Dangote Sugar: Experts predict potential upside of 11.2% to current market price

Following the release of its impressive first half results for 2017, analysts at Cardinalstone Research have updated its target price (TP) to N14.45 (previous: N9.78) and disclosed that its price target implies a potential upside of 11.2 per cent to current market price.

Dangote Sugar Refinery, in its second quarter of 2017 results, reported an impressive earnings growth of 159.4 per cent despite a 0.6 per cent decline in turnover. This was mainly the result of relatively lower production costs as the company obtained more foreign exchange for its imports (majorly raw sugar) at the official rate during the quarter. The experts highlighted that the exchange rate at the oficial market was at a 16 per cent discount to the parallel market. Owing to this, the company’s gross margin expanded by 1903bps quarter on quarter to 32 per cent in the second quarter and largely led to the 291bps year on year expansion in gross margin, as well as the 131.7 per cent year in the second quarter and largely led to the 291bps year on year expansion in gross margin, as well as the 131.7 per cent year on year growth in the first half 2017 after-tax earnings.

“With no major threat to the forex outlook in the near term, as well as the gradual accretion in forex reserves, we believe the apex bank can sustain forex supply in the official market in the second half of 2017, which would largely drive gross margin expansion and earnings growth in the full year,” they opined. The analysts expected the improvement in forex supply to offset the negative impact of sustained energy challenges arising from upsurge in the price of low pour fuel oil (LPFO), noting that energy contributes about 7 per cent to the group’s cost of sales.

According to the experts, “We contnue to reiterate that significant value in the stock will be unlocked when the company begins to produce refined sugar efficiency from locally harvested cane sugar, eliminating its exposure to the volatility in forex and international raw sugar prices. “We raise our target price to N14.45 and retain our HOLD recommendation given the significant outperformance of Dangote Sugar’s first half earnings to our previous expectation (+81.8 per cent deviation). We have revised our forecasts for full year 2017. We raise our full year turnover projection by 1.7 per cent to N231.2bn, which implies a 36.2 per cent year on year growth from full year 2016. Our full year turnover projection is mainly driven by higher pricing as we expect a 4.7 per cent year no year contraction in sales volume. “However, relative to half-year 2017, we expect a mild recovery in sales volume in the second half of 2017 as we envisage further cuts to refined sugar prices given the moderation in productions costs.” Following improved macroeconomic conditions and forex supply, the analysts noted an uptick in production for some of its industrial consumers, which also is positive for volume in the second half of 2017.

The analysts therefore projected a 134.1 per cent growth in full year 2017 earnings to N33.7bn (full year 2016: N14.4bn) and raised their target price on Dangote Sugar to N14.45 (previous, N9.78).