Nigeria: Dangote Sugar Refinery Outlook Remains Bright

27 August 2019

Going by the performance of Dangote Sugar Refinery Plc, its outlook remain strong despite harsh operating environment.

Capital market analysts expected the company's dominance of the sugar industry to persist given the firm's aggressive backward integration project which is in line with the federal government's sugar master plan.

The Nigerian Sugar Master Plan of 2012 is the starting point for backward integration in the sector. The plan's objective was to boost domestic production of sugar to attain self-sufficiency by 2020 and to contribute to the production of ethanol and the generation of electricity.

Dangote Sugar is Nigeria's largest producer of household and commercial sugar with 1.44M MT refining capacity at the same location. The refinery located at Apapa Wharf Ports Complex, refines raw sugar imported from Brazil to white, Vitamin A fortified refined granulated white sugar, suitable for household and industrial uses.

Its subsidiary, Savannah Sugar Company Limited's factory located at Numan, in Adamawa State, is an integrated sugar production facility, with an installed factory capacity of 50,000 tonnes. Covering 32,000 hectares, the Savannah estate has considerable opportunity for expansion which is underway as part of the Dangote Sugar for Nigeria Project, campaign. The company was spun out of Dangote Industries in 2006 and got listed on the Nigerian Stock Exchange (NSE) about 11 years ago.

The company's strategy is to become a global force in sugar production, working within Nigeria's National Sugar Master Plan to end importation and sell more than 1.5 to 2.0 million metric tonnes of locally produced sugar in Nigeria and neighbouring countries.

In order to successfully execute that strategy, the company is making significant investment in its backward integration programme (BIP). Already, the company's Savannah cane sugar factory located near Numan, in Adamawa State has an installed factory capacity of 50,000 tonnes. Covering 32,000 hectares in extent, the Savannah estate has considerable opportunity for expansion which is underway.

Dangote Sugar started the 2019 business year on a strong footing, with a profit after tax of N10.967 billion for the first half of its financial results, ended June 30, 2019. Revenue stood at N80.364 billion, cost of sales at N59.249 billion, while gross income as at the period under review stood at N21.114 billion.

Capital market analysts noted that, "Amid the unrelenting influx of illegal sugar imports, we understand that management maintained its low-price strategy in a bid to defend its market share."

Analysts at Cordros Securities Limited said that "We believe the increase in raw material cost reflected higher raw sugar prices and an upward review of Nigeria's custom duty exchange rate, which was implemented in June 2019."

According to Cordros Securities, the achieved revenue outperformed our Q2, 2019 estimate by 8.5 per cent, on account of management's continued price discounting strategy which supported volume growth.

"We had argued in our sector report that management would have to consider lowering prices to maintain current market share, especially in the light of the intensifying competitive landscape."

They stated that "In line with our expectations, management cut prices, albeit deeper than our expectation. For the rest of the year, we are now more cautious on refined sugar prices than we were in our last report, no thanks to the still porous border which continues to enable illegal sugar importation. Thus, we lower our sugar price assumption as we believe management will continue to focus on defending its market share."

Chairman of the company, Aliko Dangote, in 2018, stated that the company has so far, spent N101 billion on its backward integration projects so far, saying one of the major causes of the delay in the take-off of the projects has been difficulties in the process of land acquisition.

Dangote at the 2019 Dangote Food Award stated that "My special commendation goes to Dangote Sugar and Pasta customers who, despite the price challenges posed by influx of unlicensed and substandard grey imports stood by us."

He said that "Such challenges will soon become history as we have invested massively in the country in line with our Backward Integration Project. In the sugar sector, we developed a sugar backward integration project plan targeted at the production of 1.5MT to 2.0MT of refined sugar from various sites across Nigeria, in the next 10 years.

"This will ensure big savings on foreign exchange, and increased employment for not less than 75,000 to 150,000 persons, while placing Nigeria on the global map of Sugar producers. In effect, we expect significant cost reductions and improved profits to the customers."

Also, the chief operating officer, Dangote Sugar Refinery, Ravindra Singhvi, in 2018 said, "Though we maintained our market leadership position in the sugar sector in the year, it was very challenging due to the impact of unlicensed sugar, smuggled and sold in our key markets nationwide, and the logistics challenges brought about by the continued Apapa traffic gridlock.

"The gridlock constrained availability of trucks required daily to evacuate the production volumes, while the influx of smuggled sugar exerted a downward pressure on selling prices.

"Despite efforts being deployed by the regulators to stem the tide, the influx of smuggled sugar into the markets spread further across our key markets in the North East and North West. We are currently focusing on process optimisation and the realisation of our Sugar Backward Integration Projects targeted at the production of 1.08 million metric tonnes of sugar in six years; from our various projects across the country."

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