Dangote Sugar Refinery H1-22 Performance Review

Dangote Sugar Refinery PLC (DANGSUGAR) recently released its H1-22 financial performance, showing top line and bottom line growth of 40.5% y/y and 60.6% y/y, respectively. In this report, we analysed the company’s performance and update our outlook for the rest of the year.

Top line: revenue of the company grew from N132 billion recorded in H1-21 to N185.5 billion in H1-22, representing an impressive 40.5% y/y growth in revenue. We highlight that the y/y revenue growth is higher than the cumulative annual growth rate (CARG) of 10.2% recorded over the past 5 years. The increased revenue was due to a combination of volume growth from its refinery and increase in prices of products to the market. Its important to note that over 90% of the company’s revenue is derived from the sale of its 50kg bag of sugar. Revenue from the sale of 50kg bag of sugar rose from N128.4 billion recorded in H1-21 to N179.2 billion in H1-22; this represents an increase of 39.6% in the price of a 50kg bag of sugar.

Bottom line: the company’s profit after tax (PAT) grew by 60.6% y/y to N20.2 billion in H1-22. We highlight that the growth in PAT is also higher than the CAGR of 8.9% recorded over the past 5 years. The growth in the company’s PAT was supported by the growth in revenue as well as a 133.8% growth in the company’s other income, a marginal -6.4% drop in the company’s administrative expenses and a 286.1% growth in the company’s finance income.

Margins: the company recorded a gross margin of 20.9% in H1-22, this is 80bps lower than the 21.7% gross margin recorded in H1-21 and 310bps below than the 5-year average gross margin of 24%. The drop in gross margin was due to rising cost of sales. Importantly, the company’s cost of sales grew from N103.4 billion recorded in H1-21 to N146.6 billion in H1-22. This represents a growth rate of 41.9%, higher than the revenue growth of 40.5%. We attribute the rise in cost of sales to the rising cost of raw sugar, which is the major raw material in the production of refined sugar. Raw material cost alone increased from N83.8 billion recorded in H1-21 to N121.3 billion in H1-22, representing a 44.8% growth y/y.

It’s important to note that Brazil is the world’s leading producer and exporter of raw sugar, and events occurring within brazil have a direct effect on the worlds market. Dangote Sugar Refinery imports a bulk of its raw sugar from Brazil, and due to rising energy cost worsened by the Russia-Ukraine conflict, production of raw sugar from sugar cane has been shifted in favor of ethanol as a substitute for engine fuel. This, and other factors have led to higher global price of raw sugar. Also, the impact of the Naira devaluation against major currencies at the official and parallel market have increased the cost of importation of raw sugar into the country.

However, despite the marginal drop in the company’s gross margin, the company recorded an improvement in its net profit margin from 9.6% recorded in H1-21 to 10.9% recorded in H1-22. The improvement in net margin was due to growth in other income, finance income and an improvement in cost management as the company’s total operating expenses dropped by 9.3% y/y to N4.6 billion in H1-22.

Outlook: we expect the global price for raw sugar to remain elevated for the rest of the year as the factors driving the price of raw sugar remain intact. We also note that the Naira continues to drop against major currencies, and the cost of importation of raw sugar into Nigeria will remain high. Though, Dangote Sugar Refinery is one of the few companies allowed to source FX from the official window to import raw sugar into the country, this will only be a slight advantage to the company. Based on these, we expect a higher cost of sales for Dangote Sugar Refinery by FY-22 on a y/y basis.

However, with a market penetration of c.60%, we expect Dangote Sugar Refinery to be able to pass on some of these costs on to its customers. We highlight that historically, Dangote Sugar Refinery has maintained a lower-than-average gross margin in times of increased cost of raw materials, so we anticipate a gross margin of c.20% for FY-22. Consequently, we forecast a revenue of N390.6 billion for FY-22, this is 41.5% higher than the N276.1 billion recorded in FY-21. We expect that the revenue growth will be supported by price increase and volume growth from its refinery operations. Volume growth will be supported by raw sugar imports as well as raw sugar production from various sites were Dangote Sugar Refinery’s backward integration projects (BIP) are located. It should be recalled that based on the revised BIP plan, Dangote Sugar Refinery hopes to generate an output of 550,000 MT/PA of refined sugar from locally grown sugarcane by the year 2024.