Dangote Sugar Justifies Investors’ Confidence

The impressive results and higher dividend recommended by Dangote Sugar Refinery Plc for 2017 have compensated shareholders who increased their demand for the company’s stocks last year, writes Goddy Egene

When the shares of Dangote Sugar Refinery (DSR) Plc recorded the highest price gain in the stock market in 2017, it was due to high demand by investors who reposed high confidence in the company. DSR led other price gainers in 2017 with a growth of 227 per cent.

Although some stakeholders could have expressed reservation that high demand by investors could be unjustifiable, the results declared by DSR for the year ended December 31, 2017, must have changed the narratives.
DSR did not only post impressive growth in performance indicators but also rewarded shareholders with a dividend that was 11 per cent higher than what was paid the previous year.

2017 Financial Performance
According to the audited results, revenue stood at N204.42 billion in 2017, up 20.4 per cent above the N169.72 billion recorded in 2016. Profit before tax jumped by 173.3 per cent to N53.6 billion, from N19.61 billion, while profit after tax grew fast by 176 per cent to N39.78 billion as against N14.4 billion in 2016.

Following the impressive performance, the board of directors recommended a final dividend of 125 kobo in addition to the 50 kobo interim paid last year. In all, shareholders will be receiving a total dividend for the year to 175 kobo per share compared with 60 kobo paid the previous year.

Commenting on the results, the Acting Group Managing Director, DSR, Abdullahi Sule said: “We are very pleased with the 2017 business year, with an increased revenue growth of being 20.4 per cent and gross profit increase of 121.8 per cent, the best recorded in the history of the company.

The company said the increase in direct overheads were mainly driven by production cost, which was driven by increased energy cost. The price of gas increased marginally from $7.38/mscf to $7.45/mscf, combined with the instability in gas supply during the first three quarters, pushed up the overall energy cost for 2017.

“This led to the use of LPFO at a higher price against budget. Our actual average price for the year under review was N143/litre against budgeted price of N100/litre. Investments made in respect of the various Backward Integration Projects (BIPs) were funded from DSR’s internal resources. The group liquidity position improved from N35 billion to N41 billion as at December 31, 2017.

In line with our liquidity management policy the excess funds were placed on short term fixed deposit to earn investment income. In addition, N13.0billion was deposited with the CBN for FX forward contract payable to foreign trade creditors at maturity. This sum is treated as other financial assets under the broad class of other assets in the statement of financial position,” DSR explained.

Looking ahead
The company said it started 2018 with the same challenges from the previous year ranging from the Apapa traffic gridlock, inability of its trucks to access the ports into its facility, menace of unlicensed sugar imported into the country, terrible road conditions nationwide to its key markets nationwide and its attendant effect on our delivery timeline, high exchange rate though stable, amongst others.
“We are, however, undeterred, with concerted efforts being made to ensure evacuation of products through alternate means of transportation, in addition with the increase of our fleet to boost trucks availability, ”DSR said.

The company said achievement of its sugar for Nigeria BIPs goal remains its priority, saying efforts are ongoing to ensure that the project targets are delivered on schedule.

“Our BIPs goal is to become a global force in sugar production, by producing 1.5mt/per annum of refined sugar from locally grown sugar cane for the domestic and export markets. To achieve this, DSR has acquired other sites at Tunga, Nasarawa State (60,000ha), Lau/Tau, Taraba State (25,000ha) to augment Savannah’s 32,000 hectares in Adamawa state. The brown field sites like Savannah Sugar will be integrated sugar production facilities with new plantation and modern facilities that are located closer to the consumers,” it said.

Analysts’ Assessment
Assessing the performance for the fourth quarter (Q4), analysts at FBN Quest said while PBT was up 234 per cent to N14.3 billion, PAT grew 210 per cent to N13.3 billion.
“Unit volume sales came in at 657,775 tonnes, indicating that Q4 volume sales were flattish. This implies that DSR implemented further price cuts during the quarter.

Sugar production at the Lagos refinery declined by 17 per cent to 654,723 tonnes, implying a capacity utilisation of 45 per cent, in line with our forecast. Sugar production at Savannah Sugar Company (SSC) was flattish at around 17,000 tonnes. A gross margin expansion of 1,566bps to 23 per cent and a significant rise in net finance charges completely offset the top-line decline to lead to the PBT growth. Net finance charges were boosted by fx-related gains of N3.9 billion,” they said.

The analysts noted that DSR proposed a final dividend of N1.25 (interim of 50 kobo paid earlier) vs. their N1.10 forecast, saying it implied a total dividend yield of eight per cent and a 53 per cent payout ratio.

“Compared with our estimates, while sales was in line with our N41.1 billion forecast, PBT beat by 25 per cent . The variance was driven by the fx-related gain of N3.9 billion and a positive surprise on the other income line. The variance on the PAT line was even more significant due to a relatively low tax rate of 7.6 per cent compared with the 36.5 per cent that we were modelling. On a full year basis, while sales were in line with our forecast, PAT came in 18 per cent ahead of our N33.8 billion estimate. Full year PBT came in ahead of consensus estimate of N50.4 billion.

Based on the 2017 performance, analysts at Cordros Capital Limited, reviewed their revenue growth forecast of 0.5 per cent for 2018. According to them, the forecast is based on freight revenue (+18 per cent), which has continued to grow (18 per cent in 2017 and 26 per cent average in the last five years – although accounting for barely two per cent of gross revenue.

“ We revise sugar revenue growth forecast lower to 0.2 per cent, from five per cent, given conservative outlook on sales volume and price, than we previously had,” they said.
According to them, by their estimate, DSR’s per tonne production cost increased four per cent in Q4-17, after successive declines between Q1-Q3.

“The higher cost, combined with lower selling price, produced a gross margin of 23 per cent, below both the 32 per cent rate achieved between Q2-Q3, and our 30 per cent estimate. We have revised our gross margin estimate for 2018E 112 bps lower to 26 per cent. Our estimate remains above the 25 per cent margin achieved in 2017, and DSR’s five-year historical average of 24 per cent,” they said.