30 October 2018
Dangote Sugar Refinery Plc (DANGSUGAR) 9MÃ¢â‚¬â„¢18 results Ã¢â‚¬â€œ revenue declined by 28.4% YoY to
N116.8 billion - lower than our projected N125.3 billion for the period (-6.8% deviation). In the same vein, after tax earnings slumped 37.0% YoY to N16.7 billion, behind our N17.9 billion estimate (-6.7% deviation).
Ã‚Â· In Q3Ã¢â‚¬â„¢18, revenues slumped by 26.3% YoY to
N32.7 billion. We believe the pressure on top-line growth stems from both lower prices and slower volume growth. On a quarter-on-quarter basis, sales dipped by 23.9%, owing principally to seasonality. We highlight that volumes are typically lower in the rainy season.
Ã‚Â· Down the line, cost of sales declined at a slower pace (-13.0% YoY) than revenue growth (-26.3% YoY). As such, gross margin was pressured in Q3Ã¢â‚¬â„¢18, as it advanced by 12.1 ppts YoY and 9.5 ppts QoQ to 20.8% (Q2Ã¢â‚¬â„¢18: 30.3%, Q1Ã¢â‚¬â„¢18: 25.0%, Q4Ã¢â‚¬â„¢17: 23.0%).
Ã‚Â· DANGSUGAR incurred higher operating expenses during the quarter (
N0.06 per unit of revenue, compared to N0.05 per unit of revenue incurred in Q3Ã¢â‚¬â„¢17), weighed by 35.3% YoY increase in selling and distribution expenses. Consequently, operating profit margin worsened to 15.0% (Q3Ã¢â‚¬â„¢17: 28.5%, Q2Ã¢â‚¬â„¢18: 23.0%), given higher production and operating costs.
Ã‚Â· Overall, decline in sales, higher production and operating costs, as well as a higher effective tax rate (Q3Ã¢â‚¬â„¢18: 36.6% vs. Q3Ã¢â‚¬â„¢17: 32.7%) weighed on after-tax earnings, as it declined more than two-fold to N4.0 billion (-57.6% YoY).
Analyst take: Until the smuggling of unlicensed sugar into the country is addressed, we believe DANGSUGARÃ¢â‚¬â„¢s ability to grow its top line might remain stunted. The increase of the unlicensed non-fortified sugar has been occasioned by i) lower price of global sugar prices (-21.0% YtD) and ii) continued FX stability and availability. Furthermore, the Apapa-gridlock remains a hindrance for the company to push out volumes and we believe that this also had a negative impact on distribution costs, thus weighing on margins. We will adjust our estimates after getting further clarity from management. Our target price for the counter is under review.