13% upgrade to our EPS estimates over the ’21-23f period; Neutral rating maintained
Following Dangote Sugar Refinery’s (DSR) better-than-expected results in Q1 ’21, we have upgraded our EPS estimates over ’21-23f period by 12.8% on average to reflect the improvement in fundamentals. Nonetheless, we retain our Neutral rating. Compared with our forecasts, higher-than-expected sales volume helped drive a stronger sales growth in Q1.
As such, we have raised our ’21f sales forecast by 9.5% to NGN256.3bn (from NGN234.1bn previously) to reflect an increase in sales volumes by 2% to 793,498MT (from 780,299MT) and prices (8%, to reflect the increase in retail prices of 50kg bag to NGN20,500 in May from an average of NGN20,000 in Q1’21). We note that our new sales forecast is behind the Q1 ’21 annualised run-rate of NGN269.6bn. The change in our sales estimate implies a gross margin forecast of 27.6% (from 26.0% previously).
Notably, DSR’s gross margin rose by 7bps y/y to 26.8% in Q1 ’21. We estimate opex at NGN11.1bn (+5.0% vs previous forecast of NGN10.6bn), following the +12.7% y/y increase in opex in Q1’21 (to NGN2.3bn). Further down the P&L, we have raised our ’21f interest expense forecast to NGN3.6bn (+191.3% vs. prior forecast) after a NGN2.3bn exchange loss in Q1 ’21 increased interest expense to NGN3.4bn. We raise our tax forecast to NGN18.3bn (from NGN16.2bn previously), culminating in a PAT forecast of NGN33.7bn in ’21f (vs. prior estimate of NGN32.9bn).
For our valuation estimates, we have raised the risk-free rate in our DCF model to 12.5% (from 11%), while our adjusted beta estimate is lowered to 1.0 (from 1.1 previously). Our new price target of NGN18.1 is up by 5.9%. At current levels, our price target implies a potential upside of 5.6%. Year-to-date, DSR shares have shed -3.4% vs. the ASI’s decline of -4.3%.
Faster-than-expected volume growth lifts earnings in Q1 ’21
DSR’s Q1 ’21 results surprised positively. The company recorded sales of NGN67.4bn (41.5% y/y and 25.3% q/q respectively) in Q1 ’21, which beat our forecast by 14%. The increase in sales was largely due to higher sales volume (expanded by 5.7% y/y), and supportive low base price effect.
Gross margin expanded by +7bps y/y to 26.8% while operating profit increased by +41.9% y/y to NGN15.2bn Net interest expenses surprised negatively, as an fx exchange loss of NGN1.3bn pushed net interest expense to NGN3.3bn (+167.4 y/y and 543.8% q/q). PAT came in at N8.3bn (+30.3% y/y and 163.9% q/q), ahead of our forecast of NGN7.3bn.