Dangote Sugar Refinery Plc has seen contrasting fortunes over the past two years.
In 2023, shareholders enjoyed remarkable gains, with the stock price soaring over 255% year-to-date.
However, the tide turned in 2024 as the stock lost over 38% of its value as of December 12, ranking it 149th on the Nigerian Exchange.
The company’s financial performance has been equally turbulent. Significant pre-tax losses in 2023 and 2024, driven by foreign exchange losses, high-interest expenses, and surging costs of imported raw materials, have left Dangote Sugar in a precarious position.
In 2023, the company recorded a pre-tax loss of N108.922 billion, up 232% year-on-year. The situation worsened in the first nine months of 2024, with pre-tax losses ballooning to N275.583 billion, a significant 567% increase year-over-year.
These losses have severely impacted the company’s balance sheet. By September 2024, retained losses had grown to N117.465 billion, and shareholders’ funds turned negative reaching N105.111 billion.
The critical question now is how the company can navigate this turbulent situation and return to profitability.
The Backward Integration Plan (BIP): A way forward?
To combat these challenges, Dangote Sugar has placed significant bets on its Backward Integration Plan (BIP), a strategy aimed at reducing its dependence on imported raw materials and mitigating forex volatility.
The BIP involves transforming Dangote Sugar from a port-based refining company into a fully integrated sugar production powerhouse.
Chairman Aliko Dangote has reiterated the transformative potential of BIP, stating, “The goal of the Backward Integration Plan is to produce 1.08 million tonnes of refined sugar annually in six years and ultimately reach 1.5 million tonnes from sugarcane plantations covering more than 150,000 hectares across Nigeria.”
This ambitious project includes a phased expansion of its sugar estates in Numan, Adamawa State, and greenfield projects in Nasarawa and Taraba. By 2024, the Numan estate’s milling capacity is expected to reach 9,800 tonnes per day, while the Nasarawa estate will feature a fully integrated 12,000 tons per day sugar mill.
Despite the promise of BIP, its impact seems muted so far given the company’s financial performance.
In the first nine months of 2024, Dangote Sugar reported an impressive revenue of N484.427 billion.
However, the cost of sales consumed an overwhelming 96% of this figure, amounting to N464.607 billion.
This left the company with a gross profit of just N19.820 billion, reducing its gross profit margin to a mere 4%.
The cost of raw materials, which constitutes about 86% of the total cost of sales, remains a critical pressure point here.
A substantial portion of these costs is tied to the importation of raw materials, evidenced by the N44.991 billion interest on letters of credit, 67% of the total interest expenses in the first nine months of 2024.
This starkly highlights the impact of its dependency on imported raw materials and underscores the critical role the Backward Integration Plan (BIP) should have played.
The increase in Leverage
In 2023, the company’s current ratio, which measures its ability to pay short-term debts with its short-term assets, dropped to 0.77 from 1.09 in 2022.
This means that for every N1 of short-term debt, the company had only 77 kobo in assets to cover it, signaling a potential struggle to meet its short-term financial obligations.
- To manage this, the company turned to short-term borrowing in 2024, including a N150 billion commercial paper program.
- In mid-June, the company collectively raised N42.79 billion at competitive rates of 23% and 25%. Series 4, with a tenure of 181 days, raised N12.93 billion, while Series 5, with a longer tenure of 265 days, raised a larger sum of N29.86 billion.
- As a result of its borrowing activities, in the first half of 2024, the company had to pay N5.5 billion in interest on the commercial papers it issued, along with an additional N74 million to cover the costs of issuing these papers.
- By the end of September 2024, Dangote Sugar’s total debt increased significantly by 51.15%, reaching N616.303 billion compared to N412.267 billion at the beginning of the year.
- As a result, the cost of servicing this debt also grew sharply. Interest expenses rose by 276% year-on-year to N66.675 billion, with N14.5 billion attributed to the interest and costs associated with its commercial paper borrowings in the first nine months of 2024.
The company’s financial health has taken a hit due to rising interest expenses. Its interest coverage ratio dropped sharply to 0.12 from 3.17x in the first nine months of 2023, highlighting difficulties in meeting debt obligations.
Furthermore, the debt-to-assets ratio climbed to a worrying 92.31%, while the current ratio dropped to 0.49 signalling liquidity challenges.
In December the company returned to the market with Series 6 and 7, seeking to raise an additional N50 billion.
While these funds are crucial for immediate operational needs, it could strain the balance sheet further.
What is the way out?
Dangote Sugar’s current financial position paints a challenging picture. Rising debt, FX losses, and shrinking profitability highlight the urgency of implementing transformative measures.
- The Backward Integration Plan (BIP) remains a critical long-term strategy to mitigate forex risks and reduce dependence on imported raw materials.
- However, its success will depend on timely execution.
- On the financial front, reliance on expensive short-term funding, such as commercial papers, appears unsustainable, as reflected in the deteriorating interest coverage and liquidity ratios.
- A shift towards longer-term, or equity raising might be necessary to alleviate the debt burden and rebuild shareholders’ equity.
- The company’s lack of profitability, the high likelihood of no dividend payouts, and the bearish trend in its share price collectively paint a grim near-term picture for investors.
- Establishing a clearer timeline for BIP milestones, along with a concerted effort to address mounting debt challenges, could be pivotal in restoring investor confidence.
- Until then, Dangote Sugar’s journey is one of resilience and calculated optimism, leaving investors to weigh the significant risks against the potential promise of a brighter, more integrated future.
