In 2023, Dangote Sugar Refinery’s share price witnessed an impressive 255% year-to-date gain, closing at N57 per share.
Early in 2024, it continued its bullish trend, hitting a 5-year all-time high of N82.65 on January 29, 2024.
However, since the release of its 2023 audited results, the share price has been bearish, recording a Q1 YtD loss of 8.8%. This downward trend continued with the release of its Q1 2024 financial results, leading to a YtD loss of 25.55% as of the close of trading on June 25, 2024.
The bearish trend following the release of the 2023 and Q1 2024 results suggests that the financial results or other disclosed information may not have met investor expectations. The 8.8% loss in Q1 and further decline to a 25.55% YtD loss by June 25, 2024, indicate significant investor disappointment or concerns.
In the 2023 financial year, Dangote Sugar suffered a major setback, recording a pre-tax loss of N108.9 billion; the biggest and the only loss in five years.
The company attributed the loss to a significant net foreign exchange loss of N172 billion in 2023, representing an over 9,000% YoY increase.
According to the company, this foreign exchange loss was due to changes in foreign exchange rates affecting foreign currency purchases of operating materials (e.g., finished equipment and other inventory items) and trade receivables denominated in foreign currencies.
As foreign exchange volatility continued to worsen, by the end of Q1 2024, the situation became grimmer, with a foreign exchange loss reaching almost 60% of the 2023 figure at N102.97 billion.
This compounded the bottom line, resulting in a pre-tax loss of N107 billion, almost equaling the 2023 full-year pre-tax loss.
Aside from the impact of the foreign exchange loss, the company’s cost of sales has also been increasing.
In 2023, the cost of sales surged to N355.14 billion from N311.28 billion (+14.09% YoY), leading to a gross profit of N86.30 billion, a 6.15% decline from N91.96 billion in 2022.
This trend continued in Q1 2024, with a 14% YoY increase in the cost of sales, reaching N114 billion, which reduced gross profit by 66% YoY to N8.75 billion and lowered the gross margin to just 7%.
The significant decline in gross profit and gross margin suggests that Dangote Sugar is experiencing higher expenses related to the production or acquisition of goods, which poses challenges in maintaining profitability.
This financial strain is further highlighted by the company’s reported negative earnings per share of N6.7 in 2023 and N5.68 in Q1 2024, resulting in a trailing twelve-month earnings per share of -N12.8.
The negative earnings per share of -N12.8 on a trailing twelve-month basis reflects the fact that Dangote Sugar’s net income over the past year has been insufficient to cover its outstanding shares.
Negative EPS can impact stock valuation as it does not provide meaningful insights into the company’s valuation relative to its earnings.
However, Dangote Sugar’s price-to-book (P/B) ratio in the most recent quarter stands at 99.74, indicating that the market values the company at nearly 100 times its book value.
Such a high ratio suggests that investors are paying a substantial premium over the company’s asset value, which could reflect expectations for future growth or other intangible factors.
Nevertheless, a high P/B ratio like this may also signal that the stock is overvalued, meaning its market price exceeds what can be justified by the company’s underlying fundamentals.
While price-to-earnings and price-to-book ratios may paint a grim picture, Dangote Sugar’s price-to-sales ratio of 1.12x, lower than some of its peers, suggests a more moderate valuation.
This ratio indicates that investors are willing to pay N1.12 for every N1 of the company’s revenue, reflecting a perception that Dangote Sugar’s revenue may provide a more dependable measure of its value compared to its assets.
However, there remains a concern: despite this moderate valuation, the company’s revenue growth of 9% in 2023 and 20% in Q1 2024 trails behind its 5-year compound annual growth rate of 29%.
This disparity raises questions about the company’s ability to sustain its historical growth trajectory, which could impact the valuation metrics moving forward.
Overall, the most critical aspect remains the return to shareholders and investors. The company is currently unprofitable and was unable to pay dividends last year. Additionally, the year-to-date share price loss of 25% presents a bleak outlook for investors and must be addressed.
In addition to insights on management’s strategic initiatives aimed at robust margin and cost management to address significant forex volatility and cost inflation, the company must ensure that its backward integration strategy is impactful.
The company has indicated that its integrated sugar business primarily uses locally grown sugarcane as the input raw material for producing refined sugar. According to the company, “Our goal is to produce 1.5 million tons of refined sugar annually from locally grown sugarcane within the next ten years, to serve local and export markets from factories and plantations across Nigeria.”
Ensuring profitability and restoring investor confidence through these strategic initiatives will be essential for Dangote Sugar’s future success.
