DANGOTE SUGAR REFINERY PLC - arthursteven.com · In this report, we present our views on DANGOTE...

11/5/2019

DANGOTE SUGAR REFINERY PLC VALUATION REPORT

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Equity Valuation Q3 2019 Earnings Update

Overview

DANGSUGAR leads the sugar industry with over 70% of the market share and

production capacity of 1.44mmtp/a, a feat it has been able to achieve through

pioneer advantage, long-standing presence in the market, large production capacity,

volume driven marketing strategy, strong distribution and delivery network.

In this report, we present our views on DANGOTE SUGAR REFINERY PLC

following the Q3 report that was released recently. We are inclined to place a HOLD

rating on DANGSUGAR with a target price of N10.03. We used a blend of Free Cash

Flow to Equity and Dividend Discount Model with a weight of 50:50 which represent

a 3.11% downside to current price of N10.35 (at the time of writing this report),

please find below our Q4 outlook of the company and an analysis of its Q3 2019

performance.

The Global Sugar Market

Sugar, used as a sweetener in food and beverages, is a sweet crystalline substance

acquired from various plants, such as sugar cane and sugar beet. It is said that sugar

had first been used in the Polynesian Islands more than five thousand years ago.

Early Polynesians discovered that sugar cane held a sweet-tasting liquid and could

be used in preparing food. Sugar cane then became widespread due to trade,

invasions and conquests.



In 1493, Christopher Columbus brought sugar cane to the Caribbean and the crop

thrived in the fertile environment. Currently, about 110 countries produce sugar

from either cane or beet, and eight countries produce sugar from both cane and

beet. Sugarcane, on average, accounts for nearly 80% of global sugar production.

Last October/September season the top ten producing countries accounted for

nearly 70% of global output. In 2018, the global sugar market reached a volume of

187.9 Million tons, the market is further projected to reach 199.6 Million Tons by

2024, expanding at a CAGR of nearly 1% during 2019-2014. (International Sugar

Organization).

Sugar production is affected by weather and the amount of land under cane, while

the consumption of sugar is driven by macro-economic factors such as increasing

wealth and population growth in the developing world, set against the conscious

reductions in sugar consumption in the developed world 2022.

Price of raw sugar trended downward through 2017 from average of $0.43/kg in

Q1-17 to $0.32/kg in Q4-17, representing 25.6%, decline according to World Bank

commodity price data. The downward pressure on prices spilled over into 2018,

as average sugar prices closed at $0.29/kg in Q4-18 and the downward trend

continued through into 2019 and stand on an average of $0.27/kg in Q3 2019



About Dangote Sugar Refinery Plc

Dangote Sugar Refinery Plc (DANGSUGAR) was established in 2000 as the first

sugar refinery in Nigeria. DANGSUGAR has grown from initial installed

production capacity of 0.6MMT to one of the largest refineries in Africa with an

installed capacity of 1.44MMT. Over the years, through the brand name ‘Dangote

Sugar’, the company has positioned itself as the largest sugar refinery in Nigeria

with over 70% market share. It was listed on the Nigerian Stock Exchange in

2007 and currently has a market capitalization of N124bn with 12.0bn

outstanding shares.

DANGSUGAR leads the sugar industry with 70% market share and production

capacity of 1.44mmtp/a, a feat it has been able to achieve through pioneer

advantage, long-standing presence in the market, large production capacity,

volume driven marketing strategy, strong distribution and delivery network.

The Company’s core competencies include:

Refining of raw sugar to make high quality Vitamin A fortified and non-

fortified granulated white sugar;

Marketing and distribution of refined sugar grades in 1000kg, 50kg, 1kg,

500g & 250g packages.

Cultivation and milling of sugar cane to finished sugar from their

subsidiary, Savannah Sugar Company Limited; and



Development of Greenfield projects in line with our “Sugar for Nigeria

Project,” strategic plan

The core of the company’s operations is centered on purchases by industrial users

via its 50kg sugar bags which accounted for 94.7% of revenues in Q3-19, although

the diversification into retail sugar sachets, which commenced in 2011, was a means

to enhance market penetration. Notwithstanding, Business to Business (B2B)

consumers continue to dominate the spectrum of the company’s consumers. The

company’s strategy is volume driven with locations in population clusters. Lagos

state alone accounts for 46.8% of revenues, followed closely by the populous

Northern part of the country at 37.9%. The company boasts of over 1,000 solid

distributorship network, staff strength of around 1,500 people and delivery fleet of

up to 550 trucks amongst others.

Trend in Revenue Growth.

DANGSUGAR has maintained a good positive turnover growth momentum in the

last four years up until 2018 when there was a decline in revenue which was mainly

driven by reduced sales volume and reduction in net selling price per unit which was

caused by the influx of low priced smuggled sugar into the key market in the country

which exerted downward pressure on selling price and the Apapa traffic gridlock

which continues to affect the evacuation of products from the refinery.



The Company grew its top line from N94.86bn in 2014 to N204.42bn in 2017, and in 2018

it dropped to N150.37 representing a 12.2% Compounded Annual Growth Rate (CAGR).

Though Cost of Sales (CS) increased by 9.77% over a 5-Year period, the Company’s Gross

Profit still went up from N18.63bn in 2014 to N39.69bn in 2018, this was as a result of an

effective cost management strategy employed by the company. However, the unaudited

9M 2019 results recently released by the Company shows a marginal growth in Turnover

up by 0.57% to N117.4bn from N116.76bn and a decline of 12.21% q/q, however, revenue

reported for the third quarter in 2019 increased by 13.41% to N37.06bn compared to

N32.68bn in the third quarter of 2018 this could be because of the border closure in the

quarter which has limited entry of smuggled sugar. Cost-to-Sales ratio has averaged

between 76% in the last five years, the lowest so far was recorded in FY-18 at 70% on the

back of energy saving/efficiency projects to maximize cost savings benefits.

In the recent result, cost to sales ratio increased to 75.29% from 74.60% increasing

proportionately to sales by 1.50% y/y from N87.10bn to N88.41bn and a 10.80% decline

q/q this exerted a little pressure on the gross profit printing at N29.02bn from N29.66bn

y/y.



Profitability

The Company’s bottom line growth has witnessed a decline in the recent times; as Profit

Before Tax (PBT) declined by 35.44% from N53.60bn in 2017 to N34.60bn in 2018.

Profit after Tax (PAT) also declined by 44.75% from N39.78bn in 2017 to N21.98bn in

2018.

In Q3 2019 PBT printed at N22.97bn from N26.21bn showing a decline of 12.36% y/y

and 5.81% q/q. Likewise, PAT for the period came down by 12.01% printing at N14.70bn

from N16.71bn.

Year-on-Year, Return on Equity (ROE) has dropped to 14.56% in the 9M’19 from

16.04% recorded in the corresponding period of 2018. Return on Assets (ROA) also

declined marginally by 0.75% from 9.41% in 9M’19 to 8.67% in 9M 2018.

Liquidity and Solvency

The Company’s liquidity trend has been impressive in the last five years. The level of

current assets maintained in 2014 could cover 104.04% of its current obligations. This

however, went up to 149.37% in 2018. Without taking the inventories into

consideration, the short-term obligation of the DANGSUGAR’s current assets were

95.09% of its current liabilities in 2018. The Company has continued to maintain high

cash and bank deposits balances, inching up from N6.2bn in 2014 to N21.58bn in 2018.



This implies that DANGSUGAR has adequate liquidity to meet up with its short-

term obligation. On a long run, the debt to equity ratio of the company has declined

over the years from 4.62% in 2014 to 1.48% in 2018 and the debt to asset ratio also

declined from 2.57% to 0.84% in 2018.

This implies that the degree of the company’s asset financed by debt has reduced

over the years and this show that DANGSUGAR has a low degree of leverage and

therefore is exposed to low financial risk.

Capital Structure

DANGSUGAR’s Shareholders’ funds grew from N51.61bn in 2014 to N99.33bn in

2018, representing a CAGR of 17.79%. Total Assets also grew by 17.21% from

N92.80bn in 2014 to N175.11bn in 2018. The Company’s level of efficiency in its

asset utilization has declined over the years. Total Assets Turnover ratio declined

from 1.02x in 2014 to 0.86x in 2018, however Fixed Assets Turnover ratio has

improved over the years from 2.05x in 2014 to 2.43x in 2018. This implies that the

Company has been fairly efficient in its use of its assets

EARNINGS OUTLOOK

Going forward, we expect a positive outlook in DANGSUGAR into the last quarter of

the year being a seasonal period and the closure of the border which will further limit

entry of smuggled sugar in the market. We expected a growth rate in revenue of 4.14%

y/y, a proportional growth in the cost to sales ratio, decline in gross profit margin to

24.33% and decline in bottom line margin about 14.5% and 14% in PBT and PAT

respectively.



VALUATION, ASSUMPTIONS AND RATINGS

We valued DANGSUGAR shares using the Free Cash Flow to Equity (FCFE) and the Dividend

Discount Model (DDM) for our valuation. On our revised numbers, we now have a blended fair

value of ₦10.03 per share using a blend of FCFE and DDM with respective weights at 50% each.

Relative to last closing price, this translates to 3.11% downside and a HOLD rating on the shares is

recommended. The company currently trades at a P/E of 8.45x which is at a premium to peer

average of about 6.0x.

We therefore place a HOLD recommendation on Dangote Sugar Refinery Plc.



Analyst Certification, Important Disclosure and Disclaimer Analyst Certification The research analysts who prepared this report certify as follows: 1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the

companies, securities, industries or markets discussed in this report. 2. That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific

recommendations, estimates or opinions expressed in this report.

Investment Rating Criteria and Disclosure Arthur Steven Asset Management adopts a 3-tier recommendation system for assets under our coverage: Buy, Hold and Sell. These generic ratings are defined below; Buy: Based on our valuation and subjective view (if any), the total return upside on the stock’s current price is greater than our

estimated cost of equity. Hold: Based on our valuation and subjective view (if any), the total return upside on the stock’s current price is less than the cost

of equity, however, the expected total return on the stock is greater than or equal to the Standing Deposit Facility rate of the Central Bank of Nigeria (which is currently MPR – 200bps; i.e 10%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity.

Sell: Based on our valuation and subjective view (if any), the total return upside on the stock’s current price is less than the Standing Deposit Facility rate of the Central Bank of Nigeria (which is currently MPR – 200bps; i.e. 10%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity, especially as we consider the average 4.5% total transaction cost for an average retail investor.

Disclaimer Arthur Steven Asset Management (ASAM) notes are prepared with due care and diligence based on publicly available information as well as analysts’ knowledge and opinion on the markets and companies covered; albeit ASAM neither guarantees its accuracy nor completeness as the sole investment guidance for the readership. Therefore, neither ASAM nor any of its associate or subsidiary companies and employees thereof can be held responsible for any loss suffered from the reliance on this report as it is not an offer to buy or sell securities herein discussed.



Arthur Stevens Asset Management Ltd.

(MEMBER OF THE NIGERIAN STOCK EXCHANGE)

… Succeeding Together

Address:

86 Raymond Njoku Street,

SW Ikoyi, Lagos, Nigeria.

Telephone:

+234 9036881136

+234 9035996606

+234 8091054142

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