Dangote Sugar Delivers Value to Shareholders amid Challenges

Goddy Egene writes that despite the challenging operating environment, Dangote Sugar Refinery recorded an improvement in its 2013 financial results and enhanced value delivery to shareholders
When the board of Dangote Sugar Refinery (DSR) decided to employ Mr. Graham Clark last year as the managing director of the company, that decision sent one major signal to the entire sugar industry: the birth of  a company that would lead the sugar industry in the entire Africa and deliver value to all stakeholders.
Clark, who has a 30-year experience in the African sugar industry, was the MD of Illovo Sugar Limited, Africa’s biggest sugar producer, with operations in six African Countries, before joining DSR last year.
Although the company is still implementing strategies that would comfortably see it dominate  the industry, the company’s 2013  performance has indicated the performance what investors should expecting going forward.
Corporate Background 
DSR commenced operations as a sugar refiner in March 2000, while its refining plant was inauguration in 2001, with an initial capacity of 600,000 metric tonnes per annum (MT p.a). It is one of the largest refineries in the world with a capacity of 1.44 million MT p.a.
The company  employs the talo-phosphatation and ion exchange resin technologies to purify sugar to internationally accepted quality standards. Located in Lagos, at Nigeria's largest port, the Apapa Wharf, DSR controls a dominant market position in the sugar refining sub sector of the Nigerian food & Beverage Industry.
DSR has Aliko Dangote as chairman and Clark as Group Managing Director(GMD).
Abdullahi Sule is deputy GMD. Other directors are: Sani Dangote; Olakunle Alake; Bennedikter Molokwu; Konyinsola Ajayi; Uzoma Nwankwo; Abdu Dantata; Suleiman Olarinde, while Chioma Madubuko  is the company Secretary/Legal Adviser.
Promise to Deliver Value
On assumption of duty, Clark assured stakeholders that he would bring his experience in sugar business to bear and deliver returns that will meet stakeholders’ expectations.
Speaking to journalists in Lagos on his plan for DSR, he said working with the board, management and other members of staff of the company, its position as a leading sugar company would be consolidated in the market.
“Our plan is to consolidate what we have and build on the plans to continue to reinforce DSR as the leading player in sugar in Nigeria. There will be exciting things taking place in the next few years. We see our sugar development story effectively moving from now through a period of five to 10 years when we will develop new sugar plantations, new sugar factories across the country.
We will embrace Nigerian farmers to join us in the production of our raw material, which is sugar cane. We will stimulate considerable economic activities in the rural communities. Employment is a major objective of the Dangote Group and we see ourselves employing many people. More 150, 000 can be employed by our sugar business and it will have a multiplier effect,” he said.
According to him,  DSR will  increase our capacity significantly and enables it reach its  retail market easier.
“We are bringing  agriculture back to  rural Nigeria and be  the largest commercial farmers in  Africa. We will bring new skills to rural Nigeria and employ many people,” he said.
He noted that in line with the backward integration programme of DSR, the company has acquired farm machinery worth  $35 million from Panafrican Equipment.
Clark said the  equipment acquisition, was also   in line with the Backward Integration Policy (BIP) of the Federal Government of Nigeria and National Sugar Development Council (NSDC).
“This is yet another milestone in the DSR journey as we work towards the achievement of our strategic sugar master plan to produce 1.5 million metric tonnes of sugar per annum, locally.”
He emphasised that DSR is actively pursuing a backward integration master plan with a target of producing a total of 1.5 million tons of sugar locally per annum.  The subsidiary, Savannah Sugar Company Limited, Numan, Adamawa State is geared to meet this target.
Savannah Sugar is located on 32,000 hectares of land with a 50,000 MT/PA sugar production capacity. Currently, the company has 5,000 hectares on cane which is now being harvested for sugar production. 
2013 Financial Results
DSR’s audited results for the year ended December 31, 2013, at company level, showed a revenue of N102.467 billion compared with N106.8 billion, while gross profit rose by 16 per cent from N23.228 billion to N26.969 billion. Profit before tax by 23 per cent from N16.331 billion to N20.1 billion,  while profit after tax grew by 25 per cent from N10.79 billion to N13.537 billion.
The directors recommended a dividend of 60 kobo per share, up 20 per cent from 50 kobo to 60 kobo. A further analysis of the performance indicators showed northward climb.
For instance, gross margin grew from 21.7 per cent to 26.3 per cent in 2013. Earnings before interest and taxes (EBIT) margin improved from 15.2 per cent in 2012 to 19.6 per cent in 2013. Similarly, PBT margin stood at 15.2 per cent compared to 19.6 per cent in 2012, while PAT margin grew from 10.1 per cent to 13.2 per cent. Return on average equity was 27 per cent, as against 25.2 per cent.
Similarly, return on average asset grew from 13.8 per cent to 15.9 per cent. Earnings per share improved from 90 kobo to 113 kobo. 
Analysts Assessment
Reviewing the performance of the DSR, analysts at Cordros Capital Limited, an investment bank,  said  DSR reported revenue contraction in 2013 financial year as the management continued to enforce its strategy of price reduction in pursuit of volume growth.
They noted  that  despite the decline in sales income, a considerable moderation in cost of sales and a huge growth in investment/other lent support to earnings which grew in double-digits.
According to them, Savannah Sugar Company Limited was in a state of rehabilitation, and therefore contributed less to revenue and more to the cost line. Note that in order to avoid comparing unlike items, hence their analysis focused only on DSR as a company and not as a group.
“2013 revenue of N102.47billion , a 4.1 per cent decline is on  the back of the management’s strategy of deliberately lowering its refined sugar prices in an effort to ramp up volumes and control market share. This strategy came into play in 2012 and has been a major game-changer in the company’s operation, as global raw sugar prices remained overwhelmed by supplies,” they said.
They added that  the group revenue of N103.15 billion is only 0.7 per cent  higher than the number reported by the company, coming as a clear confirmation that Savannah Sugar Company (Savannah) was practically in a state of rehabilitation.
Profit Growth amid Contracted Revenue
The analysts said despite the contraction in revenue, gross profit rose by 16.1 per cent to N26.79billion, leveraging on the support from decline in cost of goods sold (COGS).
According to them, COGS fell by 9.7 per cent  to N75.5billion in 2013 after losing 8.3 per cent  in 2012.
“ Aside other cost-saving measures such as a reduction in mechanical downtime and the conversion of energy source to natural gas, a major softener of input costs came from the downward trend in raw sugar prices in the commodities market, as global production continued to exceed consumption,” they said.
Double-digit Earnings Growth
The  analysts said the impact of higher operating expenses was absorbed by a stronger growth in investment and other income, resulting in an operating profit of N20.1billion  and a constituent margin of 19.6 per cent.
“Earnings on bank deposits and insurance claims (from the 2012 fire accident) constituted the investment/other income. There were no financial liabilities in the company account (hence no provision for finance charge), but a finance charge of N67.16million was reported for the group, reflecting interest rate on N536.09million short term debts attributable to Savannah,” they said.
They added that “applying a tax rate of 32.7 per cent (33.9 per cent in 2012) to the pre-tax profit produced a profit after tax of N13.54billion for the company, a 23.4 per cent growth from N10.8billion in 2012. PAT margin rose by 311bps to 13.2 per cent while RoAE (27.1 per cent) and RoAA (15.9 per cent) improved by 177bps and 206bps respectively.”

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