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).
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.
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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.
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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