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Dangote Sugar Refinery Outlook is Less Bullish in Q3 2021 Results Review

Nov 25, 2021   •   by   •   Source: Proshare   •   eye-icon 1583 views

ThursdayNovember 25, 2021 / 12:04 PM / by FBNQuest Research / Header ImageCredit:  Dangote Sugar Refinery

 

Earnings over the '21-23fperiod cut by 15.3%

DSR'searnings disappointed in Q3 '21 due to topline miss, raw material costspressure and higher-than-anticipated net interest expenses during the quarter.As such, we have lowered our EPS forecasts over the '21-23f period by 15.3% andcut the company's price target by 15.9% to NGN15.8. We believe the pressure onthe topline is as a result of pressure on prices, arising from increasedsmuggling in the north, as well as tougher competition across the B2C and B2Bsegments in Lagos and other southern markets. Based on Q3 '21 results, averagefinished sugar prices fell by -6.1% y/y and -15.8% q/q to NGN289,040/tonne.However, unit volume grew by 18.1% y/y and 6.9% q/q to 219,858 tonnes,confirming our view that management cut prices in response to a price reductionby a competitor in July. This new trajectory informs a reduction in our toplineestimate for FY'21 to NGN262.6bn (-1.6% vs. prior forecast).

 

Our gross margin estimate is now lower by -200bpsto 18.2% (from 20.2%), due to the sustained rise in raw material costs (+50.6%y/y to USD447.5/tonne in Q3'21 alone). From our checks, raw sugar prices are upby around +27.0% ytd and +33.2% y/y in the international sugar market, drivenby improved demand amidst reduced inventories. Further down the P&L, wehave raised our net interest forecast to -NGN8.4bn, after it rose significantlyahead of our estimate in Q3 '21. Net interest expenses is driven by interest onletter of credits and fx losses. For bottomline, we have reduced PAT for FY '21by 22.5% to NGN19.5bn and average EPS over 21-23f by 15.3%. Our risk-free rateand equity risk premium assumptions are unchanged; however, we have a higheradjusted beta of 1.1 (from 1.0 previously).

 

With these adjustments, we have a new price targetof NGN15.8 (-15.9% lower). This indicates a potential downside of -4.2% fromcurrent levels. As such, we maintain our Neutral rating on DSR. We expect adividend/share of around 97kobo, which indicates a yield of 5.9% and a 60%pay-out in FY'21. On multiples, DSR trades on a FY '22 EV/EBITDA of 2.4x,compared with a selected global peer average of 10.7x. Year-to-date, DSR'sshares have shed -6.5% vs. the ASI's +7.4%.

 

Q3 '21 earnings disappoint

DSR's Q3 '21 bottom line was behind expectations.Sales grew by 10.9% y/y to NGN63.9bn but came in behind our estimate ofNGN65.2bn (variance of -2.6%). Also, gross margin fell to 12.8% (its lowestsince Q4'16) largely due to higher-than-expected cost pressure, while netinterest expenses increased to -NGN1.2bn (from NGN236mn in Q3' 20). Thecompany's PAT fell by -80.7% y/y and -32.4% q/q to NGN2.9bn (behind ourforecast of NGN4.7bn).

 

Proshare Nigeria Pvt. Ltd.


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Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

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