Dangote Sugar Refinery Plc

DANGOTE SUGAR REFINERY PLC

Ticker:                       DANGSUGARNature of Business:    Food ProductsLocation :                            Nigeria
Recent Price:              NGN17.15  52-Week High/Low: NGN23.45/11.00Estimated Fair Value:    NGN18.73-NGN23.00
Expected Return:      36.6%Consider Buy:                   Below NGN20.87Business Risk:            Average
Financial Risk:      AverageEconomic Moat:             WeakCorporate Governance: Strong

Company Overview
DANGSUGAR, a member of Dangote Group, started as an offshoot of Dangote Industries Limited in 2000. It was spun off as Dangote Sugar Refinery Plc in January 2006 and was listed on the Nigerian Stock Exchange in March 2007. DANGSUGAR processes raw sugar into edible sugar for both industrial and household use. Dangote Industries Limited owns a 68% equity stake in the company.

Dangote Group uses both internal and external means to grow its businesses. DANGSUGAR acquired Dangote Sugar Numan (formerly Savannah Sugar Company Limited (SSCL) in December 2012. SSCL, located in Adamawa State, grows and processes sugarcane into refined sugar. SSCL was subsumed into DANGSUGAR due to the merger between the two companies in September 2020. DANGSUGAR is currently developing greenfield sites in two states in the northern part of Nigeria, namely Taraba and Nasarawa.  The management intends to use this kind of backward integration to check the soaring cost of raw sugar and ensure an assured supply of raw sugar going forward.

Being the largest sugar refining company in Sub-Saharan Africa, DANGSUGAR is in a better position to benefit from the drive of the Federal Government of Nigeria to encourage the acquisition of sugarcane fields across the country by way of soft loans. The gross profit margin could improve going forward.

Alhaji Aliko Dangote (GCON), an astute industrialist, presides over a nine-man board of directors. Ravindra Singh Singhvi was named Group Managing Director in October 2020.  Ravindra Singhvi joined DANGSUGAR as chief operating officer in August 2018. He had occupied different positions in manufacturing companies in India for over 4 decades.

Investment Thesis
DANGSUGAR, an integrated company, is one of the largest sugar refining companies in the world. It keeps on spending on the upgrade of its refineries to increase its capacity and meet the demand for sugar in Nigeria. In addition, its acquisition of sugarcane plantations would increase the availability of sugarcane for sugar production and reduce foreign exchange risk as it presently depends on importation for most of its raw materials. There is firm demand for sugar for both industrial and non-industrial use. Sugar has different applications in the production of food and beverages such as a sweetener, preservative and catalyst for fermentation.

DANGSUGAR has the largest market share in Nigeria and boasts of assets in excess of NGN200 billion. It is one of the few producers supported by the Federal Government of Nigeria to implement the National Sugar Development Plan (NSDP). NSDP aims to encourage producers to use local raw materials to produce sugar and stop the country’s dependence on foreign sugar manufacturers. DANGSUGAR is expected to be able to produce 550,000 metric tonnes of sugar annually by 2024.

There is also an opportunity for DANGSUGAR to export sugar to Sub-Saharan countries if it continues to upgrade factory capacity. The company has the capacity to obtain more loans in order to carry on its expansion effort. DANGSUGAR is a sound company with little debt that allows for financial flexibility in funding its operations and meeting its maturing obligations.

The smaller product sizes introduced by the company a few years ago have not ceased to appeal to the teeming retail consumers. In 2020, sales from the retail end of the market jumped by 34.6% from NGN4.3 billion to NGN5.8 billion. In fact, it produced the highest revenue growth of 7.4% over the past three years. On a 3-Year Compound Annual Growth Rate basis, the sale of molasses added 6%, total sugar sales gained 1.9%, while freight income fell by 27.8%. DANGSUGAR has a dividend yield of 7.4% and an earnings yield of 14.2%. Dividend Per Share (DPS) gained 38.2%.  DANGSUGAR would reap the benefits of its continuous investment in the future.

DANGSUGAR  is keeping tabs on its costs. Profits and profit margins have been relatively satisfactory. We expect the cost to drop further when it could source for all its raw materials locally and start enjoying economies of scale. Although COVID-19 has sent the Nigerian economy into a tailspin, DANGSUGAR’s profitability and financial stability are not questionable. DANGSUGAR is trading below our fair value estimate. So, we maintain a buy recommendation.

Valuation
Adjusted Earnings Power Value is NGN14.30 and earnings multiple averaged 7.4 times. DANGSUGAR trades at 1.7 times book value at the end of 2020. We put a share of the company between NGN18.73 and NGN23.00.

Financial Overview
The revenue of NGN214.3 billion posted in 2020 was 33% more than the revenue of the prior year.  The sale of sugar is the major contributor to revenue. Revenue from sugar sales gained 34.6% year-over-year to NGN212.2 billion in 2020. The sale of molasses (by-product of sugar extraction) and freight income produce about 2% of sales revenue. Despite accounting for 2.7% of total sugar sales, sale of retail sugar grew by 34.6% over the previous year. Gross profit gained NGN15.5 billion and gross profit margin increased by 1.3%. The operating profit margin of 20.7% surpassed 18.6% achieved a year ago. The Profit After Tax (PAT) was strengthened by 33.2% while the PAT margin was more or less flat at 13.9%.

Earnings Per Share (EPS) was NGN2.48 in 2020 compared to NGN1.86 of the year before. EPS has been on the rise since 2018 when it lost about 45% of its value.   A Dividend Per Share (DPS) of NGN1.52 was tantamount to a 38.2% increase. Furthermore, Return on Equity (RoE) was 23.9% up from 20.6% of the previous year. However, the Return on Assets (RoA) of 10.7% was worse by 0.8%. Shareholders’ fund and total assets leaped by 15.3% and 43.5% respectively. Sales Per Share of NGN17.86 was better than NGN13.42 of 2019 (2018: NGN12.53).

The total liabilities of DANGSUGAR  accounted for 55.1% of the total assets compared to 44.2% of the earlier period. However, total liabilities exceeded shareholders’ fund by 22.9%. DANGSUGAR is a low-geared company with a total debt of NGN1.2 billion at the end of the 2020 fiscal year. Total debt was just 0.4% of total assets and 1% of total equity. In addition, the company makes a lot of profit and cash to settle interest and repay the principal. We do not envisage any problem in the near future as the company is financially stable with a good cash flow position and working capital. Despite spending a substantial amount on capacity upgrades, DANGSUGAR generated a free cash flow of NGN33.6 billion up from NGN16.6 billion made a year ago. In other words, DANGSUGAR has NGN2.80 cash flow per share left after adjusting for capital expenditure of NGN2.24 per share.

Business Risk
The unfavourable exchange rate makes DANGSUGAR’s business unpredictable as it sources a lot of raw materials from suppliers abroad. The high cost of sales impacts profits negatively. Management has to strengthen its distribution network in order that the vibrant retail market can push up sales volume and revenue. If the effort to explore other markets in West Africa is successful, DANGSUGAR would diversify and improve its revenue going forward.

Recommendation: Buy

Earnings Chart of Dangote Sugar Refinery Plc

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