Dangote Sugar Refinery Plc 9M'18 results - Unimpressive top line performance weighs on earnings

30 October 2018

Dangote Sugar Refinery Plc (DANGSUGAR) 9M'18 results "" 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). 

Other highlights:

·     In Q3'18, 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.

·     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 Q3'18, as it advanced by 12.1 ppts YoY and 9.5 ppts QoQ to 20.8% (Q2'18: 30.3%, Q1'18: 25.0%, Q4'17: 23.0%).

·     DANGSUGAR incurred higher operating expenses during the quarter (N0.06 per unit of revenue, compared to N0.05 per unit of revenue incurred in Q3'17), weighed by 35.3% YoY increase in selling and distribution expenses. Consequently, operating profit margin worsened to 15.0% (Q3'17: 28.5%, Q2'18: 23.0%), given higher production and operating costs. 

·     Overall, decline in sales, higher production and operating costs, as well as a higher effective tax rate (Q3'18: 36.6% vs. Q3'17: 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 DANGSUGAR'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.

Kindly click here for a copy of Dangote Sugar Refinery Plc. 9M'18 results.

Regards,

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