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Below is an analysis of Dangote Sugar by Meristem Securities. A copy of the analysis is also attached. Analysis of other companies can also be found on Meristem’s site.
UPDATES ON DANGOTE SUGAR REFINERY PLC
EXECUTIVE SUMMARY AND INVESTMENT RATIONALE
Dangote Sugar Refinery Plc is a market leader in the Nigerian Sugar industry with operations spanning over 7 years. The company imports and refines raw sugar using an in-house developed technology to refine and package fortified and unfortified Vitamin A white sugar. Dangote Sugar has an installed capacity of 1.44million metric tons of a world class facility designed by Tate & Lyle (the largest sugar refiner in Europe), for the production of refined sugar in Nigeria.
The company currently operates at near 75 per cent of its installed capacity and controls about 70 per cent of the Nigerian sugar market (by sales revenue). Concerted strategic efforts are being made to grow revenue base by expansion to North and West African regions. This strategic move will expectedly enhance optimization of installed capacity and subsequently increase current production frontier by about 79 per cent in the next couple of years to 2.5M metric tons p.a.
Dangote Sugar has recorded impressive performance in the last 3 quarters of 2007 with an average growth of 75.9 per cent and 35.1 per cent in profit before tax (PBT) and profit after tax (PAT), despite the consistent dip in sales revenue by an average of 4 per cent during the same period. Current trend in performance suggests the need for the company to grow its industrial clientele base as well as its retail domestic market in order to sustain and possibly surpass its market share.
Our forecasts for the year ended December 31, 2007 put sales revenue and PAT at N84.80bn and N24.04bn. This implies a earnings per share of N2.40 for the FYE December 31, 2007 and assuming a payout ratio of 70 per cent, we project a cumulative dividend per share of N1.68k. This suggests that the management can still cough out a final dividend of 48k/Share.
Key risk attached to our analysis and valuation is the new major competitor, BUA Group of companies, the owners of BUA Sugar Refinery with an installed capacity of about 720,000 metric tons p.a, which is scheduled to commence operations by April 2007. Similarly, Dangote Sugar is also highly exposed to changes in regulations ranging from protectionist policy of prohibitive tariff on imports to NAFDAC’s regulation on Vitamin A fortification.
Our valuation suggests that the stock trades at a fair price. However, we only anticipate a strong rally provided the management declares a generous scrip issue in addition to the final dividend.
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