BY BAMIDELE FAMOOFO
The research arm of Cordros Securities Limited has revised its previously positive view on Dangote Sugar Refinery Plc.
The leading equities research company said it now maintains a neutral position on the stock due to indications that the Company’s financial performance will be pressured by elevated costs, specifically from its key input raw sugar, with a lower supply expected from key producer Brazil in the days ahead.
Existential issues like weak consumer wallets and the challenging business environment are other reasons why analysts are less optimistic on the stock.
“However, we highlight that the company’s solid market share, strong distribution network, and progress on its Backward Integration Programme remain strong upsides over the medium term,” Cordros said.
Balancing all factors, Analysts still see some respite for earnings, as they project Earnings per Share (EPS) growth of 35.7 percent on a year-on-year (y/y) basis for the 2022 financial year. This is driven by the expectations for a higher revenue outturn.
“Following the revisions to our forecasts, we have lowered our price target to N17.75/s (previously: N23.51/s) and revised our rating downwards to “HOLD”. We estimate DPS of N1.42 in 2022E, translating to a dividend yield of 9.0%. On our estimates, the share trades on a 2022E P/E multiple of 6.4x, a discount to its 5-yr historical average and EM peer average of 7.7x and 9.1x, respectively,” Cordros further hinted in a report on Dangote Sugar.
Meanwhile, DSR recorded a revenue growth on higher prices with 28.8 percent y/y growth in 2021FY, driven primarily by substantial increases in its 50kg Sugar (+30.3% y/y | 97.5% of revenue) business segment. Specifically, the growth in the segment was driven by a favourable price/volume mix. During the earnings call, management alluded to a 21.9 percent increase in net selling price, as well as a c. 6.0 percent increase in volumes.
“On the price increase, management noted that the increase was instituted to offset the impact of inflationary pressures, FX challenges, and the rise in raw materials prices, specifically raw sugar. We attribute the surge in the price of raw sugar (+18.1% y/y to USD497.10/tonne in 2021FY) to lower supply following unfavourable weather conditions in Brazil and as producers switched focus to ethanol production in the face of higher energy demand amid rising crude oil prices,” Cordros stated.
“For 2022E, we forecast a 26.0% y/y growth in topline, majorly driven by sustained price increase in the year, with the company expected to pass down higher costs to consumers to protect margins. We expect a minimal increase in volumes, factoring the possibility of a demand dip from price-sensitive consumers. Over the medium term (2023 – 2026E), we model annual revenue growth of 11.4%.”
Cordros expects sustained cost pressures in the 2022 financial year, driven by a sustained increase in raw sugar, FX constraints and the pass-through impacts of elevated inflationary pressures on energy costs and other inputs. “Thus, we expect margins to remain pressured in the near term. Pertinently, we estimate gross margin to decline by 200bps to 16.2%. Based on the preceding and an 11.3% y/y expected increase in operating expenses, we expect EBITDA margin to decline by 108bps to 15.0% in 2022E. Notwithstanding, we forecast EPS of N2.46 in 2022E, implying a 35.7% y/y growth compared to the decline in 2021FY (-25.9% y/y). Our EPS forecast tracks below Bloomberg’s consensus estimate of N2.62 for 2022FY.”
Analysts have consequently lowered their price target on DSR to N17.75/s, implying a 10.9 percent potential upside. “Our TP points to a 2022E P/E and EV/EBITDA of 7.2x and 2.1x, respectively; a discount to MEA peers of 9.1x and 6.1x, respectively.”
