Last Friday, Dangote Sugar Refinery Plc (DSR) released its unaudited H1 2016 result wherein PBT and PAT rose 13.8% YoY and 16.9% YoY to N11.2 billion and N7.4 billion respectively. Focusing on Q2, despite FX induced input cost pressures, which offset strong top-line growth, interest savings following DSR’s complete liquidation of its debt drove modest improvement in earnings.
- Improved financial efficiency support earnings: Given challenges on the macroeconomic front, declining purchasing power of consumers and rising input costs, companies across the FMCG’s space are focusing on financial and operational efficiency. In this light, DSR paid down its outstanding
N2 billion loan which drove finance charges 32% YoY lower toN139 million over Q2 16. The lower interest expense combined with a strong rise in interest income (twenty nine fold YoY higher toN119 million) drove net finance costs 90% lower YoY. - Currency and gas supply woes impale gross margins: The cost improvement helped mask underlying challenges (gas supply disruptions, increased production costs, FX shortage and rising raw sugar prices) which underpinned a 6pps YoY contraction in gross margin to 18.9%.
- Sizable cash balance and cost containment buoy earnings outlook: Going forward, naira worries and higher raw sugar prices point to sustained input cost pressure. The foregoing provides pretext for DSR to raise prices, which together with positive volume momentum underpins our expectation for higher turnover. (FY 16E: +33.7% YoY to
N135.1 billion). Nonetheless, given pressured consumer spending, we do not see DSR fully transmitting the aforementioned input costs to consumers. Thus we project gross margin compression of 88bps YoY over FY 2016. However, given projected decline in net finance expense and contained operating costs, we still expect earnings to sustain to maintain its uptrend over the rest of the year. - DSR trades at a current P/E of 6.9x vs. 14.9x for Bloomberg Middle East & Africa peers. The stock has gained 16.1% YTD (Food: -1.74% YTD, NGSE: -2.21%) with last trading price of
N7.00 at a 13% discount to our FVE of (N7.90) which translates to an OVERWEIGHT rating. - Conference call to hold on Thursday, 4 August 2016, at 4:00pm Lagos time.