Dangote Sugar released its 2015 Half year results last week reporting a 4.5% drop in pre-tax profits to N9.8billion compared to the N10billion it reported a year earlier. Despite this drop, the second quarter of results (April to June) ended up being Dangote Sugar’s best quarter yet.
When Dangote reported its 2015 Q1 results earlier in the year almost all major income lines dropped compared to the same period a year earlier. However, when compared to its most recent quarter (2014 Q4) one could see a massive improvement. For example, whilst revenue was N21billion in Q4 2014, it was N22.5billion in 2015 Q1. Also whilst the company reported a Net Operating Loss of N3.6 billion in 2014 Q4, it bounced back into an operating profit N3.8billion in 2015 Q1.
This trend apparently followed in the second quarter of the year as revenue this quarter rose by a whopping 27% to N28.5 billion. Operating profit also rose 64% to N6billion. So what happened?
Drawing from the company’s analyst presentation the company informed analysts that it had increased sugar prices by 20.6%. The company also reported a drop in raw sugar prices which translated to lower cost of sales during the quarter.This also helped boost gross profits for the company.
This results on paper looks very impressive however we still have some reservations. For example, the continued pressure on the naira continues to pose potential risk though cost of raw materials as we head deep into third quarter.
Also, the company took on a significant portion of debt (N7 billion) which it hoped to pour into Savanah Sugar. This will generate additional interest cost down the line and could impact more on Dangote Sugar’s profits considering that Savanah Sugar is yet to contribute significantly to bottom line.
We are also worried with the way the company classifies certain portion of its expense lines. For example, it basically decided when to charge management fees effectively using that to determine the impact of operating expenses on profits. For example, its operating expenses was N1.7billion in Q1 which then dropped by 45% in the second quarter. In fact, the N932 million it reported this quarter as operating expenses is perhaps the second lowest it has reported since we started tracking in 2012.
Also despite this profits cash balance seems to have only increased by N196 million. Operating cash flows also came in negative at N5.3billion by June. The company this despite making profits did not represents those profits by cash. Ironically cash declined by about N7.2 billion this quarter alone. This therefore suggest a significant portion of the sales it made wasn’t backed up by significant cash receipts.
Dangote Sugar also announced the departure of its CEO Graham Clark, after 23 months at the helm, due to from differing views with Dangote Sugar board over growth strategies.
Whilst this result was great on paper, we doubt that they can continue to maintain this momentum in the latter quarters of the year.