Dangote Sugar Refinery Plc. (DSR) released its unaudited 9M 2016 result wherein revenue climbed 57.8% YoY to N115.3 billion while PBT and PAT rose 7.7% YoY and 8.4% YoY to N15.3 billion and N10.1 billion respectively.
Price hike insufficient to offset input cost pressures: In its continued quest to defray inflationary pressures, DSR hiked refined sugar prices (YoY: +82%, QoQ: +38.3%) in Q3 16. The price hike supported increased revenue, which more than doubled YoY to N44.8 billion (Q4 16E: N31billion), but came at the cost of slower volume growth (Q3 16: +6.8% YoY 174.35 MT, H1 16: +18.3%). Nonetheless, as in prior quarters, the price hikes were unable to offset the impact of input cost inflation in Q3 16 with COGS rising nearly three-fold YoY to N39.7 billion. Consequently, gross margin contracted 16pps YoY to 11.3%. This, in addition to higher OPEX (+51% YoY to N1.9 billion) as DSR’s grip on both admin (+72% YoY to N1.2 billion) and S&D (+24% YoY to N695 million) expenses loosened, weighed on earnings (-9.5% YoY to N2.7 billion).
Base effects to flatter earnings: Going into the last quarter of the year, we believe subsisting inflationary pressure should drive retention of status quo on pricing and project a 103% YoY rise in prices to N12,530/kg over Q4 16. However, in response to the price hike, we expect volumes to remain uninspiring with projected sales of 170KMT over Q4 16 35% lower YoY than a 15-quarter high of 251.20 KMT in corresponding period of 2015, when DSR cut prices to stimulate growth. Nonetheless, reflecting the impact of higher prices, we project a revenue growth of 43.5% YoY to N40.2 billion.
On costs, currency pressures and bullish trend in global raw sugar prices informs our expectation for COGS pressures to linger. Thus, we raise our COGS-Sales ratio to 89.2% (prior: 84.7%). That said, reflecting a particularly high base in Q4 15 (93%), gross margin should expand 3.8pps YoY to 10.8%. Impact of the foregoing should more than offset higher OPEX (+48.2% to N3.4 billion) and lower net finance income (-52.6% YoY to N108 million) resulting in a mild rise in PAT (+1.9% YoY to N1.8 billion). Overall, we project FY 16E EPS to rise 3.1% YoY to N0.99 while DPS of N0.50 should remain unchanged from prior year.
DSR trades at a current P/E of 6.3x (forward: 4.63) vs. 17.6x (forward: 12.79) for Bloomberg Middle East & Africa peers. The stock has gained 2.8% YTD (Food: -7.2% YTD, NGSE: -4.9%) with last trading price of N6.22 at a 16% discount to our FVE of (N7.20) which translates to an OVERWEIGHT rating.
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