Dangote Sugar is one of the most profitable arm of the huge conglomerate owned largely by Africa’s richest man. The company released its 2012 audited accounts posting a revenue of N106.8billion. Operational profit at the end of the period rose 49.5% to N16.3billion (2011: N10.9billion) helping increase post-tax profit to N10.8billion at the end of the year or an earnings per share of about 90kobo per share (2011: 62kobo).
Result overview
This is one of those result that fails to deliver organic growth but yet increased profitability by almost 50%. How was this possible? Despite delivering flat revenue growth the company managed to cut down cost of sale by nearly N8billion resulting in a 55% boost in gross profit. The more than 100% rise in SG&A could be attributed to the high cost of doing business, a common peculiarity with manufacturing companies. But that is more of a worry rather than excuse considering that this rise is the highest in the last 4 years of operations. Before now S,G & A was highest in 2009 at N4billion. To get a grip of what this means is to imagine the impact of revenues remaining flat in the next couple of years and expenses rising at this trajectory.
Naysayers to my worry will probably look to the wider economic outlook for the industry to allay my concerns. The GEJ government last year boosted the local sugar industry when it announced it will remove import duties on machinery and spare parts used for sugar processing. A tax holiday was also announced as part of the incentives just including a higher tariff for importers of Raw Sugar. A recent article on Financial Times also suggest that by 2020 Sub Saharan Africa will rely less on imports of Sugar and become a net exporter of the commodity. Nigeria consumes about 1.4million metric tons of sugar per year and produces about 1million metric tons. What this all means is that the prospect for growth is there for Dangote and in typical fashion, with the help of the government.
Buying opportunity?
Dangote Sugar share price ironically dropped 4.6% today to N8.3 per share. The share price as risen nearly 150% year on year and at todays has a price multiple to earnings of 9.2x. It is proposing a dividend per share of 50kobo, representing 56% of current year’s earning and a current yield of 6%. The company still has a revenue reserve in excess of N20billion and a cash pile of about N25billion at the end of the period making its related party loans innocuous. I wouldn’t miss this buying opportunity if I have the cash.
Some might wonder if the current price is a bargain? That depends on your metric and what you are looking for. An ROE of 25.3% look impressive to me and justified by an equally good ROA of 21%. The company also has no debt rendering the high price to book ratio (2.5x) unnerving. Surely, all this attributes may not classify the share price as cheap but it certainly isn’t expensive.
Dangote Sugar 2012 Annual Report was posted on the website of the NSE
Key take-aways from Dangote Sugar DS
Raw Sugar prices the main inputs for DS collapsed by close to 20% in 2012 which is why Cost of goods sold dipped.Though SGA costs rose over the year, it was not enough to upset the gains made from the lower input cost. This combined with high interest income from their huge cash stockpile to send earnings higher.
Outlook for Sugar prices is for it to remain subdued over 2013 on account of the bumper Brazilian harvest. However the industry horizon is changing due to the govt plans to force Backward integration among producers which resulted in the tariff increases. This should have lead to price increases. DS however cut its own prices why? I think its becos as the market leader by size. DS has refining capacity of 1.44million metric tons with national capacity estimated at 2.3 which far exceeds domestic sugar consumption estimated at 1.3 as well so in effect if u cut prices other guys either follow u down or they lose volumes. Most valuations i’ve seen see the current share price as over-valued using fundamentals. But the price still looks cheap sha on a nominal naira basis but in terms of upside not much scope so results need to come in sharp or dividends sharper 😉
Why do they think it is over valued?? The company has no freaking debt and at a P.E of 9.2X?? Id be damned
part of the problem i think is becos DS has no peer locally on the NSE that you can compare the P/E with so while the P/E appears low who do u compare it with? some say look at peers elsewhere in Africa which appears limited so people often look more closely at fundamental valuations as its the only means of assessing DS. maybe if BUA lists or FlourMills lists their new sugar coy separately on the NSE till then i think DCF/DDM is it.
a very good illustration of this would be Nestle. Most valuations of Nestle i see put its DCF max = N500. Its when they apply relative valuations that the target price rises to the highs we’re seeing and this is because foreign investors buying into the NSE like to play safe. No one is going to query you for buying a global brand like Nestle, Unilever, PZ, Guinness or Heineken’s Nigerian Breweries. So this guys look at the P/E of these international subsidiary coys versus what the other EM peers in their portfolio quoted in S.Africa, India, Ghana, etc i.e Nestle SA, Nestle India, Unilever Ghana, etc are trading at and try to equalize the P/E’s by bidding up the price. So while fundamentally the prices appear illogical when you apply relative valuations the Nigerian P/E might be at a discount, And given Nigeria’s population and scope for increases these guys wont see anything buying Nestle at close to N1000 to trade it up to the other guys in their portfolios.
see link for raw sugar price trends > http://www.indexmundi.com/commodities/?commodity=sugar&months=12