Dangote Sugar: Rising Purchasing Index Boosts Revenue | Independent Newspapers Limited
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Dangote Sugar: Rising Purchasing Index Boosts Revenue

Posted: Aug 12, 2016 at 4:32 am   /   by   /   comments (0)

Kirk Leigh

Dangote Sugar, a major player in the food and beverages sub-sector of the manufacturing sector, is experiencing positive growth despite the current economic slowdown.

The growth is projected to continue on the back of growing revenues and a likely change in the direction of the economy.

Revenues sprang 40 percent to N70.5 billion from N51.12 billion to raise expectations that the company, which produces granulated sugar, could exceed full year estimates of N123.33 billion despite the bite in the economy.

The revenue rise of the company founded by Africa’s richest man lends credence to forecast that manufacturing purchasing managers’ index (PMI) is set to rise in the coming months in the face of an economic trough.

Specifically, the Central Bank of Nigeria (CBN)’s and FBN had forecast a rise in PMI. While FBN forecasts a rise to 51.5 from 51 the CBN projects a rise to 45.6 from 44.1. A rise of the PMI, a lagging indicator, suggests a rise in the economy from manufacturers’ point of view.

Despite the jump in revenue, Dangote Sugar only managed a 9.6 percent rise in gross profit due to a heavy cost of sales, spending as much as N47 out of every naira to achieve the revenue for the period. Cost of sales rose 47.2 percent to N56.56 billion from N38.42 billion. The rising cost of sales is due mostly to the rising cost of doing business as reflected by rising inflation, which started this year at 9.62 percent but was 12.77 percent by March, according to CBN figures.

In the period under review, selling and distribution costs sprang up by almost half to N488.23 billion from N273.5 billion but the company still managed an 11.5 percent improvement in operating profit to N11.32 billion from N10.16 billion. The rise, however, couldn’t help the drop in pre-tax profit margin, which sank to 15.83 percent from 19.2 percent. This again is despite a 13.8 percent rise in pre-tax profit to N11.16 billion from N10.16 billion.

A slightly lower tax liability for the period helped net profit to a 17 percent improvement in the period to N7.38 billion from N6.31 billion. But it couldn’t save the company from a drop in net profit margin relative to the equivalent period in 2015 as it fell to 10.5 percent from 12.4 percent.

Investors demand for the stock was not enough on Tuesday, August 9, 2016 to push it beyond the N6.69 mark, which is a 4.15 percent setback over the value of the stock a day before when it sold for N6.98.

But analysts are bullish of the stock’s performance; the Financial Times (FT), which tracks analysts’ opinion on stock performance on the Nigerian Stock Exchange (NSE), say that “as of August 5, 2016, the consensus forecast amongst 8 polled investment analysts covering Dangote Sugar Refinery advises investors to hold their position in the company”. According to the FT, this has been the consensus forecast since the sentiment of investment analysts deteriorated on July 26, 2016. The previous consensus forecast advised that Dangote Sugar Refinery would outperform the market.

The London based financial newspaper said further that “the seven analysts offering 12-month price targets for Dangote Sugar Refinery have a median target of N6.13, with a high estimate of N9.13 and a low estimate of N3.90. The median estimate represents a -12.18% decrease from the last price of 6.98”.

This means there is yet scope for growth in the stock of the company, which “refines, packages, and sells granulated raw white sugar domestically and regionally in Africa”. Of the sector where Dangote Sugar operates BMI Research says though growth will be depressed in 2016, 2017 holds promise of a northbound trajectory.

“Nigeria’s food and drink industry will contract over 2016 due to an acute decline in per capita food spending. Over our forecast period, economically priced products will perform well as consumers’ trade down price points to mitigate rising food costs. From 2017, growth will return to positive territory and inflation will abate, relieving pressure on consumer purchasing power.”

One upside for the company is that sugar is an inelastic consumable, at least at the retail level where consumers are unlikely to cut spending or increase spending whether there is a boom or bust. This characteristic may well be the clincher as far as meeting the company’s drive to hit revenue and profit targets for the full year.