- Dangote Sugar share price has declined 26% in value this year to date
- September is already looking like the most bearish month this year
- Results this year haven’t been impressive as the decline in revenue reported in 2013 (compared to 2012) seemed not to have abated
- We explore four theories/reasons that could be the reason for bearish trend that is slicing value off the stock
Dangote Sugar Plc has had better years in the Nigerian stock exchange making 2014 one of those years it will hope to forget. The stock has returned about −15% in the last one year. In fact it opened 2014 at a price of N11.30 and as at 15th of September it was trading at N8.37 a whopping 26% decline year to date. It has also lost ground this month making September its most bearish month thus far. So why is this stock taking a pounding? I have a theory that may be the reason for this decline. [upme_private]
Dangote Sugar reported a quarterly decline in revenue in Q2 compared to Q1 2014. Top line revenue fell 8% to N23.7billion in Q2 compared to N25.8billion in Q1 2014. Overall revenue has declined 6% (N49.6b) in the first half of this year compared to the first half of 2013 (N55billion). However, operating profit increased 13% to N10billion in the first half of 2014 compared to N8.8billion same period in 2013. This was a result of a drastic (56%) cut in operating expenses this year compared to the last. The cut was across board with selling and distribution expenses reduced from N1.8billion a year ago to N631million in 2014 H1. Admin expenses also dropped from N4.7billion in the first half of 2013 to N2.3billion same period in 2014. A major part of this drop was in sales and related cost (from N1.5billion to N1billion) and then more noticeable zero management fee paid this year. Despite this pre-tax profits dropped 5% to N10billion with a N2billion other income earned in 2013 making the difference. The results surely did not help matters and guidance if any appears to have been lost on the market currently.
In the half year results released back in August, the company complained of disruptions in Gas supplies to their plants. This adversely affected production in the second quarter of the year with turnover dropping 8% to 23.7billion for the quarter. The company has to use fuel as an alternative source to fire its boilers. Now this occurred in June 2014 with little time to reflect on cost of sales. Dangote Cement also experienced a similar problem (thought much earlier) and had to also rely on the more expensive fuel to fire that plants. The result for Dangote Cement was a spike in Cost of sales. This may not be different for Dangote Sugar if fuel is used in the third quarter of the year. The cost will reflect thus depressing margins much further. Gas supply being unlikely to have improved should also give some anxiety concerns.
One major disadvantage with Dangote Sugar’s business model is that the prices of the goods they sell is determined by the global market. It’s the same model as oil, salt and most commodities in general. This posses a risk because in times of lower prices margins are depressed if there is no inverse rise in volumes. Sugar prices have taken a fall the third quarter of this year dropping from 18cents per pound in June to 15.8cents per pound as at August. This was a similar situation the first quarter of 2014. It is thus unlikely that things will improve in Q3.
Dangote Sugar’s acquisition hasn’t really started providing the returns expected. The subsidiary is still undergoing a turnaround and only just started producing in Q2. As such, cost will overshoot revenue in this subsidiary for a while before it starts to break-even. This added cost will impact on Dangote Sugar’s bottom line which doesnot augur well for the stock.
These are tough times for the company but the challenges they face are surmountable. I still see these issues as short term in nature and can change a year. The Aliko Dangote factor is also a key reference even though what happened to Dangote Flour Mills is also a reminder of the limits of his ‘magical wand’. I feel the share price is fairly valued currently leaving room for any upside for any potential buyer looking for short term gains. However, this is probably a good buy opportunity for anyone looking at a long term hold.
Disclosure: Dangote Sugar is included in Ugometrics Portfolio[/upme_private]