As of 9M-22, DANGSUGAR posted solid numbers despite elevated cost pressures, specifically from its key input (raw sugar), and the challenging business environment.
Cordros Capital avers that the company could significantly grow its revenue and maintain margin expansions despite the aforementioned headwinds. Considering the resilience shown so far in the year, we expect DANGSUGAR to maintain the pace of growth in Q4-22 and end 2022FY positively. 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. Balancing all factors, we project an EPS growth of 39.5% y/y in 2022E, driven by our expectations of a higher revenue outturn. Following the revisions to our forecasts, we have raised our price target to NGN21.61/s (previously: NGN17.88/s) and upgraded our rating to “BUY”. We estimate a DPS of NGN1.58 for 2022E, which would translate to a dividend yield of 9.7% based on the last closing price of NGN16.30/s (10 November 2022).
Higher Prices Support Revenue Growth: DANGSUGAR recorded revenue growth of 47.5% y/y in 9M-22, driven primarily by substantial increases in its 50kg Sugar (+46.7% y/y | 96.9% of revenue) business segment, amid a favourable price/volume mix. Specifically, DANGSUGAR’s net selling price increased by 40.9% y/y in the period, with total sales volume inching up by 4.7% y/y. We believe the price increase was instituted to offset the impact of inflationary pressures, FX challenges, and the rise in raw materials prices (specifically raw sugar). For 2022FY, we raise our topline growth projections to 44.2% y/y (prev.: 36.0% y/y), majorly driven by sustained price increases through the year, with the company expected to pass down higher costs to consumers to protect margins. However, our estimates still reflect a minimal volume increase, factoring in the possibility of a demand dip from price-sensitive consumers. Over the medium term (2022 – 2026E), we expect revenue to grow at a CAGR of 7.8%.
Higher Revenue to Mask Costs and Support Profitability: We expect cost pressures to remain prevalent in Q4-22, driven by a sustained increase in raw sugar prices, FX constraints and the pass-through impacts of the highly inflationary environment on energy costs and other inputs. Nonetheless, we expect faster growth in sales to protect and support margin expansion. Pertinently, we project a 150bps y/y increase in gross margin to 19.7%. Based on the preceding, we expect EBITDA margin to grow by 140bps to 18.9% in 2022E, amid a 14.8% y/y anticipated increase in operating expenses. Consequently, we forecast EPS of NGN2.87/s in 2022E, implying a 57.7% y/y growth compared to the decline in 2021FY (-25.9% y/y). Our EPS forecast tracks ahead of Bloomberg’s consensus estimate of NGN2.71 for 2022FY by 5.9%.
Valuation: Following the revisions to our forecasts, Cordros Capital Research have raised its price target to NGN21.53/s, implying a 32.1% potential upside and a total return of 41.8% after factoring in our expected dividend yield of 9.7%. Our TP points to a 2022E P/E and EV/EBITDA of 5.7x and 1.1x, respectively, a discount to MEA peers of 7.6x and 6.2x, respectively.
