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Dangote Sugar EPS growth driven by the stellar growth in sales y/y

Dangote Sugar Refinery Plc (DANGSUGAR) released its Q2-22 unaudited financials last week Friday, reporting standalone EPS of NGN0.94 (NGN0.35); bringing H1-22 EPS to NGN1.67 (H1-21: NGN1.04). The EPS growth was driven by the stellar growth in sales (+41.0% y/y) in the period.

DANGSUGAR’s revenue increased markedly by 41.0% y/y in Q2-22, supported by stellar increases across all its business segments – 50kg Sugar (+39.4% y/y | 96.1% of revenue), Retail sugar (+63.4% y/y | 2.0% of revenue), Molasses (+44.3% y/y | 0.7% of revenue) and Freight income (+268.4% y/y | 1.2% of revenue). Across its geographical footprint, revenue from the Lagos (+34.6% y/y) and Northern (+51.5% y/y) regions made up for the lags in the Western (-35.7% y/y) and Eastern (-486.4% y/y) regions. On a q/q basis, revenue declined by 3.6% y/y, driven by lower 50kg Sugar (-4.8% y/y) sales in the quarter.

Gross margin (+493bps) expanded to 21.3%, as the faster growth in revenue (+41.0% y/y) offset the increased cost of sales (+32.7% y/y) balance. The higher costs highlight the effects of the increase in key raw materials costs amid inflationary pressures and FX illiquidity issues. Consequently, EBITDA (+466bps) and EBIT (+701bps) margins increased to 20.7% and 18.8% in the quarter, respectively, further buoyed by a 16.1% decline in operating expenses.

Net finance costs (+164.1% y/y) remained elevated, driven by a 174.2% y/y increase in finance costs, with finance income also growing significantly by 201.1% y/y in the period. We attribute the significant rise in finance costs to the exchange rate losses DANGSUGAR recorded in the period. For context, exchange rate loss as of HY-22 settled at NGN4.92 billion (HY-21: NGN1.99 billion).

Overall, pre-tax profit grew by 137.0% y/y to NGN16.13 billion in Q2-22. Following a tax expense of NGN4.76 billion, profit after tax (+164.3% y/y) printed NGN11.37 billion in Q1-22.

Comment: DANGSUGAR’s Q2-22 performance beat our expectations as we expected FX illiquidity, inflationary pressures and structural inefficiencies would inhibit margins and drag earnings. We like that the company could withstand the constraints mentioned above and put out a strong performance. Considering the resilience shown in the first half of the year, we are more optimistic about DANGSUGAR’s performance for 2022FY. Our estimates are under review.