**Posts Positive Performance Despite Input Costs Pressures
By Modupe Gbadeyanka
Dangote Sugar Refinery Plc delivered a remarkable financial performance in spite of elevated input cost within the financial year, as top line recorded a solid growth of 68 percent at N169.7 billion (FY 2015: N101.1 billion) and bottom line grew by 29 percent to N14.4 billion (FY 2015: N11.1 billion).
After a review of the company’s performance and based on our expectations, we project a fair value of N8.23 for Dangote Sugar and we assign a BUY rating on the stock.
The current market price of N6.00 implies a 27 percent discount to our fair value estimate of N8.23. DSR currently trades at a forward P/E and EV/EBITDA multiple of 4.82x and 4.97x, respectively.
FY’16 Performance Highlights:
- Revenue grew markedly by 68% to N169.7bn (FY 2015: N101.1bn) on the back of major price increases within the year, while volume growth remained muted.
The average selling price in the year increased by 69% to N214.41/kg (N126.82/kg: FY’15), while sales volume was flat at 778,518mt (FY 2015: 778,000mt).
- The major price hikes within the year were necessitated by the sharp rise in input costs as cost of sales increased by 82% to N146.7bn (FY 2015: N80.6bn), driven by a combination of increase in the international price of raw sugar, depreciation of the domestic currency, and higher energy costs.
- The international price of raw sugar rose by 19% to an average of USD410.6 in 2016 (USD345.3 in FY 2015) while the domestic currency depreciated by 53% to further impact the cost of imported raw sugar. Also, gas supply interruptions led to the usage of more expensive low pour fuel oil (LPFO) and this aggravated energy costs.
- DSR was, however, unable to fully pass the higher input costs to consumers through the several increases in selling price within the year as gross profit margin declined to 14% (FY 2015: 20%) and gross profit increased marginally by 12% to N23.0bn (FY 2015: N20.5bn).
- Profit before tax grew by 21% to N19.6bn (FY 2015: N16.2bn) as fair value gains on biological assets of N2.5bn (FY 2015: N1.2bn) recorded in the year also supported bottom line. Profit after tax rose by 29% to N14.4bn (FY 2015: N11.1bn).
We expect revenue growth in FY 2017 to be driven primarily by volume. We believe the second phase of the crop season which kicked off in November ’16 from DSL’s backward integration drive will support more increases in production volume in H1 ’17. We expect volume sales to be driven by increase in market share as foreign exchange scarcity and higher imported sugar prices continue to subdue competition.
Ultimately, we believe lower international sugar prices, relative “stability” in the FX market and improved gas supply should ease input costs pressures and support profitability margins in FY 2017.
Valuation and rating
In estimating the fair value of DSR Plc, we adopted a combination of DCF and relative valuation methodologies. Our initial year cost of equity estimate of 19% was computed using a 10-yr risk-free rate of 15.80%, beta of 0.53 (relative to the NSE ASI) and an equity risk premium of 5.69%. We arrived at a fair value estimate of N8.23 per share.
- Our fair value estimate implies a justified forward P/E multiple of 6.61x and EV/EBITDA multiple of 6.00x.
- The current market price of N6.00 is at a 27% discount to our fair value estimate; hence, we rate the company’s stock a BUY.
Downside Risks to Valuation
The downside risks to our fair value estimate include:
- Gas supply disruptions and increase in energy prices;
- Further spike in international price of raw sugar;
• Devaluation of the domestic currency and the impact on the international price of raw sugar.
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