Currency devaluation, security challenges stunt Dangote Sugar Refinery’s growth

The devaluation of the naira and security challenges in the North of the country have continued to stunt the growth of Dangote Sugar Refinery (DSR) plc, as the company’s first quarter (Q1) profit and revenue falter.

For the first three month through March 2015, Dangote Sugar’s profit after tax (PAT) fell by 36.80 percent to N2.37 billion from N3.75 billion the same period of the corresponding year (Q1) 2014, while sales reduced by 12.98 percent to N25.88 billion.

The devaluation of naira had a major role to play in the margin contraction, though not to the extent anticipated, according to Uwadiae Osadiaye, equity research analyst with FBN Capital in an April 28 note to BusinessDay.

“The decline in sales on a y/y basis is unsurprising as cross-border trade and sales in Northern Nigeria continue to suffer from the insecurity in the region, similar to Q4 2014,” said Osadiaye.

Nigeria central bank scrapped its bi-weekly currency auctions in February 2015 and the market body said it would sell dollars only at N198, a move that amounts to a de facto devaluation of Nigeria’s currency.

The devaluation is hurting Fast Moving Consumable Goods (FMCG) companies in Africa largest economy, Nigeria, as most raw material used for the purpose of production are imported, hence culminating in rising production costs.

These firms also have revenue growth crimped as the security challenges in the North part of the country’s hinder them from pushing their products to the crisis ridden region and its borders.
DSR is feeling the heat of the headwinds as its cost-to-income ratio increased to 75.48 percent in 2015 from 72.48 percent in 2014, though cost of sales reduced by 9.09 percent.

The company is not efficient in managing direct costs attributable to projects as gross profit increased by 25.51 percent to N5.52 billion from N7.19 billion in 2014. Gross profit margin moved to 24.51 percent in the review period to 27.78 percent in 2014.

DSR plans to almost double refining capacity to 2.75 million metric tons by 2017, with a view to tapping into the Nigeria’s robust economy.

Nigeria government has imposed 60 percent on raw sugar and 80 percent on refined sugar in order to cut imports and boost local production.

Nigeria’s domestic sugar production in MY2012/2013 remains unchanged at 65,000 tons (raw value), the same figure as MY2011/2012, according to United States Foreign Agriculture Service (USDA) in a  2013 Annual Sugar Report on Nigeria.

DSR’s return on equity (ROE) reduced to 6.97 percent in 2015, as against 11.72 percent in 2014.

The company’s share price closed at N6.11 on the floor of the exchange, while market capitalisation was N77.16 billion.

“Given the de-facto devaluation of the naira in Q1 2015 and continued insecurity in the North, we suspect DSR’s performance in H1 2015 is likely to be unimpressive,” said Osadiaye.

BALA AUGIE