dangote sugar refinery plc - investment one sugar.pdf · 2018-05-31 · dangote sugar refinery plc...

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Company Coverage Monday, August 15, 2011

Dangote Sugar Refinery Plc

We initiate coverage on Dangote Sugar Refinery Plc and place a “HOLD” recommendation for a time frame of 12 months. We consider the shares of Dangote Sugar to still hold attractive upside and foresee an 18% rally from current price in a time frame of 12-months; we forecast a target price of N13.99 within the next 12 months. Company Summary Dangote Sugar is into the business of Sugar refinery and distribution. The company’s 1.44 million metric tonnes is the largest sugar refinery plant in the country and the second largest in the world, though capacity utilization has ranged between 60-70%.

The company refines raw sugar imported from Brazil to a vitamin A fortified white sugar, packaged and distributed in 50kg bags to leading blue chips companies like NBC, Nestle, Cadbury etc. as well as to a number of distributors. Valuation and Earnings Forecast We arrived at an intrinsic price of N12.10 for Dangote Sugar Plc., by employing a DCF valuation method and a relative valuation method. The DCF valuation metric is based on 5 years of forecasted financial statements, a terminal growth rate of 5% and a cost of equity of 15.6%. In arriving at the fair value of Dangote Sugar Plc, we assigned relative weights to the various valuation methods used.

We forecast a FY ’11 turnover of N97.2 billion by December 31st year end and fore see the company closing its 2011 books with a profit after tax of N14.8 billion. Our View Our recommendation is to “Hold” shares of Dangote Sugar Plc in a diversified portfolio of equities, and expect that the stock will return 18% in the next 12 months.

We have concerns on the ability of the company to sustain its growth target considering the difficult business situation in which the company operates, particularly with the galloping price of raw sugar. We note that the company is aware of the difficult business climate it operates and have taken adequate steps to sustain its growth target

Fair Value: NGN12.10 Market Capitalization: NGN137,760mn Shares Outstanding: 12,000mn Authorized Shares 12,000mn Bloomberg Quote: DANGSUGAR NL Reuters Quote: DANGSUGAR.LG Year-end: Dec. 31 Source: NSE data, GTB AM Research

Price Statistics 52wk High: NGN19.38 52wk Low: NGN10.06 Year High: NGN16.20 Year Low: NGN10.06 Year-to-Date Return Ψ: -25.8% Source: NSE data, GTB AM Research. Ψ Return as at time of report

Balance Sheet (N’bn) 2010 2009 % Chg Total Assets: 62.29 77.41 -19.5 Total Liabilities: 21.39 38.80 -44.8 Net-worth: 40.89 38.61 5.90 Source: NSE data, GTB AM Research

Profit and Loss Statement (N’bn) 2010 2009 % Chg Turnover: 89.98 82.39 9.2 PBT: 16.15 19.59 17.6 PAT: 11.28 13.16 -14.3 Source: NSE data, GTB AM Research

2011e 2010 2009

EPS (NGN): 1.23 0.94 1.10 DPS (NGN): 0.80 0.60 1.00 P/E (x): 10x 13x 11x Source: NSE data, GTB AM Research

12 month target price: NGN13.99 Investment Case

Pass the Sugar

Recommendation: HOLD

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Figure 1: Process step to the production of Sugar

GTB Asset Management Company Research Dangote Sugar Plc 15th August, 2011

Dangote Sugar Refineries a company spun off from Dangote Industries Ltd in January 2006 via a scheme of arrangement which saw the parent company transfer all the assets, liabilities and

undertakings due to the sugar division of the company to Dangote Sugar Plc.

The company is by far the biggest sugar refinery company in Nigeria and the second largest in the world with its 1.44 million metric tonne capacity plant; an expansion from the initial 600,00 metric tonne that the company began operation with. The company imports raw sugar from Brazil and refines it to a Vitamin A fortified white sugar.

The operation of Dangote Sugar is broadly divided into:

a. The Sugar Refining process and; b. The Marketing and Distribution Unit: The raw sugar

produced in (a) abovecomes out as a white granulated sugar that is packaged in 50kg bags and distributed to

customers that are classified as: I. Large industrial users: This group accounts

for 18% of the company sales, the group is made up of leading blue chip companies like Nestle, Seven-up, NBC and Cadbury Nigeria Plc.

II. Distributors: Accounting for 82% of the company’s turnover, the group is made up of small industrial users and retailers

Dangote Sugar controls more than 80% of the Sugar market in Nigeria. In a bid to still acquire more market share, the company has recently perfected strategies to play in the lower end of the market in a project themed “retail package project” which commences from the third quarter of the year, this would see products of Dangote Sugar been packaged in 1kg, 500g and 250g packs.

Company Description:

Raw Sugar Melting Taloclarification Decolorisation

Crystallization Separation and Drying

Sugar Recovery Sugar Conditioning

Warm water Lime and Phosphoric acid Decolourizer

Heat Separation Liquor Raw Sugar for packaging

Dangote Sugar is by far the biggest sugar refinery company in Nigeria and the second largest in the world with its 1.44 million metric tonne capacity plant; an expansion from the initial 600,00 metric tonnes that the company began operation with.

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The price of sugar has persistently been on the increase since the beginning of the year, though it slightly dipped between April and May, it has however maintained an upward trend all through the course of the year, roaring to a new high of $31 by the end of July.

It’s been alluded that the rise in sugar prices is due to:

I. Unfavorable weather conditions: The adverse weather condition in India led to a number of crop failure in the region, as a result India- the largest consumer of sugar in the world had to depend on importation of the commodity to fill its supply gap; this inevitably affected the global supply of sugar in the world.

II. Sugar as an alternative source of energy: The increased

demand for alternative energy sources has put pressure on commodities like grain, sugar etc, that are seen as raw materials for bio fuels in the production of clean energy.

Figure 2: Price of raw sugar in the last 18months

The persistent rise in sugar prices has not favoured the operations of Dangote Sugar Plc as it means a rise in the company’s cost of production i.e. via increase in raw materials cost. This has slightly dampened our revenue forecast for the company, as we expect that the company’s gross profit will not grow in the same margin as the top line.

We admit that Dangote Sugar is making concerted efforts to improve its overall performance. We view their decision to play in the retail market as a direct reaction to improving its margins. The company has also acquired additional haulage trucks to aid with the nationwide distribution of its product.

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Sugar Price

Sugar prices have persistently been on the increase throughout the year, roaring to a new high of $31 by the end of July.

The Persistent rise in Sugar prices has contributed in dampening our revenue forecast for the company


Operational Climate:

Source: Bloomberg, GTBAM Research estimates

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For FY’10, the company waded through a difficult business climate to post an N89.9 billion turnover

For FY 2011, we expect the company’s revenue growth to be driven by an 8% increase in turnover, due largely to an increased demand for sugar by major manufacturing companies in the country. Our view is supported by Dangote Sugar’s delivery capabilities, though we admit that the company’s current business climate is somewhat harsh as a result of the persistent rise in its raw material (sugar), however we still see the company closing FY’11 with a turnover of N97.1 billion; a N7.2 billion increase from last year’s figure.

For FY’10, the company waded through a difficult business climate to post N89.9 billion turnover; which represents a 9% increase in the top line. The company however recorded a decline in its profit after tax, which lowered by N1.9 billion from the N13.1 billion recorded in 2009, to N11.2 billion in 2010. The company attributed the decline in profitability to a direct result of the increased cost of doing business and reduced level of activity spurred by the high cost of sugar.

Figure 3: Dangote Sugar’s Turnover and PAT

We foresee a CAGR growth of 5% in the company’s turnover for the next two years to over a N100 billion by 2012 largely boosted by increased capacity utilization; we expect this to trickle to the bottom line and project a PAT growth of 31% in 2011.

We anticipate that the company’s PAT will close at N14.7 billion for FY ’11; in arriving at this figure we have assumed a 30% tax on the company’s PBT, this is consistent with what the company has paid in the last three years.

Figure 3 shows how the company’s Profit after tax has grown in relation to its turnover

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Financial Highlights:

Source: GTBAM Research estimates, Company annual reports

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Cost of Sales accounts for 90% of the total cost item in the Company’s P&L statement

The cost efficiency achieved in the distribution of the company’s goods could be traced to the 250 trucks the company acquired, complementing the transport service rendered by Dangote Transports

Figure 3: FY 2010 Cost breakdown and Historic Gross Margin

We note that the company is aware of its struggle to sustain its margins at current levels; hence the management of Dangote Sugar Plc has put in place a more cost containing system to improve margins. A classic example is in FY’10, the company’s distribution and administrative expense improved from the N3.36 billion that was spent in 2009 to N1.93 billion in 2010. This saved the company N1.43 billion regardless of the increased turnover they achieved. We see the distribution and administrative expense in FY'11 not exceeding N3 billion and still short of the 2009 figures.

The cost efficiency achieved in the distribution of the company’s goods could be traced to the 250 trucks the company acquired, complementing the transport service rendered by Dangote Transports.

In 2009, Dangote Sugar earned N3.7 billion on other incomes, principally from interest income, FY’ 10 however saw a sharp decline in interest income dropping to N1.4 billion; this is understandably due to the sharp drop in the company’s bank and cash balances which declined from N22.8 billion in 2009 to N6.2 billion in 2010. We foresee a mild rebound in the company’s interest income rising to over N3 billion in FY ’11.

90%

2%2% 6%

Cost of sales Distri. & admin. expensesDepreciation Taxation

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Gross Profit


Source: GTBAM Research estimates

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The valuation metrics used in determining the one year target price of Dangote Sugar shares of N13.99 was derived using a combination of DCF, weighted at 70 percent and a relative valuation technique weighted at 30%. The DCF valuation metric is based on 5 years of forecasted financial statements, a terminal growth rate of 5 percent and a cost of equity 15.6 percent. Adjusted Beta per Bloomberg was 0.859.

To form the basis for our valuation we are using the underlying assumption that the company would enjoy a turnover growth of 8%.

Our DCF valuation model is a function of the following variables:

Future Net Income from the company which is based on our revenue expectations adjusting for our projected expenses.

The earnings estimation period extends till 2015 Future changes in working capital The cost of equity using CAPM of 15.6% The long term expected growth rate for the company

We have assumed a growth rate to perpetuity of 5% in estimating the company's future earnings' and adopted a conservative approach in projecting the company’s growth turnover; we believe the company is in a good position to meet our estimates.

From the forecasted results we calculated the free cash flows that we used for our valuation.

Figure 5: Projected Cash Flow Estimates

14.717.9 18.5

22.423.9

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Free Cash Flow

The DCF valuation metric is based on 5 years of forecasted financial statements, a terminal growth rate of 5 percent and a cost of equity 15.6 percent

Our DCF model used the following assumptions:

MAJOR ASSUMPTIONS

Shares Outstanding (‘000) 12,000,000 Cost of Equity 15.6% Terminal growth 5% Intrinsic Equity Value Per Share

N12.10


Valuation Summary:


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Sensitivity We conducted a sensitivity analysis on the variables that impact more on our price estimate. The variables are cost of equity and the terminal growth rate. The most probable scenarios in our analysis are shown below:

Figure 4: Sensitivity Analysis

Our sensitivity analysis responds more to the discount factor; e.g. if we apply a discount rate of 14% at a terminal growth rate of 5%, we would expect that the DCF method will yield N13.7 as the intrinsic price for Dangote Sugar shares. Our DCF model yielded a price of N11.7.

Relative Valuation

For our relative valuation methods, we considered the P/E and P/S multiples of a basket of similar food and beverage stock companies on a trailing twelve month basis. We took the industry's trailing twelve month's P/E to arrive at Dangote Sugar's value per share. We implemented similar calculation method for the P/S.

The Industry's average P/E and P/S multiples used in our

calculations are 15x and 1.3x respectively. The value per share arrived at using these multiples are N13.6 and N9.80 respectively.

An average price of N11.72 was arrived at from our relative valuation models.

The discount factor used remains a sensitive parameter in determining the intrinsic price of Dangote Sugar

The Industry's average P/E and P/S multiples used in our calculations are 15x and 1.3x respectively



Disc. Factor 12% 14% 16% 18% 20% 22%

Growth Rate

5.0% 16.3 13.7 11.8 10.3 9.1 8.2

5.5% 16.4 13.7 11.8 10.3 9.1 8.2

6.0% 16.4 13.8 11.8 10.3 9.2 8.2

6.5% 16.5 13.8 11.9 10.4 9.2 8.2

7.0% 16.5 13.9 11.9 10.4 9.2 8.2

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Ratios 2006 2007 2008 2009 2010 2011e 2012e

EPS 167 215 182 110 94 123 145

DPS 115 170 120 100 60 0.80 0.94 Proposed Dividend 0 5,000,000 14,400,000 12,000,000 7,200,000 9,610,595 11,307,871 Payout Ratio 0.00% 23.28% 65.84% 91.01% 63.82% 65.00% 65.00% Retention Ratio 100.00% 76.72% 34.16% 8.99% 36.18% 35.00% 35.00%


Fig 7: Balance Sheet Ratios

Weighted Average Valuation

In arriving at the fair value of Dangote Sugar Plc, we assigned

relative weights to the various valuation methods. We assigned a lower weight of 30% to the relative valuation methodologies used; we opted to assign lower weights to the relative method of valuation due to how market sentiments skew the P/E and P/S ratios.

A weight of 70% was assigned to the DCF method, as this method examines the fundamentals of the company to determine its future cash earnings.

We arrived at a weighted average fair value of N12.10 per share, hence place a "HOLD" recommendation.

Figure 6: Valuations method employed

Valuation Method Value (NGN) Weight

Discounted cash flow 11.72 70%

Price to earnings multiple 13.64 25%

Price to sales multiple 9.80 5%

Weighted average fair value 12.10

At an intrinsic price of N12.10, we estimate that our price target for the stock within the next 12 months is N13.99; hence an 18% upside from current price is attainable.

We arrived at a weighted average fair value of N12.10 per share, hence place a "HOLD" recommendation

At an intrinsic price of N12.10, we estimate that our price target for the stock within the next 12 months is N13.99

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The increasing demand for sugar in the Food, manufacturing and consumer goods sectors in the country coupled with the growing number of eateries been opened in the country and the high growth in population and urbanization favours the sugar industry in Nigeria. Though the country’s sugar industry appears to be over supplied; with an industry installed capacity of 2.1 million MT far exceeding the current market demand of 1.5 million MT. However, all of the players in the industry cannot match up to the volume demanded due to low capacity utilization. Current industry output is projected to be c.1.0 million MT. Dangote sugar has a near monopoly of the industry with its 1.4 million MT per annum installed capacity; they are distantly followed by BUA sugar refinery with a 720,000 MT per annum installed capacity. With the proposed entrants of the new players Dangote Sugar is set to lose a sizeable market share in an industry that is already over supplied. Companies like Flour Mills of Nigeria Plc, Olam Int’l Ltd and Josepdam group of companies have indicated interest to play in this market. Our valuation of the future earnings of Dangote Sugar was slightly dampened as a result of the competition that we foresee in the sector. The share price of Dangote Sugar has struggled to keep afloat, firming up by 6% in 2010 and shedding over 25% year-to-date in 2011, while we admit that at current price the stock is under priced, we also feel strongly that the price of N19-N21 it sold at between June-July last year was rather overvalued and a correction was only imminent. Figure 8 shows how the price of Dangote Sugar Plc has compared to the broad NSE index as well as the tracker for the Food & Beverage sector in 2011.

Figure 8: Peer Comparison Flour Mills Vs NSE ASI

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ASI F&B Index Dang Sugar

Currently, Dangote sugar has a near monopoly of the industry with its 1.4 million MT per annum installed capacity

The share price of Dangote Sugar has struggled to keep afloat, firming up by 6% in 2010 and shedding 25% year-to-date


Peer Analysis

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Some of the risks we see to our valuations and outlook on the company are:

1. Depreciation of the Naira

2. Steep rise or fall in the price of raw sugar

3. Lower demand of sugar in the next two years

4. Likely entrants of new players

5. Unsteady Government policies

Our recommendation is to “Hold” shares of Dangote Sugar Plc in a diversified portfolio of equities, and expect that the stock will return 18% in the next 12 months.

We have concerns on the ability of the company to sustain its growth target considering the difficult business situation in which the company operates, particularly with the galloping price of raw sugar. Hence we have projected a FY’11 PAT of N14.7 billion a marginal increase of 8% from 2010 numbers.

From our point of view, Dangote Sugar should explore to the fullest its export potentials taking advantage of government’s current incentives to Nigerian exporters and the friendly import policies of ECOWAS countries, this move will be a sure bet in improving the company’s bottom-line.

We are positive on the long term business prospects of the company and are confident about its financial performance; hence at a current market price of N11.86 and an expected target price of N13.99, we reiterate our “HOLD” mandate on shares of Dangote Sugar Plc with a medium to long term investment horizon.

We have concerns on the ability of the company to sustain its growth target considering the difficult business situation in which the company operates, particularly with the galloping price of raw sugar

Risk to our Target Price

Outlook:

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2008 2009 2010 2011e 2012e

Balance-Sheet Forecasts (N’000) Fixed Assets 13,755,535 16,696,409 15,742,539 16,743,911 15,724,717 Investments 874,255 968,125 972,337 1,892,790 2,044,213 Stocks 9,257,767 14,094,044 15,960,376 14,559,923 15,724,717 Trade debtors 5,402,003 5,946,265 5,958,702 7,491,080 8,090,367 Other debtors and prepayments 3,504,002 790,347 1,370,879 2,183,988 2,358,707 Amount due from related companies 5,532,716 16,040,286 16,048,892 14,559,923 15,724,717 Bank and cash balances 19,847,111 22,878,380 6,240,257 10,919,942 11,793,537 Current Assets 43,543,599 59,749,322 45,579,106 49,714,856 53,692,045 Total Assets 58,173,389 77,413,856 62,293,982 72,799,614 78,623,583 Trade creditors 8,999,918 14,003,672 9,794,006 11,336,222 12,243,119 Bank overdrafts 12,332 0 0 0 0 Other creditors 5,130,581 3,586,800 2,283,300 3,639,981 3,931,179 Amount due to related companies 797,244 1,037,866 2,188,240 990,075 1,069,281 Taxation 9,311,111 15,117,202 4,980,105 7,279,961 7,862,358 Current Liabilities 24,251,186 33,745,540 19,245,651 23,246,238 25,105,937 Net Current Assets 19,292,413 26,003,782 26,333,455 26,468,618 28,586,108 Total Assets less Current Liabilities 33,922,203 43,668,316 43,048,331 49,553,376 53,517,646 Deferred taxation 907,815 1,452,929 1,661,572 1,943,750 2,099,250 Employees gratuity 387,190 602,590 491,722 575,117 621,126 Net Assets 32,627,198 41,612,797 40,895,037 47,034,509 50,797,270 Total Equity (Shareholders' Funds) 32,627,198 41,612,797 40,895,037 47,034,509 50,797,270 Total Liabilities 25,546,191 35,801,059 21,398,945 25,765,105 27,826,313

Profit and Loss Forecasts (N’000)

Turnover 80,671,383 82,395,712 89,980,499 97,178,939 104,953,254 Profit Before Tax 30,151,378 19,586,932 16,146,930 21,122,186 24,852,464 Profit After Tax 21,871,047 13,185,599 11,282,240 14,785,530 17,396,725

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Disclaimer

This publication is for general information only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication.

The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by GT Asset Management to be reliable, are not necessarily all-

inclusive and are not guaranteed as to accuracy, completeness or otherwise. Opinions expressed are our own unless otherwise stated. GT Asset Management and its affiliates may trade for their own accounts, the company may decide to take a long or short position on any securities, and/or may take the opposite side of public orders.

Past performance is no guarantee of future results. The inclusion of past performance figures is for illustrative purposes only. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. This is not in any sense a solicitation or offer of the purchase or sale of securities. Neither GT Asset Management nor any officer or employee of GT Asset Management accepts any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. Investments in general and, equities, in particular, involve numerous risks, including, among others, market risk, counterparty default risk and liquidity risk.

The ratings and company profile assessments reflect the opinion of the individual analyst and are subject to change at any time.

This material has been issued by GTB AM, which is regulated by the Securities and Exchange Commission. Further information on any security mentioned herein may be obtained by emailing: [email protected]

Address: Investment Management & Research

GTB Asset Management Limited 37, Karimu Kotun Street Victoria Island Lagos Nigeria email: [email protected] visit us at : www.gtbasset.com

dangote sugar refinery plc - investment one sugar.pdf · 2018-05-31 · dangote sugar refinery plc...

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