Neutral rating maintained
Dangote Sugar Refinery’s (DSR) Q4 2017 earnings of N13.3bn were up 210% y/y and well ahead of our estimate. Looking ahead, we have retained our capacity utilisation forecast of 55% for the Lagos Refinery because we are more assured of relatively improved gas supply through 2018 and better evacuation on completion of road works at Apapa. On the Q4 2017 conference call, management guided to a gas-to-LPFO ratio of 90:10 for 2018E compared with 50:50 in 2017. We believe this target is achievable in the event that the calmness in the Niger Delta is maintained. For 2018, we do not expect a significant cut in prices even though relatively low finished sugar prices in Q4 have helped DSR recover lost market share gradually and raw sugar (a key raw material) prices have declined by c.30% to US$270/tonne over the last year. We forecast an average price of N14,500/50kg bag, down -7% y/y. We believe funding requirements for backward integration projects would be prioritised in decisions going forward.
Within the next five years, management expects to locally produce 1 million tonnes of sugar annually from projects in Adamawa, Taraba and Nassarawa States. According to management, project funding is now expected to exclude any form of additional equity capital. We have raised our EPS forecast over the 2018-19 period by 21% on average, largely on the back of our expectations of stable pricing and an 18% y/y growth is sales volume to 773,170 tonnes. However, we anticipate a persistent rise in operating expenses over the next three years as land cultivation progresses. Our new price target of N24.0 is up 26% and implies an upside potential of 8% from current levels. We retain our Neutral rating on the stock. At current levels, DSR shares are trading on a 2018 P/E multiple of 5.2x for an EPS decline of -6% over the next two years. Ytd, DSR shares are up +11.3% compared with the broad market’s gain of +7.0%.
Marked improvement in profitability, driven by GM expansion
In Q4 2017, while sales declined -24% y/y to N41.4bn, both PBT and PAT grew significantly. PBT was up 234% y/y to N14.3bn and PAT grew 210% y/y to N13.3bn. A gross margin expansion of 1,566bps y/y to 23.0% and a significant rise in net finance charges completely offset the topline decline to lead to the PBT growth. Net finance charges were boosted by fx-related gains of N3.9bn during the quarter. Sequentially, while sales fell -7% q/q, PBT and PAT were both up 3% q/q and 41% q/q respectively. DSR proposed a final dividend of N1.25 (interim of 50 kobo paid earlier) vs. our N1.1 forecast. This implies a total dividend yield of c.8% and a 53% payout ratio.