Key Highlights & Takeaways From Dangote Sugar’s Conference Call

Dangote Sugar Refinery Plc.: Notes from Conference Call

HIGHLIGHTS

• Revenue: Management projects positive revenue growth over 2016 largely on the back of higher volume sales and increased prices.
• Focusing on volumes, management is optimistic that positive impact of September 2015’s price cut (-28%), which enabled the company to access the grey market, should drive an uptrend in volume sales. Importantly, YTD, volume sales have exceeded corresponding periods in 2015 and 2014.
• With regards to prices, management notes that an ongoing industry-wide discussion with the FGN has stalled the resumption of the scheduled increase in import tariff and development fees (double to 10% each). These increases have been delayed since 2014. In the event of a negotiation breakdown, management acknowledged that refined sugar prices would have to rise.
• Input Costs: DSR projects that raw sugar prices over 2016 should remain flat relative to 2015 levels which informs a flat-to-lower forecast for COGS-Sales ratio over the year.
• Forex: DSR continues to access all FX needed for the importation of raw sugar at the inter-bank market, though the lead time for obtaining FX has increased. Meanwhile, some of the FX needed for importation of other items are obtained at the parallel market.
• OPEX: The downtrend in operating costs over 2015 (-44.7% YoY) largely reflected staff rationalization with particular emphasis on expatriate staff.
• Sugar for Nigeria Project: DSR restated its commitment of producing 1 million MT of raw sugar over the next five years. As a result, DSR plans to invest between N120 billion and N150 billion over the next five years. However, over 2016, most of the planned investment would be financed through DSR’s equity contribution to the project (20% of total capital).

Key takeaways

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• Volume growth should remain strong over H1 16 though likely price hikes as DSR tries to pass-on higher import tariffs should drive deceleration over H2 16.
• In the event of breakdown in negotiations between government and industrial stakeholders, upswing in import tariff should drive COGS higher, raising scope for gross margin contraction.
• Prospects for higher borrowings to finance both working capital needs at Savannah and DSR’s Sugar for Nigeria project raises scope for higher net finance charges.
• Overall, we remain broadly positive on Dangote Sugar’s earnings outlook and expect modest changes to our estimates to leave our BUY recommendation (FVE N7.7) on the stock largely intact.