Dangote Sugar Refinery may step up its profit recovery process this year if its growth rate in the first quarter is maintained to full year. Sales revenue has been tapering and that trend is likely to be in force even this year. However Mr. Graham Clark, the company’s group managing director seems to be promising to extract more profit from each naira of sales this year than he did in 2013.
The company’s strength for this year lies in cost saving with which it is able to stretch out profit margin. Cost cutting has been the company’s defensive strategy in recent years in the situation of sustaining revenue stagnation. The profit recovery anticipated this year is therefore not rooted in improving sales or market share, which leaves the company’s medium-term outlook uncertain.
The company’s latest profit figures are nowhere close to the peak record of 2008. A recovery move made in 2012 could not be sustained last year but this year may see a strong profit recovery stride by the sugar manufacturing company after a flat growth in 2013.
At the end of the first quarter, net profit amounted to N3.78 billion for the company, which is an increase of 9.5% over the corresponding figure in the preceding year. Net profit is projected at N16 billion for Dangote Sugar Refinery at the end of 2014. This will be an increase of 47.5% from the full year profit figure in 2013.
Profit growth was flat in 2013 at N10.85 billion after a strong recovery of 50.9% in 2012. A downturn in profit performance began in 2009, when the company’s after tax profit fell from the 2008 peak of N21.87 billion to N13.19 billion. The falling trend continued up to 2011 when its profit dropped to N7.16 billion – less than one-third of the 2008 high.
The profit weakness of the company is induced by revenue weakness. For four years to 2009, the company was unable to match its 2006 sales revenue figure. Sales revenue has again been creeping down in the past two years from the 2011 peak record of N107.22 billion. The weakness is continuing even in the current financial year.
The company reported a turnover of N25.88 billion at the end of the first quarter. This is a decline of 6.4% from the corresponding sales revenue figure in 2013. Based on the current growth rate, sales revenue is projected at N105.5 billion for Dangote Sugar Refinery in 2014. This will be a marginal improvement of 2.3% against a decline of 3.5% in 2013. Earnings performance is also affected by a drop of 70.8% in other income to N204.9 million over the period.
The ability to improve profit against a decline in sales revenue in the first quarter came from a significant cost saving. The company saved revenues from two major cost lines during the review period. These are distribution/administrative expenses and cost of sales.
Against a decline of 6.4% in turnover, distribution/administrative expenses dropped by 30.5% to N1.62 billion. This reduced the proportion of sales revenue devoted to this particular expense line from 8.4% in the first quarter of last year to 6.3% this year.
Cost of sales also moderated relative to sales revenue during the period. At about N18.70 billion, cost of goods sold declined ahead of sales revenue at 8.4% year-on-year. The proportion of sales revenue claimed by cost of sales therefore declined during the period from 73.8% to 72.2% over the same period. This improved gross profit margin from 26.2% to 27.8% over the period. Cost of sales represents a declining proportion of sales revenue from 87.3% in 2011 to 80.2% in 2012.
Improvement in profit margin is the key strength for the company’s performance this year. Net profit margin has improved from 12.5% in the first quarter of 2013 to 14.6% in the current year. This is well above the 10.5% net profit margin the company recorded at the end of 2013. Net profit margin has continued to improve from 7.1% in 2011 to 10% in 2012. Profit margin remains significantly down from the peak record of 27.1% achieved in 2008.
The company’s balance sheet is entirely free of interest bearing debts and that has helped the cost saving strategy of the company by way of zero interest expenses. Other major developments in the balance sheet in the first quarter include a drop of 34.6% in trade debtors and other receivables to N16.18 billion from the opening figure for the year.
Cash and bank balances dropped by 70.2% to N7.44 billion at the end of the first quarter from the opening figure for the year. Trade creditors and other payables also went down by 13.2% while inventories closed higher by 39.3% to N19.54 billion at the end of the first quarter.
The company earned 31 kobo per share in the first quarter, up from 29 kobo per share in the corresponding quarter last year. Based on the projected net profit for the company this year, earnings per share is expected to be in the region of N1.33 at the end of 2014. The company earned 90 kobo per share in 2013 and maintained a dividend of 50 kobo per share for the second year.
By the net profit forecast for the company at the end of this year, management is expected to step up profit growth in the remaining three quarters. It is expected to earn a minimum of N4.07 billion in net profit in each of the remaining quarters. Inability to achieve the minimum growth record will warrant a downward revision of the full year profit forecast for 2014.
