Dangote Sugar Refinery Plc. (9 months ended September 2014)
- Dangote Sugar Refinery Plc (DSR) released unaudited results for 9 months ended September 2014 wherein revenues declined 5% YoY to N73.8 billion with PBT and PAT shrinking 6.5% and 5% YoY to N14billion and N9 billion respectively.
Higher prices and modest volume gains drive positive topline growth
- Revenues bucked the four quarter declining trend rising 6.7% YoY to N24.2billion (Q3 14E: N25.4 billion) driven by higher refined prices (+4% YoY, +9% QoQ) and volumes (+3% YoY to 250kt).
Figure 1: Domestic Refined Sugar Prices and DSR volumes
Source: DSR, NSDC, ARM Research
Gas supply issues drive gross margin contraction
- At N20.4 billion, Q3 14 COGS rose (9.8% YoY) faster than revenues and our estimates (N18.95 billion) resulting in 5% YoY decline in gross profits to N4.5 billion with associated margins decreasing 2pps YoY to 18.5%. The COGS pressures emerged as higher fuel costs due to a switch to more expensive boiler fuel (LPFO) at Apapa refinery following gas supply shortages, which offset the impact of lower input costs. (Raw sugar prices -6% YoY)
- Nonetheless, OPEX contracted 54% YoY to N839 million as DSR deferred recognition of management fees to Q4 14 which resulted in a 26.7% YoY expansion in EBIT to N3.6billion with related margins 2.4pps higher YoY at 15%.
Finance expense exacerbates earnings pressures
- In a departure from a history of strong finance income, DSR reported net finance expense for Q3 14 of N57.6 million, as compared to net finance income in Q3 13 of N441.8 million. This reflects 96% YoY contraction in finance income to N17 million reflecting lower cash balances (-31% YoY to N7.4 billion) and appearance of ST debt (N371 million) and LT debt (N312 million) which resulted in the finance charges of N231.5 million.
- Other income declined 69% YoY in Q3 14 to N256 million which reflects base effects from the one-off scrap fleet sales (Q3 13: N833 million). Consequently, PBT and PAT declined 9.3% and 11.7% YoY to N3.7 billion and N2.3 billion respectively with corresponding margins declining 2.7bps and 2bps YoY to 15.3% and 9.5%.
Recent price decline see scope for BUY rating post adjustments
- Recent declines in raw sugar prices (-8% QoQ) on account of subsisting surplus production across major producers dims scope for DSR to raise refined sugar prices over the last quarter. Indeed management hints at greater scope for price cuts in Q4 14 which should offset modest volume growth resulting in largely subdued sales growth over the period. Whilst output for input cost remains benign, management guidance of increasing reliance on expensive LPFO as backup in the face of gas supply challenges should result in further gross margin contraction over Q4 14. Compounding Q4 14 earning woes is the deferral of management fees. Overall, we see scope for southward drive movement in our FVE (N9.59) post revisions to our models. Nonetheless, current P/E of 7x is at a sizable discount to Bloomberg regional peer average of 12.9x on account of recent price declines which leaves sufficient scope for BUY rating post revisions.
Source: ARM Research