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DangSugar 9M'20: Higher Market Share Reflects in Strong Topline Growth (A BUY Rating)
DANGOTE SUGAR PLC: Higher Market Share Reflects in Strong Topline Growth (A BUY Rating)


Dangote Sugar Refinery (‘DSR’ or ‘the Group’) sustained its impressive operating performance in Q3’2020, reflected in the 55% year-on-year increase in revenue from N37.06bn in Q3’2019 to N57.28bn in Q3’2020. Operating profit spiked by 86% YoY from N5.62bn in Q3’2019 to N10.48bn in Q3’2020. Profit before tax grew by 103% YoY while profit after tax grew by 304% YoY from N3.73bn in Q3’2019 to N15.05bn in Q3’2020.

Q3’2020 Revenue Surge on the Back of Price and Volume Growth
The Group sold a total of 193.77k tonnes in Q3’2020, representing a 19% increase from 156.31k tonnes in Q3’2019. The growth in volume sold was on the back of increased access to the market and improved market share, amid the sustained land border closure by the national authorities. The land border closure meant that the persistent influx of smuggled unlicensed sugar, which had previously eroded market share for the Group, was limited. In addition, the Group increased prices during the period to reflect the impact of rising costs, induced by the exchange rate devaluation. Expressly, average price per tonne grew by 30% YoY in Q3’2020. Therefore, the combined effect of the double-digit in average price and volume resulted in the 55% YoY revenue growth in Q3’2020.

Higher Costs Incurred on the Back of FX devaluation
Cost of sales grew by 51% YoY from N29.16bn in Q3’2019 to N47.80bn in Q3’2020, reflecting the impact of exchange rate devaluation on costs. In addition, the Group, in its press release, emphasised that there were increases in the prices of raw input during the period. Thus, the effect of higher exchange rate and prices of raw input weighed on costs. However, cost margin lowered by 200 basis points from 79% in Q3’2019 to 77% in Q3’2020, resulting from a successful transfer of cost to consumers during the period. As a result, gross profit grew by 69% YoY from N7.90bn in Q3’2019 to N13.32bn in Q3’2020.

Lower Operating Expense Margin Expand Bottomline Growth
Operating expense margin in Q3’2020 stood at 5%, which implies a 100 basis points lower than 6% operating expense margin in Q3’2019. In absolute terms, operating expense grew by 25% YoY from N2.33bn in Q3’2019 to N2.89bn in Q3’2020. The increase in operating income (+68%) relative to the increase in operating expense (+25%), resulted in an 86% YoY spike in operating profit from N5.62bn in Q3’2019 to N10.48bn in Q3’2020.

A N1.79bn increase in fair value adjustment on biological assets was recorded during the period (Q3’2019: N326.77mn), thus further supporting bottomline growth. Profit before tax increased by 103% YoY from N6.33bn in Q3’2019 to N12.03bn in Q3’2020. The Group recorded a tax credit of N3.02bn in Q3’2020, relative to a tax charge of N2.21bn in Q3’2019. Therefore, profit after tax grew by 304% YoY from N3.73bn in Q3’2019 to N15.05bn in Q3’2020.

In our view, we attribute the operating performances of the Group to the increased market share induced by the land border closure. Hence, we posit that the Group will continue to report solid performance for as long as the border closure policy remains effective. While we believe that the land border closure policy is not sustainable, we yet maintain that we do not expect to see any reversal in the short term.

We revised our earnings and cash flow projections. We now estimate a FY’2020 EPS of N3.13 (previous: N2.01), and a dividend of N1.50 (previous: N1.20). Using a blend of Discounted Cash Flow (DCF), Dividend Discount Model (DDM), Residual Income Model (RIM), and EV/EBITDA valuation methodologies, we arrived
at a fair value of N18.85. At the current market price of N16.50, the stock offers a total return of 23% (price return: 14%; dividend yield: 9%). Hence, we recommend a BUY.

WSTC Securities Limited registered office is at 2,
Maitama Sule Street, South West Ikoyi, Lagos, Nigeria.
© WSTC Securities Limited 2020.

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