SAT 31 JULY, 2021-theGBJournal- DANGSUGAR published its Q2-21 and H1-21 results after market close Friday, reporting a 17.6% y/y decline in EPS to NGN0.35 in Q2-21 (Q2-20: NGN0.43) – the lowest since Q3-19 – underpinned by a 10.1x surge in finance cost amid higher operating expenses.
However, H1-21 EPS grew by 7.6% to NGN1.04 (H1-20: NGN0.97), supported by the impressive earnings in Q1-21.
Revenue grew by 16.1% y/y in Q2-21 (H1-21: +27.8% y/y), driven by an increase in the sales of 50kg sugar (+19.9% y/y; 97.1% of revenue) and sale of molasses (+78.0% y/y; 0.7% of revenue). We believe the double-digit growth in 50kg sugar sales was price-driven, given the strong price increase of 19.4% y/y implemented in Q2-21.
Meanwhile, revenue from the sale of retail sugar (1.7% of revenue) declined sharply by 59.3% y/y in Q2-21 – the highest quarterly decline in at least 18 quarters. We attribute the decline to a 2.6% y/y decrease in sales volume to 188,097 metric tonnes in Q2-21 (Q2-20: 193,193 metric tonnes), reflecting the intensified competition in the sugar industry within the period.
Gross margin increased by 176bps to 16.3% in Q2-21, as the price-driven revenue growth (16.1% y/y) outpaced the increase in the cost of sales (+13.7% y/y). The higher COGS outturn reflects the challenges in the business environment during the period, including foreign currency constraints and the pass-through impact of elevated inflationary pressures on raw material costs, energy cost and other inputs.
However, EBITDA and EBIT margins declined by 84bps and 20bps to 16.0% and 11.8%, respectively, in Q2-21 (Q2-20: 37.8% and 18.5%) following a 62.9% y/y expansion in operating expenses. The higher operating expenses was influenced by an expansion in both the administrative (+67.4% y/y) and selling & distribution (+11.7% y/y) expense lines.
Net finance cost stood at a negative of NGN1.01 billion in Q2-21 relative to a positive of NGN50.45 million in Q2-20, following the more than ten-fold increase in finance cost (NGN1.39 billion in Q2-21 vs NGN124.79 million in Q2-20). The surge in finance cost was mainly driven by an increase in foreign exchange loss (+177.2% y/y to NGN2.79 billion) following the currency devaluation within the period.
Overall, Profit before tax declined by 9.7% y/y to NGN6.81 billion in Q2-21 (Q2-20: NGN7.54 billion), while Profit after tax fell faster by 17.4% y/y following a 7.8% y/y increase in tax expense.
Cordros Research comment: We like that the company has maintained its double-digit top-line growth trajectory for eight consecutive quarters despite implementing a substantial price increase. In addition, we note that the reopening of land borders did not affect the company’s sales volume adversely, which implies a limited influx of unlicensed sugar into the country.
However, the persistent increase in operating and finance cost remains a concern. Nevertheless, over the rest of 2021FY, we believe the company will maintain positive performance given its market leadership position and substantial progress in its backward integration programme despite renewed competition in the sugar industry. Our estimates are under review.
Twitter-@theGBJournal|Facebook-The Government and Business Journal|email: govandbusinessj@gmail.com
