Dangote Sugar Refinery Plc Q1-24: Weakened Fundamentals and FX Losses Undermine Profitability

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May 10, 2024/Cordros Report

This report provides an updated view of Dangote Sugar Refinery Plc (DANGSUGAR) for 2024E subsequent to its Q1-24 results release. DANGSUGAR recorded strong topline performance in Q1-24, supported by price increases. Nonetheless, margins and earnings faced downward pressure, indicating operational challenges amidst industry-wide issues such as consumer price sensitivity, FX liquidity constraints, inflationary pressures, and structural inefficiencies. Going forward, we expect further improvement in revenue in 2024E driven by price increases and moderate volume growth. However, elevated international raw sugar (major raw material) prices, currency weakness, and FX challenges remain significant near-term challenges. Thus, we revise our target price downwards to NGN44.80/s (Prev.: NGN55.08/s) but retain our “HOLD” recommendation. The reduction in our target price reflects ongoing cost pressures stemming from currency depreciation and elevated input costs. However, our outlook for the group remains positive in the medium to long term, underpinned by its leading position in the sugar industry. DANGSUGAR benefits from sustained sugar consumption growth in Nigeria, driven by population growth and rising urbanisation. On our estimates, DANGSUGAR trades on a 2024E EV/EBITDA of 3.7x relative to the Middle East and Emerging peers’ average of 4.3x.

Stronger revenue growth expected in 2024E: For 2024E, we expect revenue to be driven by higher prices (2024E: +39.6% y/y), underscoring the necessity to counter rising costs amidst volatile raw sugar prices, and (2) volume growth supported by its improving route-to-market strategy. Unlike the previous fiscal year, where FX illiquidity and delayed letters of credit hampered volumes, improving FX liquidity conditions should aid increased raw sugar imports, supporting production and volume growth. Thus, we expect a recovery in volume growth in 2024E and have modelled a 15.0% y/y growth in volume to 13,762 bags (2023FY: 11,967 bags). Overall, we expect DANGSUGAR’s revenue to grow by 34.1% y/y in 2024E, with an average growth rate of 17.3% projected over 2025-2028E. Nevertheless, we model a 350bps y/y decline in gross margin to 16.0%, primarily due to heightened cost pressures. Consequently, we forecast a 410bps decline in EBITDA margin to 14.6%. Conclusively, we forecast a 2024E loss per share of NGN3.13 (vs a loss per share of NGN6.07 in 2023FY), after factoring in expected FX loss of NGN111.25 billion (2023FY: NGN172.20 billion).

Higher capex requirements to impact FCF generation in 2024E: Our model suggests a 65.9% y/y decline in DANGSUGAR’s free cash flow to NGN20.84 billion (2023FY: NGN41.42 billion). This drop is primarily attributed to increased capital expenditure anticipated for the year, driven by ongoing expansion initiatives, notably the enhancement of refining capacity at its Numan factory from 3,800TCD to 9,800TCD by year-end. Consequently, we estimate a FCF margin of 3.5% in 2024E (2023FY: 9.4%).

Valuation: Our target price is NGN44.88/s, derived from a 40/60 blend of sector relative valuation estimate (EV/EBITDA) and a DCF valuation. On EV/EBITDA, we utilised the 2024E MEA peer average (4.3x) as gotten from Bloomberg and derived a fair value estimate of NGN49.90/s. For our DCF, we utilised the free cash flow to firm methodology and derived a fair value estimate of NGN41.53/s, assuming a 23.7% WACC and 4.0% terminal growth rate.

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