Dangote Sugar Refinery Q2 2017 Results Review – Higher Pricing Key Driver for Earnings Growth

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FBNQuest Research

2017/18E EPS ests. up by 85%; price target up by 120% to N15.6
Dangote Sugar Refinery’s (DSR) Q2 2017 earnings of N12.3bn surprised positively, coming in well ahead of our N5.5bn forecast and consensus’ full year projections. The primary driver was the variance on the gross margin line. DSR benefitted from improved access to fx from the central bank which offset adverse effects coming through from a higher utilisation of the relatively more expensive LPFO due to gas delivery disruptions.

Even though DSR’s local production is gathering momentum, the firm continues to rely on raw sugar (a key raw material) imports in the medium term. As such, DSR’s fx vulnerabilities remain. Following the Q2 2017 results conference call, we have raised our average finished sugar price forecast by c.30% to N15,500 per 50kg bag because we believe that management prefers to hold (or modestly reduce) prices at these levels for as long as possible.

Additionally, higher prices are likely to more than compensate for relatively lower volumes. We estimate a sales volumes decline of around -10% y/y to 700,000 tonnes. For the Lagos refinery, we forecast a capacity utilization of just 49% in 2017E which compares with 55% for FY 2016.

Going forward, given the magnitude of the earnings surprise, we have raised our EPS estimate over the 2017-18E period by 85%. Our new price target of N15.6 is up 120%, helped by our decision to roll forward our valuation to 2018. Global raw sugar prices are expected to remain soft through H2 2017.

Additionally, an improving macroeconomic environment is supportive of the central bank’s recent fx intervention policy which bodes well for DSR’s production costs. DSR shares are trading on a 2017 P/E multiple of 5.4x for an EPS growth of 13% in 2018E. Ytd, DSR shares have gained 133.2% (ASI: +41.9%). We retain our Neutral rating.

Q2 PBT of N18.2bn up 26% y/y driven by lower business costs
In Q2 2017, although sales declined -57% y/y to N59.2bn, both PBT and PAT were up 26% y/y and 12% y/y respectively. The big surprise was the significant gross margin expansion of 2,038bps y/y to 32.2%. In addition to the gross margin expansion, both opex and net finance expenses declined y/y to support PBT growth, though to a lesser extent.

Sequentially, sales came in flattish q/q. On the other hand, both PBT and PAT were up significantly, by 159% q/q. Compared with our estimates, while sales beat by around 6%, PBT was more than double our N8.3bn estimate. DSR proposed an interim dividend of N0.50, implying a dividend yield 3.5%.

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