ARM Research 
ARM| Over 2016, Dangote Sugar Refinery Plc. (DSR) reported an upsurge in earnings despite lingering pressures: currency weakness, elevated raw sugar prices and higher energy cost. Solid earnings reflected the steep hike in refined sugar prices as well as volumes resilience hinged on the largely non-discretionary nature of DSR’s product. In addition, the company improved its financial efficiency by refinancing its expensive debt with CBN’s concessionary borrowings which, together with support from higher revaluation gains on biological assets, capped an impressive year for the company. In view of this, the company raised its DPS to N0.60 (2015: N0.50).
Price hike tempers elevated cost pressures: Over 2016, DSR faced sizable input cost pressures as steep naira depreciation combined with bullish raw sugar prices (+40% YoY) to drive cost of raw materials nearly two-fold higher YoY. Faced with sizable input cost pressure, DSR responded by hiking refined sugar prices 68% YoY (9M 16: +36.3% YoY) to N10,900/50kg bag on average. Though volume growth consequently suffered in the final quarter of the year (YoY: 9M 16: +16%, Q4 16: -33%), overall sales in the year was flat at 778.5KMT to leave DSR’s top-line printing at a record high of N169.7 billion over FY 16.
Financial efficiency and one-off gains support earnings growth: In a bid to minimize margin compression, DSR substituted its more expensive inter-company loan (interest rate at 13.5% per annum) with concessionary CBN financing (9% per annum). Aided by improved cash position, stemming from efficient working capital management, the company reported net finance income of N302 million vs. net interest charge of N653 million in FY 2015. In addition, the company reported a more than two-fold YoY rise in fair value adjustments on biological asset reflecting improved yield and longer tenor life. Consequently, mainly riding pass-through from strong top-line growth, DSR reported its fastest earnings growth in four years.
Price support to leave earnings in green zone: Going forward, whilst we expect volumes to track lower (FY 17E: -13% YoY to 674KMT) as corporate institutional clients seek cheaper alternatives, revenue should maintain its upswing on the back of higher prices. Aided by the impact of stronger naira (at the parallel market) on COGS, cheaper borrowings, as well as improved cash position, we expect earnings (+13% YoY to N16.3 billion) to rise for the second consecutive year in 2017.
DSR trades at a current P/E of 6.4x vs. 16.4x for Bloomberg Middle East & Africa peers. The stock has gained 0.16% YTD (Food: -7.3% YTD, NGSE: -4.6%) with last trading price of N6.12 at a 32% discount to our FVE of (N8.08). We have a BUY rating.
