Since posting a record profit after tax of N39.7 billion in 2017, Dangote Sugar has struggled to replicate such strong performance amidst declining sugar prices, weakening consumer demand in Nigeria and rising expenditure.
In 2018, Dangote Sugar reported net earnings of N21.9 billion and the company appears poised to generate net earnings around N19.5 billion this year based on annualized earnings after the company reported that it generated N14.7 billion in net earnings in the first 9 months of the year.
The biggest challenge the company has faced in growing its profitability has been the declining demand for sugar which is negatively impacting its topline performance. In 2018, the company’s revenue dropped by around N54 billion or 26% in just one single year. However, revenue is forecasted to improve to N156.1 billion this year which is 4% higher than the N150.3 billion it achieved in 2018 but still far behind the N204.4 billion revenue generated in 2017.
Analysis of the Bloomberg sugar index which tracks the daily changes in prices of future sugar contracts shows that the price of sugar has declined by more than 50% in the last 3 years. Since peaking at $156 in July 2016, sugar price has fallen to about $70, representing a decline of around 55%.
According to the International Sugar Organization (ISO), the cause of the drastic drop in sugar prices can be traced to the sugar glut currently in the global market. According to ISO, global sugar surplus is set to hit 1.83 million tonnes in the 2018/19 season, up from a previous estimate of 641,000 tonnes. The excess production they said is coming largely from India and Thailand were sugar production has grown astronomically in recent times.
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Expected sugar consumption in 2018/19 was revised down to 176.91 million tonnes, from the previous forecast of 178.04 million tonnes according to ISO. The intergovernmental body is also forecasting a shift to a global deficit of about 3 million tonnes could occur next year but opine that it may not lead to any recovery in sugar prices.
“It has to be stressed that any price recovery on the back of a statistical deficit of this magnitude might be muted by the huge stocks accumulated since the beginning of the surplus phase in 2017/18,” the ISO said according a report by Reuters.
“If sugar prices continue to dwindle the prospects for a significant growth in sugar prices may be very dim,” said Maju Eldad, a Nigerian economist. “I think Dangote Sugar will have to refocus its business to put more strategic intent towards cost cutting and improve cost efficiency if the business will hope to see profit growth in the near future.
Operating expenses has remained flat in the last two years, as the company spent N7.4 billion in 2017 and grew OPEX to N7.7 billion in 2018 despite a decline in revenue in the business.
Dangote Sugar closed the market on Friday lower, returning -9.97% to end the trading day at N14.90. The stock however is down significantly from a high of N22.50 it reached in early 2018 when the company last reported year on year growth in its net earnings.
