Recently published nine months results of Dangote Sugar at the floor of the Nigerian Stock Exchange (NSE) have shown that the company’s EPS declined by 12.1% y/y.
The earnings underperformance was mainly due to the unrelenting pressure stemming from production (+2.0% y/y) and operating (1.6% y/y) costs, both of which offset the moderate revenue (+0.6% y/y) growth.
Meanwhile, Q3-19 EPS only declined by a tamer 6.5% to NGN0.31, supported by stronger revenue (+13.4% y/y) and lower tax expense (-4.3% y/y).
In what looks like a deviation from the performance in the prior quarter, the company reported strong revenue growth (+13.4% y/y) in Q3-19.
In a review sent to Business Hilights by Codros Capital group, they said “This, to our mind, was supported by the blend of better volume outturn and higher average prices.
“While the global supply glut continues to exert downward pressure on global sugar prices (-2.5% y/y) – which should have ordinarily induced illegal importation of cheaper sugar –, we believe the impact of Nigeria’s border closure has paved way for the company to raise its average selling prices, while also pushing higher volumes given the perceived decline in domestic supply of refined sugar.
“For emphasis, the impressive topline performance mirror improvements across the sales of 50kg (+15.2% y/y), retail (+11.1% y/y), and molasses (+28.6% y/y) bags. To underscore the scale of things, the achieved revenue growth in Q3-19 completely masked the weaknesses over the first half of the year. Thus, 9M-19 topline grew by 0.6% y/y.
“Q3-19 COGS (+12.6% y/y) growth trailed revenue growth, with cost-to-sales ratio declining by 11bps y/y to 78.7%.
“Against that backdrop, gross profit was 16.4% higher relative to the prior year, with related margin marginally improving to 21.3% vs. 20.2% in the corresponding period of last year. Meanwhile, the improved Q3 performance was not enough to salvage the 9M-19 gross margin, owing to the freight cost-induced pressure recorded over H1-19. To be clear, gross margin declined by 1.1ppts to 24.7% over 9M-19, as COGS grew faster than revenue over the same period.
“Further down, gains from other income (+30.0% y/y) were offset by the significant expansion in OPEX (+21.9% y/y). Nonetheless, EBIT grew by 14.4% y/y, but EBIT margin moderated by 4bps to 15.2%, as OPEX grew at a face pace relative to revenue. Elsewhere, the combination of lower gain from fair value adjustment (-66.4% y/y) and decline in other investment income (-98.9% y/y) on a 46.2% y/y decline in cash balance, underpinned declines in PBT (-5.8% y/y) and PAT (-6.7% y/y).
In Codros Capital’s passing comments, the capital market watchdog averred that Dangote Sugar’s performance in Q3 was indeed an improvement from the last quarter. However, the still negative growth in PAT remains a key concern, in our view. Therefore, we expect a reaction to the result will be neutral.”
