Earnings Review H1: Dangote Sugar’s Result Is Sweet But….

Dangote Sugar, one of the prized asset of the famed Dangote Group released its Half Year Earnings report to mostly positive reviews. But is it all positive??

Revenue

Revenue for the first half of 2012 rose 10.3% to N53b compared to the same period last year. This was followed by a stable cost of sale of N42b leading to a 51% increase in Gross Profit for the period. Gross Profit margin increased to nearly 21% when compared to the 15% obtained in first half of 2011. The Company is in a highly competitive industry and so an increase in turnover that is complimented by a minute increase in cost of sale is highly commendable.

Expenses

The company was also able to reign down on cost by 7% to N3b only. This is impressive considering the high cost of doing business in Nigeria companies have to deal with. SG&A as a percentage of Gross Profit thus dropped from 44.2% in H1 2011 to 27% in the first half of this year. This is well under the marker of 30% which I expect from the manufacturing company. Whilst this is a good development it will be wise to watch the trend to ensure that this is not as a result of circumstances not totally within the control of the company. If it is, then there is every tendency that the company may revert back to its 2011 levels.

Profit After Tax

With the help of an improved top line and cost stability, Dangote has almost doubled its profit after tax to N5.7b in the first half of the year. Return on Equity also increased to 13.7% in the first half of the year from the 7.6% in the same period last year. Profit as a percentage of sales at the end of the year was 10%. This is notable considering that direct cost took over almost 80% of revenue.

Bottom Line

Dangote Sugar mostly qualify as a stock most would want to have in their portfolio considering its dominance in the Sugar Business. However, certain stats in their balance sheet makes me shiver. For example, even though the company has no debt, its net Inter-company receivables of almost 11b makes for a postponement of doomsday. Just how will it be recovered is one question that they may have to answer very soon? A write off, hope not, a pay back? Well!. They also have a huge tax liability of N6b which is mostly current, indicating that payment is due within the year. Their cash balance of N14b is good cushion but how much this will affect working capital is yet another worry.  They do have trade receivables of N8b which some may argue is a mitigating factor to any suggestion of problems with solvency. Other than that, I like Dangote Sugar.

The company’s share price has mostly been down as depicted by the downward slope of the trend of its shares over the last one year. Its P.E ration of 6x make for a cheap buy at the moment despite market apathy towards it. For me though, the approach is cautious especially when you look at cost. I want to be sure the cost profile remains the same and that the company does not amass debts going forward. For now there are no long term debts. Finally, the company is surely in the black and can ride on this period’s performance towards year end.