutral rating on DSR.

Q4 ’21 earnings beat our forecast by 53%

In Q4’21, DSR recorded sales of NGN80.6bn (+49.8% y/y) while PAT expanded by 107.9% y/y to NGN6.59bn. Notably, gross margin contracted to 16.7% (vs. 42.9% in Q4 ’20). EPS was mostly driven by higher prices in Q4 ’21 as sales volumes were up only 1.4% y/y to 164,894 tonnes. DSR’s Q4’21 results beat our sales and PAT estimates by 20% and 53% respectively. Nonetheless, FY’21 EPS fell by around 26% y/y.