FSDH Initial Reaction: Dangote Sugar 3Q23 results 
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November 3, 2023/FSDH Research

Key Performance Highlights:

• Dangote Sugar reported respectable topline numbers for 3Q23. The Company’s revenue rose 4.0% YoY to N106.9 billion in 3Q23 from N102.9 billion in 3Q22, primarily driven by a 27.0% YoY rise in the retail sugar revenue segment to N2.6 billion, supported by a 3.6% YoY jump in the 50kg sugar revenue to N103.8 billion in 3Q23. However, the Company’s Cost of sales increased 19.2% YoY to N100.5 billion in 3Q23. As the Cost of sales grew higher relative to the revenues, it resulted in a significant 1205 bps YoY gross margin contraction to 6.0% in 3Q23, from 18.1% in 3Q22. Increased raw material prices (+21,2%) and direct overheads (+27.5%) majorly contributed to the Cost of sales growth.
   
• Other income spurted 14.0x YoY to N867 million in 3Q23 versus N62 million in 3Q22. Dangote Sugar managed to control the selling and distribution costs, which fell 17.4% YoY to N156 million compared to N189 million in 3Q22. However, primarily due to increased employee costs (+17.3%), Insurance (+92.7%) and management fees (+41.5%), but slightly offset by reduced donations and scholarships (-63.5%), administrative expenses were up 20.4% YoY to N3.3 billion in 3Q23 versus N2.7 billion in 3Q22. Consequently, the Company’s operating profit slumped 75.0% YoY to N3.9 billion in 3Q23 versus N15.6 billion in 3Q22.
   
• Furthermore, the finance income surged 38.0% YoY to N2.4 billion due to higher interest income on bank deposits, while the finance costs also jumped 54.8% YoY to N18.0 billion in 3Q23, primarily due to an increased cost on the letter of credit that was up  4.6x to N10.2 billion in 3Q23 (2Q22:N2.2 billion). However, the Company reported a fair value gain on biological assets (that comprises growing cane) of N1.8 billion in 3Q23, compared to N713 million in 3Q22. Consequently, Dangote Sugar reported a net loss before tax of N10.0 billion in 3Q23, compared to a profit of N6.5 billion in 3Q22. Nonetheless, as the Company reported a N10.9 billion income tax credit versus a N1.9 billion income tax expense in the prior year quarter, it reported N960 million profit in 3Q23 versus N4.6 billion in the prior year quarter. The Company’s earnings per share came in at N0.08/share in 3Q23 versus N0.37/share in 3Q22.
   
• For 3Q23, all the segments continued to report positive growth except for the freight income segment. Sugar-50 kg (97.0% of 3Q23 revenue) revenue was up 3.6% YoY to N103.8 billion, Sugar-Retail was up 27.0% YoY (2.5% of 3Q23 revenue) to N2.6 billion, and the Molasses income (0.4% of 3Q23 revenues) rose 45.5% YoY to N425 million in 3Q23. However, the freight income (0.05% of 3Q23 revenues) decreased 77.7% YoY to N55 million. Regarding geographical revenue distribution, revenue from the North was up 11.4% YoY, generating N50.0 billion in revenues. Lagos sales generated N43.8 billion (-1.5% YoY), and the revenue from East sales was N3.8 billion (-16.4% YoY), while the revenue from the West grew 4.0% YoY to N9.3 billion.
   
• The Company’s margins contracted across the board in 3Q23, primarily due to the increased Cost of sales. The gross margin contracted the most, with a 1205 bps YoY decline to 6.0% in 3Q23. The Company’s operating margin shrank 1163 bps YoY to 3.7%, and the net margin was down 356 bps YoY to 0.9% in 3Q23.
   
• Looking at the sequential performance, Dangote Sugar reported a 6.3% QoQ revenue growth in 3Q23. The Cost of sales spiraled 47.5% QoQ to N100.5 billion in 3Q23 against N68.1 billion in 2Q23, and the gross profit slumped by 80.1% QoQ to N6.5 billion from N32.4 billion in 2Q23, resulting in a margin contraction of 2621 bps QoQ to 6.0% in 3Q23. Furthermore, the selling and distribution expenses grew 21.0% QoQ. However, the Company witnessed a 78.1% decline in finance costs, mainly as the Company had recorded significant foreign exchange losses in 2Q23. Finance income grew 5.7% QoQ to N2.4 billion in 3Q23 compared to N2.3 billion in 2Q23. Consequently, a net profit of N960 million was reported in 3Q23 versus a loss of N40.8 billion in 2Q23.
   
• On August 30, 2023, Dangote Sugar Refinery notified that, further to its announcement of July 31, 2023, the Merging Entities have agreed with the terms and conditions of the Merger of the Company with NASCON Allied Industries Plc. and Dangote Rice Limited, which is an internal restructuring. NASCON, incorporated in 1973, is a salt refinery and was acquired by Dangote Industries Limited in 2007. NASCON has a wide variety of products that it manufactures and offers to consumers, including salt retail packs sold under the brand name Dangote Refined Salt and Seasoning under the Dangote Classic Seasoning brand name. Dangote Rice Limited was incorporated in 2014 and is a subsidiary of Dangote Industries Limited. It is in the business of creating rice processing facilities across the country. The transaction is expected to consolidate and solidify the Group’s market position.

Market Reaction: The investor reaction to the 3Q23 results was tepid as the Dangote Sugar stock declined 1.2% to N63.00, versus a 1.65% rise for the All-Share Index (31/10).

Dangote Sugar Earnings Highlights 3Q23

Source: Company Financials, FSDH