April 3, 2023/Cordros Report
DANGSUGAR’s 2022FY performance was in line with our expectations (Click here for our last update). We like that DANGSUGAR put up a resilient showing in 2022FY amid sector headwinds such as consumers’ price sensitivity, FX illiquidity, inflationary pressures, and structural inefficiencies. Going into 2023E, we expect the company to record a positive financial performance, supported by a favourable price/volume mix. Notwithstanding, we envisage that margin expansion may be inhibited by the volatility in raw sugar prices and the aforementioned sector headwinds which we expect to remain prevalent in 2023E. Over the medium term, we maintain our expectations of a sustained growth in sugar consumption in Nigeria supported by population growth, and an increasing urbanization rate. Following the revisions to our forecasts, we raise our price target to NGN38.54/s (previously: NGN26.30/s), and maintain our “BUY” rating on the ticker. We estimate DPS of NGN2.06 in 2023E, translating to a dividend yield of 11.3%. On our estimates, DANGSUGAR is trading on a 2023E P/E of 3.0x and EV/EBITDA of 2.9x, representing discounts of 52.0% and 44.3% respectively to EM peers – 7.3x and 5.7x respectively. We find this discount unjustified given DANGSUGAR’s stronger cash margins, healthy RoE and FCF generation.
Higher revenue on favourable mix: We project a 32.2% y/y growth in 2023E revenue, driven by sustained price increases through the year and an increase in volumes sold. On the former, management cited the need to raise prices to align with any increase in the cost of production. We forecast a 26.3% y/y increase in the net selling price per bag to NGN29,911.10 (2022FY: NGN23,647.50/bag). For volumes, we forecast a marginal increase of 5.0% y/y to 48,597 bags per day (management’s guidance: 50,000 bags). This reflects our expectation of an increase in utilisation rate to 61.0% (2022FY: 56.0%) and leftover stock from 2022FY. We model an average annual revenue growth of 13.2% over the medium term (2024-2027E).
Higher margins, higher earnings: Though we expect cost pressures to remain prevalent in 2023E, we model a 44bps y/y increase in the 2023E gross margin to 23.2%, as we expect faster growth in sales to protect and support margin expansion. Off of the preceding, we forecast a 15bps growth in EBITDA margin to 23.0%, amid a 24.6% y/y growth in operating expenses. Conclusively, we project a 38.9% y/y increase in EPS for 2023E to NGN6.26 (2022FY: NGN4.51). Further out, we forecast an EPS CAGR of 11.3% over 2023E-2027E.
Valuation: Our 12M target price is NGN38.54/s, derived from a 40/60 blend of sector relative valuation estimates (P/E & EV/EBITDA) and a DCF valuation. On P/E, we utilised the Middle East & African (MEA) peer average 2023E multiple of 7.3x from Bloomberg. Applying this to our 2023E EPS estimate of NGN6.19/s gives a FV of NGN45.45/s. Similarly, for EV/EBITDA, we also utilised the 2023E MEA peer average (5.7x) gotten from Bloomberg and derived a fair value estimate of NGN46.15/s. The combination of both multiples results in a multiple-based FV of NGN45.80/s. Our DCF FV is NGN33.70/s assuming a 21.5% WACC and 3.0% terminal growth rate.
