Back in April 2013 I had suggested a buy opportunity for Dangote Sugar. The price was ₦8.3 per share and a price earnings multiple of ₦9.2x. Today the price is ₦11.06 but does is still represent a buy opportunity?
Strengths
- Consistently posted profits over the years
- Revenue has grown moderately at a CAGR of about 7%.
- Controls over 70% of Sugar market
- Has control over its prices
- Has been able to control cost of sale
- Company has no debt yet has over ₦20 billion in cash
- The industry currently enjoys massive concessions from the government
- The brand is very well known and is part of the renowned Dangote Group
- Share price of ₦11 enjoys a 12.3x multiple over trailing EPS.
Weaknesses
- Margins has been under pressure over the years leading to very poor profitability growth.
- Industry is dependent on nature to ensure crops yields are fully optimised. Climate change has been discouraging to say the least
- Infrastructural amenities remain a strain on distribution of products
- High cost of capacity expansion can result in high depreciation cost
- Share price has yet to hit the 2009 high of ₦24 peaking only at ₦12.85 since then
- Price to book ratio appears high at 2.8x. This is probably attributable to its zero debts
Opportunities
- A lot has happened over the last six months since the company announced flat revenue growth for it 2012 FY results.
- The company also continued with its dual strategy of cutting sugar prices and cost of production to boost bottom line. For example revenue rose only 4% in the first quarter of 2013 compared to the same period 2012 yet Pre-tax profits rose 44%.
- The Federal Government recently approved the National Sugar Master Plan and has raised tariffs for Sugar importation thus giving preference to Manufacturers. Dangote Cement has been in this business for years and is positioned to reap.
- Tax incentives abound in the industry which suits the company’s expansion plans.
- The company has also continued to invest in capacity expansion and recently received a 20,000 Hectares of Land donation from Kogi State Government
- The company announced plans to double its capacity from 1.44million metric tonnes to 2.8million metric tonnes. This will drastically increase its market dominance
- Share price carries an upside on the back of its ability to continue to increase market share squeeze out cost and increase margins
Threats
- Sugar supply may be hitting a clog in Nigeria considering that installed capacity is nearing demand
- Sugar prices may continue to remain cut to fight of competition from backward integration and other supply chain competitors
- Expansion into other African market will put a strain on cash flow and soon enough margins will dip before it starts to rise again
- Share price may remain depressed or W shaped in the short to medium term as the company takes its time to reap the benefits of its expansion plans
Buy, Sell or Hold?
The above SWOT analysis indicates a company currently in transition. This always portends a risk but more often that not it presents an upside. The current share price appear high if you are looking to buy on the short term. Based on that one may choose to hold. Since my current portfolio is long term I see no current need to wait for a decision.
BUY
I instructed my stockbroker to purchase Dangote Sugar Shares on my behalf.
