Event

Dangote Sugar Refinery Plc (‘the Company’) demonstrated its market leadership and pricing power in FY 2022 – a move that emphasises the strong fundamentals of the sugar industry. Revenue grew by 46% year-on-year to N403.25bn, making it the third consecutive year on a double-digit revenue growth. The solid revenue growth was price-driven, as the Company raised average prices by 32%. Sales volume also recorded a double-digit growth of 10%.

We note that the Company consistently raised prices since 2020, in response to higher raw material costs, induced by global supply chain disruptions and unavailability of raw materials.

Gross margin improved to 23% in FY 2022 (FY 2021: 18%), as gross profit grew by 83% year-on-year to N91.96bn. The gross margin expansion was a result of effective pricing. Notably, the Company’s business model is mostly B2B sales. In our view, the Company’s business model made it relatively easy to pass on the cost burden given a higher bargaining power.

Net finance costs declined by 34% year-on-year to N3.42bn, largely due to a 350% growth in finance income to N6.38bn. Finance costs grew by 48% YoY to N9.80bn. The increase in finance income offset the increase in finance costs. Thus, bottomline expanded. An additional fair value gain on biological assets led up to a 142% year-on-year profit before tax growth to N82.30bn in FY 2022. Profit after tax grew by 148% year-on-year to N54.74bn. Net profit margin stood at 14% in FY 2022 (FY 2021: 8%), while return on equity doubled to 37% (FY 2021: 17%). As a result of increased profitability, the dividend of N1.50 declared for FY 2022 was 50% higher than  FY 2021 dividend. The qualification date is on March 24, 2023, while the payment date is on April 15, 2023.

The Company’s cash balance closed the 2022 fiscal year on a very strong note. Total assets grew by 37% year-on-year to N492.43bn. Cash balances grew by 70% year-on-year to N174.86bn, although we note that c.70bn of the cash is collateralising letters of credit associated with raw materials. The LCs were infused in trade payables which grew by 36% year-on-year to N273.75bn. Gearing ratio (i.e., debt-to-equity) declined to 0.01x in FY 2022 from 0.03x in FY 2021. This was due to a 47% year-on-year decline in total borrowings, while net assets grew by 33% year-on-year.

Outlook

The management guided that the direction of prices will be influenced by its cost structure. According to the management, an excess supply is expected in the global sugar market in FY 2023. Naturally, that should translate to lower raw material costs, and thus create a less need for higher price increases of products. However, other cost dynamics including foreign exchange unavailability, higher energy costs, and the tradeoff between raw sugar and ethanol production could drive cost profile upwards in FY 2023. When asked how to manage any potential cost pressure, the management confirmed that the plan is to pass on increased costs to consumers – however, it will be done carefully. In our view, we think that any price increases could be successfully passed on due to the Company’s pricing power and market leadership status. At the same time, we also consider rising competitive pressures from other market players including Flour Mills of Nigeria Plc and BUA Foods Plc.

We forecast a 21% revenue growth to N486.53bn for the Company in FY 2023, driven by a 15% price growth and a 5% volume growth. We expect a 13% net profit margin, a 100 basis points decline from 14% in FY 2022. This is because we discounted any fair value gain in FY 2023. We also did not forecast any material increase in finance income due to our expectation of lower cash balance in FY 2023 as working capital requirements increase in FY 2023.

Overall, we estimate a N24.18 fair value for the Company’s stock (previous: N20.47). At the current market price, the stock trades at 31% price discount to our fair value estimate. Incorporating an estimated 9% dividend yield translates to a potential 40% total return on the stock. We also note that the stock’s forward price-to-earnings multiple (P/E multiple) of 3.44x trades significantly below its historical average of 6.77x and our estimated justified P/E multiple of 4.50x. Therefore, we recommend a BUY.

Please follow the link “Dangote Sugar FY 2022 – Blistering Performance Underlines Strong Company Fundamentals” to view the whole report.

Thank you.