Nigerian Sugar Industry - Proshare
Nigerian Sugar Industry Falling Prices; Rising Prospects
THE NIGERIAN SUGAR INDUSTRY
Analyst Adedoyin Adelakun [email protected]
June 16, 2011 Market Cap:
N168 bn(US$1.07bn)
Symbol: NSE Bloomberg Reuters:
As with most countries, the fortunes of the Nigerian sugar industry is hinged on the performance of raw sugar prices on the international scene, more so, as Nigeria is a net importer of raw sugar. Nonetheless, our optimism is based on the gradual strengthening of the upstream segment (cultivation and milling of sugar) which has the potential of minimizing the exposure of sugar refiners to volatile commodity prices as well as engender a stable supply of key input. We therefore take a look at the global trend, supply and demand dynamics of raw sugar and how it affects sugar refineries in Nigeria.
DANGSUGAR DANGSUGA.NL DANGSUG.LG
Metrics Forward 2011 P/E:
9.3x
EV/2011 EBITDA:
9.0x
2011 Div Yield:
6.5%
YTD perf:
Our Validation. Raw sugar prices are falling from record highs (from a 30year high of US$38.9/lb in January 2011 to US$29.1/lb a 27 percent easing), and are estimated to fall further in the coming months due to the robust harvest in sugar producing regions such as Brazil, Thailand and India, owing to favorable weather. This is expected to boost the performance of sugar refineries in Nigeria, given the inverse relationship between raw sugar prices and the earnings performance of sugar refiners. Expectations are that global sugar supply will outstrip demand in 2011 and most of 2012.
-9.09%
Favorable Demographics. Our optimism on sugar consumption is hinged
Shares Outstanding (Nbn):
12.00
Current Price (N):
14.00
Recommendation:
ACCUMULATE
mainly on increasing population and growing income levels. We note that the Nigerian population has been growing by c.2.8% annually over the years. This favorable demography further brightens the prospects for steady increase in sugar consumption. Further reinforcing the demand prospect is the currently low sugar consumption per capital of 9kg (Vs. 15kg for emerging African peers and a global average of 23kg), We have observed that in the last 6 years, sugar consumption has grown at a CAGR of 8%, albeit at a much slower pace in the last 3 years due to high raw sugar prices.
Share Price Performance Year High (NGN):
16.20
Year Low (NGN):
11.80
Government Policies. We expect that Government’s effort towards 30 Days (%):
6.46
Vetiva Research 90 Days [email protected] (%): Email:
(9.09)
52 weeks (%): (26.24) Plot 266B, Kofo Abayomi Street Victoria Island Lagos, NIGERIA Tel: +234-1-4617521-3 Vetiva Capital Management Limited Fax: +234-1-4617524 Plot 266B Kofo Abayomi Street Victoria Island Lagos, Nigeria Tel: +234-1-4617521-3 Fax: +234-1-4617524 Email: [email protected]
overhauling the agriculture value chain and in particular, the sugar industry will bode well for domestic refiners in the medium to long term. The Nigerian Government has put in place favorable regulations to support and protect local production of sugar (raw and refined). Such policies include the imposition of higher levies on importation of refined sugar in contrast to low duty on raw sugar (production capacity remains low) and the low duty on importation of sugar milling and refinery equipments. One of the major reasons for Government’s interest in the industry, apart from its ability to generate revenue, is to reduce external shocks from the volatility in global raw sugar prices. Nigeria spends an estimated N30 billion annually importing raw sugar.
Our Focus. Dangote Sugar Refinery (DSR) is the only quoted company in the Nigerian sugar refining industry. Our investment case for DSR is largely premised on its attractive valuation (using the DCF methodology) which gives a Target price range of N15.79 - N17.96; and its strengthening upstream segment. We think that DSR is ‘undervalued’ at its current trading price of N14.00, and thus place an ACCUMULATE rating on the stock.
Please see last page for important disclosures
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FALLING PRICES; RISING PROSPECTS
Table of Contents
Introduction: A world of Sugar
....................... 3
o Production o Types of Sugar o Uses of Sugar The Global Sugar Industry
....................... 7
o Demand and Supply Dynamics o Global Production and Consumption o Major Producers The Global Sugar Prices
..................... 9
o Price Trends o Global Sugar Prices Nigerian Sugar Industry
..................... 16
o Sugar Production o Sugar Consumption o Regulation o Industry Players o Industry Outlook Our Focus o Dangote Sugar Plc o Company Background o Operations o Five Year Financial Performance o 2010 Full Year Review o Valuation
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Introduction: A world of Sugar
There are two main sources of sugar; Sugar cane and Sugar beets but 79% of world sugar is sourced from sugar cane.
Sugar (sucrose) is the world’s predominant sweetener and is a carbohydrate that occurs naturally in every fruit and vegetable. It is the major product of photosynthesis, the process by which plants transform the sugar energy into food. Sugar occurs in the greatest quantities in sugar cane than in sugar beets. Sugar cane is a perennial crop in that it grows in the humid tropics (with at least 1,000 millimeters of rain annually) while sugar beet is a biennial root crop that grows in temperate regions. About 79% of total production is made from sugar cane while the balance of 21% is made from sugar beet, even though the end-product is the same (i.e. the source cannot be differentiated once converted to refined sugar); hence our focus on sugar cane. Sugar cane requires temperatures above 21° Celsius (C) for satisfactory growth, and the best results are obtained when the temperature exceeds 27° C. Although, growth ceases when the temperature falls below 11 — 13° C.
Production There are two stages involved in the sugar milling process they are; 1) The Sugar Milling 2) Sugar Refining. Mills extract raw sugar from freshly harvested cane, and sometimes bleach it to make "mill white" sugar for local consumption. Sugar refineries, produce refined white sugar, which is 99 percent sucrose. These two stages are slowly merging. Increasing affluence in the sugar-producing tropics increased demand for refined sugar products, driving a trend toward combined milling and refining. Sugar Milling: Newly arrived cane in sugar mills are tested for sugar content and trash percentage. The mill then washes, chops, and uses revolving knives to shred the cane. Shredded cane is repeatedly mixed with water and crushed; its juice is extracted, which is 10 - 15 percent sucrose. The remaining fibrous solids, called Bagasse, are burned for fuel in the mill's steam boilers; these boilers produce high pressure steam and the bagasse is passed through a turbine to generate electrical energy. Bagasse makes a sugar mill selfsufficient in terms of energy and can be made available for commercial purposes. The cane juice is next mixed with lime to adjust its pH to 7 (neutralized i.e. non-acidic and non-alkaline). This mixing arrests sucrose's decay into glucose and fructose, and precipitates some impurities. The mixture allows the lime and other suspended solids to settle. The clarified juice is concentrated in a multiple-effect evaporator to make syrup of about 60 percent sucrose by weight. This syrup is further concentrated under vacuum until it becomes supersaturated, and then seeded with fine sugar crystals. A batch type sugar centrifuge separates the sugar crystals from the mother liquor. The sugar from the centrifuges is dried and cooled and then stored in a silo or directly packed into bags for shipment.
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The mother liquor from the first crystallization step (A-product) is again crystallized in vacuum pans and then passed through continuous sugar centrifugals. The mother-liquor is again crystallized in vacuum pans. Due to the low purity the evapo-crystallization alone is not sufficient to exhaust molasses, and so it is passed through cooling crystallizers until a temperature of about 45 °C is reached. Then the massecuite is re-heated in order to reduce its viscosity and then purged in the C-produced centrifugals. The spun-off sugar from the B-product and C-product centrifugals is re-melted, filtered and added to the syrup coming from the evaporator station. Raw sugar is yellow to brown. Bubbling sulphur dioxide through the cane juice before evaporation bleaches many color-forming impurities into colorless ones. The addition of sulphur produces sugar known as "mill white", "plantation white", and "crystal sugar". Such sugar is the most commonly consumed in sugarcane-producing countries. Sugar Refining: In the traditional refining process, the raw sugar is first mixed with heavy syrup and centrifuged to wash away the outer coating of the raw sugar crystals, which is less pure than the crystal interior. Many sugar refineries currently buy high quality sugar and can do without the affination process.
Sugar is used to grow penicillin and thus has antibiotic properties
The remaining sugar is then dissolved to make a syrup (about 70 percent by weight solids), which is clarified by the addition of phosphoric acid and calcium hydroxide that combine to precipitate calcium phosphate. The calcium phosphate particles trap some impurities and absorb others, and then float to the top of the tank, where they are skimmed off. After any remaining solids are filtered out, the clarified syrup is decolorized by filtration through a bed of activated carbon. The purified syrup is then concentrated to supersaturation and repeatedly crystallized under vacuum to produce white refined sugar. The sugar crystals are separated from the mother liquor by centrifuging. To produce granulated sugar, in which the individual sugar grains do not clump together, sugar must be dried. Drying is accomplished first by drying the sugar in a hot rotary dryer, and then by blowing cool air through it for several days in conditioning silos. The finished product is stored in large concrete or steel silos. The finished product is the sugar (sucrose) which most are familiar with and use sweeten food around the world. The main product of a sugar factory consisting of crystals of sucrose as removed from a massecuite and containing more or less impurities, depending on the type of sugar.
• Refined sugar: A white sugar • Very high pol sugar (VHP): Raw sugar with a pol of not less than 99,3°S. • High pol sugar (HP): Raw sugar with a pol between 98,0 and 99,3°S. • Low pol sugar (LP): Raw sugar with a pol below 98,0°S. • Brown sugar: A direct consumption raw sugar. • Tel quel sugar: The bulk product without reference to its quality.
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Uses of Sugar We use sugar in a variety of ways in our daily life. The most common form is granulated sugar which is used to sweeten food. However, this is only one of the important roles sugar plays. It can also be used in a variety of ways: In pharmaceuticals: It is used to grow Penicillin which is an antibiotic made by growing the mold Penicillium chrysogenum in a fermenter. The mold is grown in a liquid culture containing sugar and other nutrients. As the mold grows, the sugar is used up and only starts to make penicillin after using up most of the nutrients for growth.
Sugar is also used in pharmaceuticals for flavoring to mask the bitter taste of medicines.
Sugar possesses antibiotic properties and is effective in healing wounds. When it fills an open wound, it dissolves and prevents bacteria from growing as well as supplying nourishment to damaged tissues
In preservation: Sugar is used to preserve fruits, by cooking the material to be preserved in sugar to the point of crystallization and the resultant product is then stored dry. It can also help keep fresh flowers stay fresh longer. Other uses:
Sugar slows down the hardening of concrete.
Sugar is used in leather tanning and in the sizing and finishing of textiles.
Sugar is used as a hydrophilic agent in printing inks. Sugar can be used as an insect repellant.
Types of Sugar The three major types of sugar are: White, Brown and Liquid sugar.
Primarily, there are three types of sugar and they are; 1) White Sugar 2) Brown Sugar 3) Liquid Sugar. White Sugar There are many different types of granulated sugar. Some of these are used only by the food industry and professional bakers and are not available in the supermarket. The types of granulated sugars differ in crystal size. Each crystal size provides unique functional characteristics that make the sugar appropriate for a specific food’s special need. E.g. Bakers Special Sugar, Castor/caster sugar, Confectioners or powdered sugar (icing sugar), Coarse sugar, Date sugar, Fruit Sugar, Granulated sugar, Sugar cubes (moist granulated sugar pressed into molds and dried), Raw sugar ( tan colored sugar), Sanding sugar ( coarse sugar), Superfine, ultra fine, or bar sugar.
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Brown Sugar Brown sugar retains some of the surface molasses syrup, which imparts a characteristic pleasurable flavor. Dark brown sugar has a deeper color and stronger molasses flavor than light brown sugar. Demerara sugar - Popular in England, is a light brown sugar with large golden crystals, which are slightly sticky from the adhering molasses. It is often used in tea, coffee, or on top of hot cereals. Muscovado or Barbados sugar, a British specialty brown sugar, is very dark brown and has a particularly strong molasses flavor. The crystals are slightly coarser and stickier in texture than “regular” brown sugar. Free-flowing brown sugars - These sugars are specialty products produced by a co-crystallization process. The process yields fine, powder-like brown sugar that is less moist than “regular” brown sugar. Since it is less moist, it does not clump and is free-flowing like white sugar. Turbinado sugar - This sugar is raw sugar which has been partially processed, where only the surface molasses has been washed off. It has a blond color and mild brown sugar flavor, and is often used in tea and other beverages. Liquid Sugar There are several types of liquid sugar. Liquid sugar (sucrose) is white granulated sugar that has been dissolved in water before it is used. Liquid sugar is ideal for products whose recipes first require sugar to be dissolved. Amber liquid sugar is darker in color and can be used in foods where brown color is desired. Invert sugar - Sucrose can be split into its two component sugars (glucose and fructose). This process is called inversion, and the product is called invert sugar. Commercial invert sugar is a liquid product that contains equal amounts of glucose and fructose. Because fructose is sweeter than either glucose or sucrose, invert sugar is sweeter than white sugar. Commercial liquid invert sugars are prepared as different mixtures of sucrose and invert sugar. For example total invert sugar is half glucose and half fructose, while 50% invert sugar (half of the sucrose has been inverted) is one-half sucrose, one-quarter glucose and one-quarter fructose. Invert sugar is used mainly by food manufacturers to retard the crystallization of sugar and to retain moisture in the packaged food. Which particular invert sugar is used is determined by which function – retarding crystallization or retaining moisture – is required.
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The Global Sugar Industry Demand and Supply Dynamics Total World production of sugar ranges between 145 and 170 million tons annually, the total sugar production fluctuates every year depending largely on the harvest of sugar cane in sugar producing nations. The demand for sugar closely tails supply/production for sugar; hence in the years of thin harvest, demand usually outstrips supply which leads to volatile prices of sugar and ultimately results in the booms and burst in prices. Factors that influence the demand and supply for raw sugar on a global level are wide and varied. Some of the factors affecting demand include; the price of sugar, per capital real income, price of substitutes (sweeteners e.g. honey etc.), the demand for complements (bio-fuels, ethanol, power etc), the population, tastes, diets and preferences as well as health concerns. There is an inverse relationship between sugar price and demand for sugar, given that consumers tend to reduce demand in periods of high prices and opt for cheaper substitutes. The sectors that demand sugar the most are Soft Drinks, Beverages, Processed foods, Quick service restaurants (QSR) and households. On the other hand, factors influencing supply of sugar include; the weather condition, availability of arable lands, Government policies, natural disasters and sugar cane diseases in major producing nations, commercial farmers ability to migrate from one crop to the other due to profitability etc. The interaction of these factors largely affects the pricing of sugar and the dynamics of the industry. Booms, Bubbles and Burst
The sugar cycle may take about six to seven years to complete a full round from boom to bust and back to boom.
The interaction of demand and supply dynamics creates the booms, bubbles and burst cycles in the price of sugar. Cycles are a dominant feature of commodity prices, and there is no known consistency to the shape of these cycles. However, from past trends, the price slumps seem to last longer than the price booms. Irrespective of demand, this oscillatory pattern generally obtains in a seasonal industry like the sugar market. At the bottom of the cycle, prices trade at depressed level and at the top, they command significant premium, leading to bumper profits for the producers and suppliers who sell raw sugar to the sugar millers and refiners. The periods of high prices make sugar a major income earner for sugar producing nations. The sugar cycle may take about six to seven years (being a perennial crop that can be harvested two to ten times before replanting) to complete a full round from boom to burst and back to boom. Typically, a boom is witnessed when there is low sugar production relative to consumption, followed by lower inventory/stock, higher imports and higher sugar prices, leading to bumper profits for producers. But, once prices reach high levels, farmers perceive sugar cane cultivation as more attractive, which leads to increased availability, surplus sugar production and thus lower sugar prices, making it difficult for farmers to make profits.
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FIG 1: TYPICAL FOOD COMMODITY CYCLE Peak
Trough
There are two sides to this curve, the sugar farmers profit from high prices caused by the scarcity whilst sugar refiners profit from low prices…
Source: Vetiva Research
Generally, commercial farmers tend to be drawn towards commodities with high prices as the possibility of making bumper profits (which is more than enough to cover production costs, and make new investments in their farms) is higher than lower priced commodities. Hence, these farmers contribute to the cycle via their activities of migrating to a more profitable crop/commodity. This is further displayed for instance, when sugar prices begin to rise (shortly after a major price decline). These commercial farmers at this point perceive sugar as more lucrative and begin to cultivate more sugar than other commodities and consequently shoring up global supply (assuming other factors affecting supply are unchanged). However, there is a time lag between the time of cultivation and harvest this period still gives room for uptrend in sugar prices. By the next harvest season sugar prices are forced down from their previous highs by the supply glut. Hence, there are two sides to this curve. The sugar farmers profit from high prices (caused by the scarcity of sugar) by selling to the sugar millers and refiners at much higher prices which implies higher margins for farmers. The other side of the curve is the refiners, who profit from low prices. They have higher margins in the periods of low prices as the percentage decrease in the price of refined sugar is usually significantly lower than the percentage decrease in raw sugar prices and hence the higher margins. In most parts of the world, sugar milling is being integrated to sugar refining. More recently, most sugar refineries are acquiring sugar cane plantations to complete the value chain; entering the upstream segment and thereby riding the curve to minimize shocks from price uptrend.
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Global Production and Consumption World production of sugar is expected to increase in 2012, buoyed by increased production in India, bumper harvests in Brazil, Thailand and other sugar producing regions (even as Russia is due to lift ban on exportation in July 2011). We expect to see increased supply over the next year, as sugar prices still remain attractive (prices are not down to record lows yet), farmers will continue to plant and harvest sugar in order to ride on the boom and switch when prices are at the trough.
FIG 2: GLOBAL SUGAR PRODUCTION AND CONSUMPTION 2000 – 2012E (Million MT) 180
Production
Global production is expected to outstrip global consumption after more than two seasons of large deficit. The ISO revised the global sugar production for a third time putting 2011/12 production at 167mtrv
Consumption
160 140 120 100 80 60 40 20 0 2000/01
2002/03
2004/05
2006/07
2008/09
2010/11 Source: USDA; Vetiva Research
We expect to see increased supply over the next year, as sugar prices still remain attractive, farmers will continue to grow sugar.
Observation from the USDA chart above shows that in 2010/11 global production and ending stock is expected to outstrip global consumption after more than two seasons of large deficit. The sugar production for 2011/12 marketing year is forecast at 168 million MT, up 8 million MT from the previous year. Consumption is forecast at a record 162 million MT, up 2.7 million MT from a year earlier and ending stocks are forecast at 29 million tons, down over 400 thousand MT. The International Sugar Organization (ISO) revised the global sugar production for a third time putting 2010/11 (for Oct/Nov season) total world production at 167mtrv (million MT) up 5.7% from the previous season. Consumption on the other hand was revised upwards to 166.1mtrv and is expected to grow at 2.2%, slower than 10-year average of 2.5%. Despite the downward revision of global production, export availability still covers projected import demand. The global export availability is put at 51.3 million MT exceeding import demand estimated at 50.4 million MT. Surplus and Deficit As stated earlier, the cause of the volatility in sugar prices has been periods of deficit and surplus over the years. The observed trend in sugar prices therefore has been moving northward in the periods of global deficit and southwards in periods of surplus. Between 1985 and 2005, we witnessed relative stability in sugar prices in the world sugar market. However, the food crisis of 2008 further upset the sugar trend for the past 10 years.
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Major Sugar Producers More than 130 countries produce sugar around the world either from sugar beet or sugar cane. Approximately 79% of total production is made from sugar cane grown primarily in the tropical and sub-tropical zones of the southern hemisphere, and the balance from sugar beet which is grown mainly in the temperate zones of the northern hemisphere. Currently, 71% of the world’s sugar is consumed in the countries of origin, whilst the balance is traded on world markets. The world’s largest producers of sugar are: Brazil, India, EU, China, US, Thailand, South African Countries, Mexico, Australia and Pakistan in that order for the 2010/11 crop year. The countries with the largest consumption of sugar in the world are: India, followed by EU, China, South African Countries, Middle East, Brazil, US, Russia, Indonesia and Pakistan. However India consumes exactly all it produces while US, Mexico, EU, China, Russia, South African Countries and Indonesia consume much more sugar than they produce.
FIG 4: TOP CONSUMERS BY COUNTRIES
FIG 3: TOP PRODUCERS BY COUNTRIES
(Million MT)
(Million MT)
India
Brazil
EU
India
China
EU-21 China
Middle East
US
Brazil
Thailand
SADC
SADC
USA
Mexico
Russia
Australia
Indonesia
Central Americ…
Mexico
Production Consumption
Pakistan 20
40
60 Source: USDA
Consumption Export
Pakistan 20
40
60 Source: USDA
Brazilian Sugar: Every year Brazil produces over 10 million tons of sugar, most of which is exported. The majority of Brazilian sugar is VHP (very high polarized sugar) which is always produced for export and subsequently refined in other countries. The ICUMSA 45 sugar is also produced for both local consumption and export. The Brazilian sugar is grown largely in Sao Paulo region of Brazil, mostly from sugar cane.
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Global Sugar Prices Factors Influencing Sugar Price Trends The following are the factors that have increasingly contributed to the upheaval in sugar prices in the past few years; Climate Change: Unimpeded growth of greenhouse gas emission (CO2, Nitrogen etc) is raising the earth’s temperature, resulting in changing global climate. According to the United Nations, the term Climate Change refers to a change in climate which is directly or indirectly attributed to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods. According to the National Aeronautics and Space Administration (NASA) Research, global surface temperatures in 2010 tied 2005 as the warmest on record. In this analysis, the next warmest years are 1998, 2002, 2003, 2006, 2007 and 2009, which are statistically tied for third warmest year. The GISS (Goddard Institute for Space Studies) records begin in 1880. The analysis found 2010 approximately 1.13°F warmer than the average global surface temperature from 1951 to 1980. To measure climate change, scientists look at long-term trends. The temperature trend, including data from 2010, shows the climate has warmed by approximately 0.36°F per decade since the late 1970s. The clearest indication of impending radical climate change came in the form of an extraordinary oscillation between extremes of heat and cold, accompanied by exceptionally violent weather, especially in the crop production regions of the world. Some of the countries that were affected are; Climate change in key sugar producing nations led to the deficit observed in 2010
− Russia: The country experienced the worst drought in 2010 as an abnormally hot and dry weather swept over the nation. Most of its farmland was affected as crops were destroyed and the Government had to intervene to support farmers. This also led the Government to place a ban on grain exportation, according to the prime minister the ban will be lifted on the 1st of July 2011. − Ukraine: The world's largest exporter of grains, especially barley, experienced winter frosts and a scorching summer heat in the course of 2010 causing huge damage on harvest and crop stocks. − Australia: Following heavy rainfalls across drought-affected regions in inland Australia, there was an outbreak of locust due to prolonged periods of rains creating a suitable environment for the gestation of spur-throat locusts (one of the most destructive breeds). − Kazakhstan: The country also experienced severe heat-waves in 2010 which have affected most of it arable areas, especially in the West, with three-quarters of crops ravaged by drought. Although the Northern region of the country was spared from the drought and destruction. − Brazil: There was excessive rains and flooding in Sao Paulo during the 2009/10 season thereby restricting the production of sugarcane. This particularly affected the sugarcane crushing period, thereby affecting raw sugar production for export and consumption.
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Increasing Alternative Uses of Sugar: In recent times, sugar has been seen as an energy source, given its use in biofuels, and rising demand for alternative energy (cleaner energy/green energy) which has made demand for sugar to continue its northward movement and thereby weighing heavily on prices. Biofuels are fuels made from living organisms and are renewable (meaning their sources can be re-grown) and can be classified into three categories; i) First generation Biofuels which are made from edible sugars and starches. ii) Second generation Biofuels are made from non-edible plant materials. iii) Third generation are made from algae and microbes. Biofuels offer environmental benefits such as lower carbon emissions and lower sulfur compared with conventional petroleum-based fuels. As a result a number of regions have adopted the usage of sugar as a source of energy, especially in Brazil. This has over the years led to an increase in demand for sugar and the hence high sugar prices. The Oil Factor (Increasing Correlation of Oil and Sugar Prices):
As a result a number of regions have adopted the usage of sugar as a source of energy, especially in Brazil. This has led to an increase in demand for sugar and the hence high sugar prices
Following from the above, we have continued to observe that the increase in oil prices pull sugar prices. The increase in petroleum-based oil price leaves consumers with no other option than to search for alternative sources of energy such as Biofuels, thus, we see an increase in price of Biofuels driven by an increase in oil price which ultimately leads to an increase in sugar (one of the main inputs into the production Biofuels). Ethanol production, derived from starch and sugar crops such as sugar cane and cereals, expanded by 53 percent from 30 billion litres in 2000 to about 46 billion litres in 2005. Owing to the advances in technology and policy incentives, the ethanol fuel industry is no longer restricted to a few countries (i.e. Brazil, Japan and the United States) but is building momentum in other parts of the world, including China, India and Thailand.
FIG 5: CRUDE OIL AND SUGAR PRICES CORRELATION MAY2003 – MAY 2011 1.60
SUGAR
OIL
1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00
Source: Bloomberg
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Current Trend: Is Another Cycle Emerging? After reaching 30-year highs of US$38.9/lb to US$29.1/lb in June 2011, global raw sugar prices are beginning to fall, largely supported by the recent news about a bumper harvest in the 2010/2011 crop year and the Indian Food Ministry’s approval of the export of 500,000 metric tons of sugar under the Open General License for the first time in more than two years. Despite recent declines (down 25% since year high) raw sugar prices are still above 2008 food crisis levels of US$19.26/lb and 2010 levels. One of the major concerns about sugar prices is that the world population has been growing by approximately 4% yearly while global food production is increasing by 1% yearly. In 2006/2008, average world food prices rose by 217%, mainly due to drought in grain producing regions, and rising oil prices which led to high cost of food transportation. This was further exacerbated by increased use of food for animal feed and bio fuels in some developed countries, resulting in a shortage of global food stockpile as we had stated earlier. Global sugar supply and production as at the beginning of the food crisis in 2007/8 was still in surplus but sugar prices rose along with other commodities nonetheless, as a band wagon effect. When the food crisis abated, sugar prices began a further ascent to new highs in 2009, prodded by an actual deficit in global supply and stock of raw sugar.
FIG 6: GLOBAL RAW SUGAR PRICE TREND OVER FIVE DECADES January 1960 – February 28, 2011
Stockpiling due to supply shortage and prices transf erred to consumers.
Increased Mechanization of sugar production raises supply and cut prices.
Introduction of alternative sweeteners e.g. Clyclamate,(a sugar substitute)
World War II reduces sugar production and raised prices.
Jan-60
Jan-65
Jan-70
2006/2008 Food Crisis
Cyclamate pulled of f market due to studies that it could induce cancer.
Imposition of tarif f s by major consuming nation reduced demand and cut prices.
Global def icit due to climate change
Increasing concerns about negative health ef f ects of sugar reducing demand.
Hurricane season in the US destroys sugar production and refining. Increased technology and mechanization increases supply keeping prices down.
Jan-75
Jan-80
Jan-85
Jan-90
Jan-95
Jan-00
Jan-05
Jan-10
Source: Vetiva Research
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Falling Sugar Prices. According to the Food and Agriculture Organization (FAO), some food commodity prices have been trending lower and somewhat stabilized. Sugar has been leading the pack with steady declines month on month since February 2011. This has been largely due to infiltration of news about the increasing sugar production into the markets, although still somewhat fragile and volatile, as any negative news from any sugar exporting country may send prices back up.
Sugar has been leading the pack with steady declines month on month since February 2011…
In May 2011, the FAO Food Price Index (FFPI) averaged 2.3 percent, down 1 percent from April but 69 percent higher than May 2010. Declines in the international prices of cereal and sugar were majorly responsible for the slight decrease in the May average value of the index; more than offsetting increases in meat and dairy prices with oils largely unchanged. The FFPI has been hovering above 231 points since the start of the year and hit its all time high of 238 points in February. Unfavorable weather and planting delays resulted in international prices of grains to rebound after a decline in March, with wheat and maize prices gaining 4 percent and 11 percent respectively. However, large export supplies kept rice prices under downward pressure. The FAO Sugar Price Index averaged nearly 311 points, down 10 percent from April and 26 percent below its January record. The recent decline was prompted by prospects of increased market availability, as the new crushing season begins in Brazil, and larger than anticipated production in Thailand. However, strong short-term demand led international sugar prices to level off somewhat in the last week of May. In February 2011, the UN Food and Agriculture Organization’s (FAO) global food prices Index rose to a 20-year high but started to decline in March 2011. Sugar is the only food commodity that has shown a consistent and significant decline in price trend since February.
FIG 7: THE UNITED NATION’S FAO FOOD PRICE INDEX January 2006 – March 2011 250 2011 230
2008
2010
210 2007 190 2009
170 150 130
2006
110 Jan
Feb
Mar
Apr
May
Jun
Jul
Aug Sep
Oct
Nov
Dec
In May , the FAO Food Price Index (FFPI) averaged 2.3%, down 1.0% from April but 69% higher than May 2010. Declines in the global prices of cereal and sugar were majorly responsible for the slight decrease in the May Source: FAO
14
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Possible Direction of Prices
FIG 8: GLOBAL RAW SUGAR PRICE POSSIBLE DIRECTIONS OCTOBER 2006 - MAY 2011 45 40
1
35 30
2
25 20
The price of raw sugar are beginning to trend downwards but this recovery still remains fragile, as a turn of events could spark off volatility.
3
15 10 5 0 Oct-06
Aug-07
Jun-08
Apr-09
Feb-10
Dec-10
Oct-11
Source: Bloomberg
In a year in which sugar prices reached record highs, we have seen prices also begin to correct itself after years of volatility. At the point at which sugar prices are trading at present there are three possible distinct scenarios that could play out as indicated in the above diagram. Scenario 1 - suggests a sharp twist of fate, as sugar prices begin to climb from its current levels which can only occur given, anticipated shortfall in supply which could be attributed to conditions that affects arable land or storage facilities, Government policies regulations discouraging export in sugar producing nations (majorly Brazil and India). Scenario 2 - indicates that supply is just enough to meet demand or consumers and producers are still uncertain about the global stock of sugar and supply level, this could be as a result of information asymmetry. There may also be some underlying cause for worry and speculation involved in this scenario. Scenario 3 - would be that the current status quo is maintained, given the expectation of bumper harvest in Brazil and India. India has already begun increasing exports in 2011, by allowing 500,000 tons of sugar exports under its Open General License (OGL) which is above expectations of 200,000 tons.
15
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
THE NIGERIAN SUGAR INDUSTRY Strong and Stable Demand: The demand for sugar in Nigeria has grown at a 6-year CAGR of c.8%, majorly driven by robust growth in the consumer goods sector, Quick Service Restaurants (QSR) and favorable demographics. Nigeria is the largest consumer of sugar in Sub-Saharan Africa (in absolute terms), excluding South Africa. The country’s consumption rate has grown annually, although consumption usually contracts in periods of high sugar prices as consumers adjust by searching for cheaper substitutes (such as synthetic sweeteners etc) to augment their use.
The combined installed capacity of 2.15 million MT exceeds the current demand for sugar at c.1.4 million MT…
Excess Refining Capacity Exists: Currently, the combined installed capacity of 2.15 million MT exceeds the current demand for sugar at c.1.4 million MT. However, based on capacity utilization rates, production remains at an average of 975,000 MT per annum, allowing room for imports. This has led to increasing infiltration by new players who also recognize the potential for growth in sugar demand. Nigeria is still a developing nation with per capita sugar consumption far below developed nations average of 35kg and world average of 23kg.
FIG 9: THE SUGAR INDUSTRY’S INSTALLED CAPACITY ‘000 TONNES
1500
1200
900
600
300
0 DSR
BUA
SAVANNAH
JOSEPDAM
Source: Vetiva Research
Supportive Government Policies: The Federal Government encourages local value addition by maintaining a levy of 35% on the importation of refined sugar and granting five year tax holidays to refineries. Some of these trading conditions, coupled with a high degree of concentration and low capacity utilization rates in local refineries, support a persistent gap between local and import parity prices of refined sugar. These tariff regimes were put in place to protect local sugar producers; because the cost of local production is high in comparison to imports, particularly as local producers have to generate their own power and deal with the other infrastructure challenges plaguing the Nigerian economy.
16
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
High Entry Barriers: Due to the huge capital outlay required to set up a sugar refinery, entry barriers are high. However, we are aware that competition is gradually building up momentum with names such as the Flourmills Group, and Olam Group already constructing sugar refineries and positioning to commence operations in the next 2-3 years. Changing Consumer Diets and Preferences: The young generation (ages 15 - 64years represent 56 percent of the total population) has an increasing preference for western diet, due to the ease of preparation and their fastpaced lives. Most of these diets contain high quantities of sugar compared to the traditional Nigerian diet. On the other hand, older generations are becoming increasingly health conscious and are avoiding sugar in their diets. On the balance, the demographics point to increasing sugar consumption.
Sugar Production Most of Nigeria’s sugar production only goes through the refining stage due to the lack of capacity to process cane to raw sugar. Commercial Sugar cane cultivation in Nigeria is almost negligible, due to poor infrastructure and incentives to encourage cultivation.
Commercial Sugar cane cultivation in Nigeria is almost negligible, due to poor infrastructure and incentives to encourage cultivation…
Integration of Sugar Milling and Refining: At the global stage, these two separate processes are becoming more integrated as refiners are beginning to incorporate the Sugar milling process. A survey conducted by the National Sugar Development Council (NSDC) showed that more than 500,000 hectares of low land, suitable for sugar cane cultivation, exists nationwide in 40 locations, which are uncultivated. Raw sugar is imported in Nigeria, as the technological capacity needed to produce raw sugar is minimal. The Government attempted to bridge this gap by establishing sugar cane plantations and production companies in some states to produce raw sugar to serve as feedstock for sugar refineries. However, most of these companies became moribund and were mostly on a small scale compared to the capacity/quantities needed by refiners of raw sugar. Many of these companies have now been privatized. They include Savannah Sugar, Nigeria Sugar Company, Sunti Sugar plantation and Lafiaji Sugar etc. Raw Sugar Importation despite Favorable Weather for Cultivation: According to estimates, Nigeria imports about 80% of her raw sugar requirement in spite of the prevalent favorable agricultural climate for sugar cane cultivation. Nonetheless, the prospects for sugar cane production and milling remains bright, given the already growing capacity. In 2007, Savannah Sugar (which was acquired by Dangote Industries Limited) commenced production and is currently expanding its operations. The NSDC is currently partnering with government (such as Agricultural Development Projects in states) in organizing and supporting sugar cane farmers to expand and improve output. Furthermore, the Federal Government has put in place incentives for investment in agriculture and agro-processing. Such incentives include: 1) Full capital allowance for agro-allied companies 2) Processing of agricultural produce is a pioneer industry, consequently there is 100% tax-free period for 5 years. 3) All agricultural and agro-industrial machines and equipment are charged low import duty (1-3%). 4) The NSDC in collaboration with the Central Bank of Nigeria and local banks, introduced a scheme to deliver inputs and credit to sugar cane growers at sub 10% interest rates.
17
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Sugar Consumption Nigeria’s domestic sugar consumption has been hovering around the 1.4 million MT mark and accounts for c.50% of sugar consumption in the West African region: total installed production capacity stands at 2.15 million MT. Nigeria’s per capita sugar consumption ranks amongst one of the lowest in the world at 9kg. Annual consumption of sugar is expected to reach about 2.5 million MT (Vetiva’s forecast) mark in the next five years. The demand for sugar has been on the increase in Nigeria, largely due to the increase in largescale industrial usage, particularly in Food and Beverages manufacturing, as well as QSRs. The changing preference of both the elite and middle class from our traditional little or no sugar based diet to westernized, sugar-filled diet has further incited the demand for sugar.
FIG 10: NIGERIAN SUGAR CONSUMPTION & GROWTH RATE 2000 – 2015E Million MT 1.6
60%
1.4
50%
1.2
40%
1
This growth in industrial sugar is expected to continue, given the recent exploration of sugar for production of ethanol, electricity and alcohol…
30%
0.8 0.6
20%
0.4
10%
0.2
0%
0 -0.2
2000
2003
2006
2009
2012E
2015E -10% -20%
-0.4 -0.6
-30% Source: NSDC, Vetiva Research
FIG 11: AFRICA’S SUGAR CONSUMPTION PER CAPITA Kilograms 60
50
30
Nigeria 9kg
40
20
10
0
Source: Vetiva Research
18
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Nigeria’s overall sugar consumption in 2010/11 is forecast to rise to about 1.45 million MT up from 1.40 million MT in 2009/10. This forecast is based mainly on population growth and declining raw sugar prices, which is expected to culminate in increased demand, especially for industrial use. The use of sugar in industrial activities such as manufacture of beverages and confectionary products, pharmaceuticals and pastries, is rising rapidly. This growth in industrial use of sugar is expected to continue, given the recent exploration of sugar for production of ethanol, electricity and alcohol, albeit still on a small scale. On the other hand, household usage/demand for sugar is growing at a slow and steady rate compared to industrial demand. Refined Sugar Importation The retail segment of the Nigerian sugar market has been dominated for decades by importation of refined sugar for both cubed and granulated sugar. Although the story changed for granulated sugar with the advent of DSR into the industry in 2000, the situation remains unchanged for cubed sugar. Cubed sugar is preferred to granulated sugar because it helps consumers monitor their sugar intake. Consumer preference for the cube is also based on the perception that it is more appealing and refined for household consumption.
For many years, the cubed sugar market has been dominated by the St. Louis brand, France’s second leading sugar producer…
For many years, the cubed sugar market has been dominated by the St. Louis brand made by Saint Louis Sucre, France’s second leading sugar producer. France is one of the leading producers of both raw and refined sugar. Its sugar consumption is 2.2 million MT with a per capita consumption of 39kg, France’s sugar production is about 5 million tons annually majorly from sugar beets, hence the room for massive exportation to African countries.
Regulation Over the years, Government policies have been targeted at the protection of domestic refineries and millers. In a bid to discourage the importation of refined sugar, the Government imposed; 1) an import duty of 20%, 2) development levy of 10%, 3) VAT of 5% This therefore implies an effective duty of 35% on imported refined sugar. Nevertheless, imported refined sugar still finds its way into the Nigerian market through smuggling. The imposition of the levy may not be a strong enough deterrent, as foreign brands, given their ability to refine at very low costs, still find their way into the market. The quantity of imported refined sugar has however decreased over time, as local refining capacity has improved. Raw Sugar import attracts a much lower duty of 5% and is exempted from the payment of the sugar development levy. This beneficial tariffs on raw sugar, encourages the importation of c.90% of the total raw sugar demand in the country. The Government has also made it mandatory for retail sugar supplied within the borders of the country to be fortified with Vitamin A. However, sugar supplied to industrial consumers, who are the largest consumers, is not fortified with Vitamin A as this causes undesired coloration in the end produce.
19
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
The Industry Players There are two major players/refiners in the Nigerian sugar industry, both located at the Lagos port; Dangote Sugar Refinery and BUA Sugar. Dangote Sugar Refinery - Dangote Sugar has a refining capacity of 1.4 million (MT) per annum (forecast total, post expansion - 2.5 million MT), making it the largest sugar refinery in sub Saharan Africa and one of the largest in the world. BUA Sugar Refinery - BUA Sugar has an installed capacity of 720,000MT per annum, and 20,000MT per day. It is the second largest sugar refinery in Nigeria after Dangote Sugar Refinery. The company acquired the sugar milling plant at Lafiagi in Kwara State and also has a sugar refinery factory located at Tin Can Port industrial estate in Lagos. The refinery is structured to generate its own power during the process of converting molasses to sugar. The refinery is 100% Nigerian owned and 100% equity financed. In 2010, the Federal Government approved 20 licenses for the establishment of sugar refineries in Nigeria…
Together, both Dangote Sugar and BUA Sugar refineries have a combined capacity of 2.2 million MT per annum, exceeding national consumption of 1.4 million MT. However, both companies are operating at a combined utilization rate of c.75%, with BUA operating at even less than 20%. The Milan Group – The Milan Group is the largest distributor of refined cubed sugar in Nigeria, with distribution centers spread across 18 geographical locations in the country. Cubed sugar is imported in containers from St. Louis Sucre, one of the largest sugar manufacturers in France. Nigeria consumes about 10,000 MT of Cube Sugar in a year, usually consumed in offices, restaurants, clubs, etc., due to its simplicity & packaging. Besides sugar, the group also imports and distributes rice, tyres, fruit juice imported from Europe and Asia, and operates shipping and clearing services, handling approximately 500,000 MT cargoes of rice and sugar. A Changing Business Terrain - Upcoming Players In 2010, the Federal Government approved 20 licenses for the establishment of sugar refineries in Nigeria. However, only three companies have disclosed on-going plans to establish sugar refineries in the country over the next few years. They are: 1) Flour mills Nigeria Plc - The largest flour miller in Nigeria disclosed plans to invest in the construction of a sugar refinery in Lagos, under the name Golden Penny Sugar, with a production capacity of 750,000 MT per annum, with plans to eventually double capacity. The company acquired Kaboji Farms, a sugar plantation and miller, in preparation for its sugar refinery billed to start in 2012. 2) Olam Int’l Ltd - The Company entered into a Joint Venture with Lababidi Group to set up a 1,500 MT per day (450,000MT per annum) sugar refinery at the Tincan Island port in Lagos and is expected to be completed by mid 2013. The venture will see Olam take an 80% stake and Lababidi 20%. Half of the project costs is expected to be funded by equity and half by debt. 3) Josepdam Group of Companies - The Company took over the assets and operations of the moribund milling company, Nigerian Sugar Company (NISCO) and the main objective of the company is to go into full scale sugar production - milling, refining and distribution of sugar.
20
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Market Share
MARKET SHARE THE SUGAR INDUSTRY (Percent)
Dangote Sugar Refinery Plc has the largest market share of c.60% with its 1.4 million MT per annum sugar refinery operating at c.60% utilization rate. BUA Sugar follows with its 750,000MT capacity operating at c.20% utilization rate. Over the years, there has been an influx of foreign brands of refined sugar into the Nigerian market, thereby competing with local brands for market share and penetration. Even though there is a 35% import levy on the importation of refined sugar, the Nigerian market still remains attractive to foreign brands as they are able to compete on all levels. French brand, St. Louis, has dominated the Nigerian retail space for decades.
Industry Outlook
DSR
BUA
St Louis
Other Imports
Other Fringe Players Source: Vetiva Estimates
The Nigerian sugar industry has the capability to be self reliant in raw sugar production which could transform Nigeria into a net exporter.…
Building Capacity to be Self-Reliant: One of the factors that make the Nigerian sugar industry attractive is the drive toward self-reliance in the production of raw sugar. We have continued to see massive investments in backward integration by the big sugar refining companies, coupled with the Government’s efforts to support this initiative. The weather condition in Nigeria is favorable for sugar cane cultivation, as it is essentially a tropical crop. Sugarcane thrives best in warm, sunny, frost-free weather. It needs fertile, well-drained soil and at least 1,500 millimetres of rain each year or access to irrigation supplies. These ideal conditions are found in Nigeria, especially in the Northern region. Being self reliant will enable companies divert funds, erstwhile channeled towards importation, to further investment in the sector, as well as expand raw sugar production capacities. In addition, it will reduce external shocks from the volatility in international sugar prices. Export Potential: As we had earlier pointed out, Nigeria has excess sugar refining capacity. Although we expect this to be utilized over the coming years as sugar consumption increases, the African market still remains to be exploited, as most West African countries are in fact net importers of refined sugar. As Africa develops and population increases, per capita consumption of sugar is expected to rise. Average per capita sugar consumption in Africa is 15kg relative to a world average of 23kg and an average of 35kg for developed countries. Riding the Curve: The sugar industry is seasonal; hence it will continue to have periods of peaks and troughs, which will continue to affect the performance of the companies within the industry. Sugar producers can ride the curve of sugar prices, concentrating on either upstream or downstream as situation allows. This will enable sugar refineries (most of which are investing in sugar plantations and milling capacity) to hedge against risks - profiting from higher margins selling raw sugar when prices are high thereby offsetting loses from sugar refining at such times and vice versa. So far, Dangote Sugar remains the only company that has started significant production in sugar cultivation and milling.
21
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
TABLE 1: Africa 2009/10 Togo
the African market still remains to be exploited, as most West African countries are in fact net importers of refined sugar.
Import/ton 80,000
Consumption/ton 82,000
Sierra Leone
52,000
57,000
Senegal
90,000
150,000
Niger
91,000
100,000
Mali
80,500
105,000
Liberia
54,450
56,000
Guinea Bissau
32,500
14,500
Guinea
109,000
125,000
Ghana
265,000
215,000
Gambia
159,000
165,000
Cote D'Ivoire
120,000
250,000
Burkina Faso
52,500
168,000
Benin
81,000
83,000 Source: Olam
22
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
DANGOTE SUGAR REFINERY
ACCUMULATE
Developing Competitive Strength along the Value Chain Dangote Sugar (DSR) is the only quoted company in the Nigerian sugar refining industry. Our investment case for DSR is largely premised on attractive valuation (using the DCF methodology) which gives us a Target range of N15.79 - N17.98 and a midpoint of N16.88 with an upside potential of 20.5% relative to the current market price of N14.00. We think that DSR is ‘undervalued’ at its current trading price, and thus, place an ACCUMULATE rating on the stock. We see DSR as a stock to strategically position for ahead of the turn of events in FY’11.
Stock Data Bloomberg Ticker:
DANGSUGA:NL
Market Price (N)
14.00
Shares Outs (bn)
12,000
Market cap (N’bn)
168
Fair value range (N)
15.79 – 17.98
Rating
ACCUMULATE
Increasing Industrial Demand: According to NSDC, the demand for Price Perf.
Dangsugar
NSE
-26.24
-1.91
-9.1
3.08
2010A
2011F
12-month (%) YTD (%)
Financials Turnover (N'bn)
89.9
98.5
EBITDA (N'bn)
16.2
26.6
PAT (N'bn)
11.3
18.0
EBITDA Marg (%)
18%
27%
industrial sugar has remained quite strong and continues to grow, while retail demand remains quite stable in the periods of high sugar prices. However, with the changing landscape, we expect to see industrial and household demand for sugar pick up significantly, buoyed by falling prices. Furthermore, the spate of packaged drinks (fizzy drinks) and fast food businesses will continue to prop up the demand for sugar, especially on an industrial scale.
Expansion and Economics of Scale: DSR currently has an installed capacity of 1.4 million MT per annum with plans to increase to a total of 2.4million MT per annum. This would make DSR one of the largest sugar refineries in the world. Operating at c.60% installed capacity, DSR controls c.70% of the Nigerian sugar market. As the largest sugar refinery in Africa, DSR benefits from economies of scale, giving the company a competitive advantage over peers. DSR has also started the exportation of sugar to neighboring West African markets. The company has on-going construction of a 1.25 million MT sugar refinery in Algeria, a country which has one of the highest per capita consumption in Africa.
PBT Margin (%)
18%
23.4
PAT Margin (%)
13%
18%
2010A
2011F
14.9
9.3
4.1
4.1
EV/EBITDA (x)
10.0
5.4
Debut into the Retail Packaging Market: DRS’s is set to introduce new
Div. Yield (%)
4.3%
7.9%
packs of 1kg, 250g, 500g sugar and cubed sugar for the retail/household market in Q3’11. This segment had been dominated by St. Louis sugar which Dangote intends to challenge head on DSR invested a cumulative N569 million ($3.6 million) over the period 2008-2010 for the expansion of its Lagos factory to accommodate the retail packaging plant.
Valuation P/E (x) P/BV (x)
One of the Highest Margins in Food & Beverages sector: DSR has one of the highest margins in the Food & Beverage sector. We had earlier stated that the company’s performance is susceptible to the volatility in raw sugar prices, and have further established an inverse relationship between raw sugar prices and the performance of sugar refineries, i.e. when sugar prices are up, performance of sugar refineries decline and vice versa. On normalized earnings, DSR boasts the highest margin of 27%, compared to an average 11% in the Food & Beverages Sector.
Stable Dividend Payment Policy: DSR has maintained a stable dividend payment policy over the years even in periods of adverse economic conditions. Its payout ratio has averaged 75% over the last 5 years.
23
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
FIG 13: DSR SHARE PRICE Vs. VOLUME TRADED 21
52 week high:N20.97 52 week low:N11.80 Average Price:N16.25 Average Vol. Traded:3.89 Mn Beta: 1.03
16
11 Volume Traded (Millions) 120
80
40
0 May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11 Source: NSE
FIG 14: 5 YEARS BENEFIT DECLARATION OF DSR Percent 100%
Payout
14%
Div Yield
12% 80% 10% 60%
8% 6%
40%
4% 20% 2% 0%
0% 2006
2007
2008
2009
2010
2011F
Source: NSE; Company Financials
24
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
COMPANY BACKGROUND Dangote Sugar commenced business in 2000 as the sugar division of Dangote Industries Limited (DIL). The DIL Group was established in May 1981 as a trading business with an initial focus on cement. The Group diversified over time into a conglomerate trading cement, sugar, flour, salt and fish. By the early 1990s the Group had grown into one of the largest trading conglomerates operating in the country.
FIG 15: OWNERSHIP STRUCTURE OF DSR (Percent)
Others 32% DIL 68%
Source: Vetiva Estimates
DSR has a free float of about 32 percent, with DIL holding the majority shares of the company of 68%.
In 1999, following a visit to Brazil to study the emerging manufacturing sector, DIL made a strategic decision to transit from a trading based business into a fully fledged manufacturing operation. DIL embarked on an ambitious construction program, initially focused on a flour milling plant, a sugar refinery and a pasta factory. In 2006, DSR was spun-off as a separate legal entity following the transfer of all the assets, liabilities and undertakings attributable to DIL’s sugar division to DSR. Presently, DSR has a free float of about 32%, with DIL holding the majority shares of the company (68%). Business Overview DSR started out by importing raw sugar from Brazil, because at that time, the sugar milling companies in the country were government-owned and moribund. The sugar refinery, which is located at the Apapa port in Lagos had an initial installed capacity to process 600,000 MT of raw sugar per annum. The refinery was designed and built by Tate & Lyle, UK and the equipment mostly imported from UK and Brazil. The refinery has since undergone two expansions, increasing the production capacity to 1.4 million MT per annum, making it the largest sugar refinery in sub Saharan Africa and second largest in the world. DSR also has plans to increase the existing 1.4 million MT by an additional 1.1 million MT which is expected to result in a combined capacity of 2.5 million MT per annum.
25
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
In 2007, DSR began the exportation of sugar to Ghana and aims to increase coverage to other sub Saharan African countries. DSR is in the process of constructing a Greenfield refinery plant in Algeria (Dangote Sucreire Algerie SPA) with an installed capacity of 1.25 million MT per annum. DSR has over the last three years invested N1 billion in the project.
Operations DSR’s operations comprise two key areas which include: i) Refining Process; ii) Marketing & Distribution.
Refining and Production: DSR imports raw sugar from Brazil, refines and packages at its Apapa-port refinery for distribution to bulk distributors and suppliers. DSR typically packages sugar in 50kg bags for distribution and aims to break into the retail market with packages of 250g, 500g and 1kg. The company has storage facilities for its stock of raw su gar before the sugar is refined. The refinery employs talo-phosphatation and ion-exchange resin technology to purify raw sugar to internationally accepted standards which is ISO 9001:2000 international quality certified. Power/Energy - DSR generates its own power supply and runs its major equipments with either gas or low pour fuel oil (LPFO). Savannah Sugar generates its own power from the production of ethanol, but it can also supply power in commercial quantity. Freight Cost: In order to further reduce costs, the management of the company has been in discussions with some ship owners over acquiring vessels, as a strategy to guaranty availability. DSR imports raw sugar from Brazil, refines and packages at its Apapa-port refinery for distribution to bulk distributors and suppliers
Products - Vitamin A Fortified Sugar - Dangote Vitamin A fortified sugar is a fine white granulated sugar, refined to the highest quality and dissolves easily. This all-purpose white sugar is ideal for table use, baking, sweetening of beverages etc. Unfortified industrial sugar - Dangote unfortified sugar is a specially processed sugar grade used by pharmaceuticals, food and beverage manufacturing companies etc.
Marketing and Distribution: DSR supplies refined sugar to a variety of customers who can be grouped into large industrial users (this group typically accounts for 30% of the company’s sales) and the wholesale distributors, (this group accounts for about 70% of sales). DSR supplies molasses - a by-product of the sugar refining process - to companies who produce sweeteners etc. Logistics/Distribution: DSR owns over 250 trucks to compliment the service rendered by Dangote Transport and other haulage companies in distributing its products across the country.
26
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Five - Year Financial Performance Growth: DSR’s growth rate has been dampened over the years by the impact of volatile sugar prices on the company’s operations with sales growing at a CAGR of 9 percent. Sales grew 60 percent and 43 percent in 2005 and 2006, but then tapered in successive years to 9.2 percent in 2010. DSR’s performance shows a high correlation to sugar prices as expected. The company’s sustainable growth rate (g) was lowest 2009 at 3% but increased to 9% in 2010, indicating improved potential for growth.
TABLE 2: GROWTH RATES Turnover grow th
2005
2006
2007
2008
2009
2010
59.9%
43.2%
-3.7%
0.0%
2.1%
9.2%
Growth in EBITDA
34.0%
44.6%
74.7%
-1.6% -35.1% -17.6%
Growth in PBT
27.2%
69.3%
84.1%
-1.7% -35.0% -17.6%
Growth in PAT
1.8% -39.7% -14.4%
27.2%
69.3%
28.9%
Growth rate (g)
49%
17%
17%
26%
3%
9%
Return on Avg Equity
49%
61%
80%
75%
36%
26%
100%
72%
21%
34%
9%
36%
Retention ratio
Source: Company Financials
Liquidity Analysis:
Liquidity profile shows healthy positions as DSR exhibits capacity to meet its short term obligations.
DSR’s liquidity profile in 2006 stood at 2.29 showing the company could meet over a 100 percent of its current obligation with its current assets. However, through 2007 to 2009, we saw this position decline but remained healthy, but then picked up again in 2010. DSR has no outstanding debt in its books, making its liquidity position a lot more stable; we do note that parent company, DIL, provides the finance it needs for the running of the company.
FIG 16: LIQUIDITY METRICS CURRENT RATIO & WORKING CAPITAL 24,000
3
Working Capital
Current Ratio
19,000 2.7
14,000 2.4 9,000 2.1 4,000
1.8 (1,000)
(6,000)
2006
2007
2008
2009
2010
1.5
Source: Company Financials
27
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Profitability: DSR’s profitability indicators have shown healthy levels over the years, with Gross Profit margin, Operating Profit margin and Net Profit margin rising from 24, 20 and 16 percents respectively in 2005 to 37, 36 and 27 percents in 2008. The years 2007 and 2008 were particularly good years; however, the company’s profitability ratios began to nose dive in 2009 and 2010 (but remain at comfortable levels), as input cost continued to pressurize the company’s profit margins.
FIG 17: PROFITABILITY RATIOS Percent
45% 29% 37%
40%
37% 36%
35% 30% 25% 20%
27% 24% 20%
27%
23% 20% 20%
23%
16%
22%
16%
18% 16%
15%
13%
10% 5% 0% 2005
2006
Gross Prof it margin
2007
2008
Operating prof it margin
2009
2010
Net Prof it Margin
Source: Company Financials
Activity (Efficiency Analysis): DSR improved on the effectiveness of the utilization of its assets, as the total asset turnover and fixed asset turnover ratios rose from 1.31x and 4.00x respectively in 2005 to 1.44x and 5.55x respectively in 2010.
FIG 18: ASSET UTILIZATION 7.00 6.00 5.00 4.00 3.00 2.00 1.00 2005
2006
2007
Fixed asset turnover
2008
2009
2010
Total Assets Turnover Source: Company Financials
28
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS Receivables and Payables: Receivable days declined from 167 days in 2005 to 67 days in 2010, a significant improvement over the years, and lower than historic average of 98 days. Receivables turnover rose from 2x in 2005 to 5x in 2010, with historic average at 4x. The development in receivables relative to historic figures, reflects DSR’s improving a credit policy. On the other hand, creditors tightened trade terms, as payable days declined from 80 days in 2005 to 49 days in 2010. Payable turnover was highest in 2006 and 2010 at c.7x (historic average: 5.5x). We note that 2006 and 2010 are years of sustained volatility in raw sugar prices, thus indicating that this ratio is quite sensitive to the volatility in raw sugar prices. On the balance DSR’s trade terms improved over the last five years. Inventory: A look at the trend here shows that turnover rate is slowing down over the last 5 years. Inventory turnover stood at 14.7x in 2005,19.7x in 2006, but declined to an average of 12x in 2008-2010. This shows that the company’s rate of turning inventory into sales gradually slackened over time. We do note the impact of rising global sugar prices on the activity of the company.
TABLE 3: ACTIVITY RATIOS
2005
2006
2007
2008
2009
2010
Inventory Turnover
14.71
19.68
13.41
8.07
7.17
7.55
Receivables Turnover
2.18
5.18
4.99
5.00
5.02
5.48
Payables Turnover
4.59
7.13
5.94
5.33
5.20
7.38
Days In Inventory Days In Receivables Days of Payment
24.82
18.55
27.22
45.26
50.88
48.36
167.60
70.48
73.08
72.99
72.66
66.56
79.50
51.21
61.45
68.48
70.14
49.45
Cash Conversion Cycle 112.93
37.82
38.85
49.76
53.41
65.48
Source: Company Financials; Vetiva Research
Market Positioning Optimal Positioning in the Sugar Industry: DSR is the leading supplier of refined sugar in Nigeria, operating a pseudo monopoly in the industry. The only other major competition to DSR is BUA which still remains a fringe player relative to the market size and share of DSR. We think competition will begin to heat up with the gradual entry of foreign and local firms (Flourmills, Olam, Josepdam). Nonetheless, DSR still possesses the scale and positioning to continue to dominate.
Backward Integration: DSR plans to expand its business horizon via its combination with sister company and subsidiary of Dangote Industries Limited (DIL), Savannah Sugar, to enable it consolidate on massive local production of sugar and further entrench its leadership position. Savannah sugar was acquired by DIL in 2002 as a sugar milling company. DIL has injected over N12 billion, making Savannah the only company in Nigeria that produces both raw and refined sugar from own-grown sugar cane plantations at its location in Numan, Adamawa state.
29
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
The proposed combination will create synergies and increase DSR’s overall capacity by 1 million MT per annum, and create in-road into the northern and eastern regions.
Potential for servicing deficient Sub-Saharan markets: The ECOWAS market, which is a free trade zone, offers an attractive market for DSR. The region, excluding Nigeria, imports 1 million MT of refined sugar per annum, the strategic location of DSR at the Apapa port offers easy access to the ECOWAS and other markets.
FIG 19: GLOBAL RAW PRICE VS DANGSUGAR PRICE TREND ON NSE MARCH 2007 - JUNE 2011 63
DSR
Raw sugar
56 49 42 35 28 21 14 7 0 Mar-07
Aug-07
Jan-08
Jun-08
Nov-08
Apr-09
Sep-09
Feb-10
Jul-10
Dec-10
May-11
Source: NSE; Bloomberg
30
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
FULL YEAR 2010 UPDATE DSR’s financial performance in the year 2010, fell below expectations as After Tax Earnings dipped from N13.18 billion to N11.28 billion (-14.4%), despite the 9% growth in Sales to N89.98 billion from N82.39 billion in the period under review.
Key Headlines
FY'10
FY'09
Chg
2010F
FY as %
%
NGNbn
of 2010F
Turnover
NGNbn 89.9
82.4
9%
86.5
104%
EBITDA
16.2
19.5
-17%
17.7
92%
EBIT
14.6
18
-19%
n/a
n/a
PBT
16.2
19.5
-17%
17.7
92%
Tax
-4.9
-6.9
-29%
-5.3
PAT
11.3
13.2
-14%
12.4
92% 91%
− Sales Growth propped by Price Increase. Sales was predominantly driven by price increases. As we had earlier stated, price increases leads to a fall in demand for sugar. This is coupled with the increasing competition within the industry (the sugar market is over supplied). Furthermore, the company has engaged in backward integration through its subsidiary Savannah Sugar which mills and refines sugar and generates power and ethanol from its activities. Savannah Sugar basically serves the northern region, where its sugar cane plantation and mill facility is located.
Pressured Earnings Profile. The company’s Before and After Tax Earnings fell short of our expectations, missing by 8.4% and 8.6% respectively. This, however, did not come as a surprise. We had earlier noted that earnings and margins would come under pressure, given the high prices of raw sugar on the international market in the course of 2010 (up 32%). The prospects for sugar in 2011 is much brighter as prices have moderated in recent months (down 19%), given improved weather conditions and bumper harvests in most producing nations.
Margins remain pressured Before and After Tax margins declined to 17.9% and 12.5%, from 23.8% and 16.0% respectively. As earlier stated, margins may have been pressured by increasing input cost. DSR’s effective tax for the period under review came in slightly lower at 30% compared to 33% in the previous year.
Dividend – lower than we expected The proposed dividend of N 0.60 fell short of our estimate of N0.82 by 27%. The proposed dividend translates to a yield of 4.3% (based on the trading price of N13.96) and payout ratio of 63.8%. We had anticipated an 80% payout ratio, in line with averages over the last three years.
31
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Valuation Our optimism is based on the company’s long term plans which make the investment case for DSR much more endearing. The company has proven to be proactive with the move towards integration and is much more aggressive in its strategy towards the retail market and product segmentation. This would broaden the company’s scope and increase market penetration and entrench market dominance in lieu of the entrance into the industry by some competitors. We therefore recommend an ‘Accumulate on the stock at current prices, based on our target price range of N15.73 - N17.98 and an upside potential of 20.4 percent.
FIG 20: NSE VS F&B VS DANGSUGAR MOVEMENT JANUARY 2010 - JUNE 2011
1.9 NSE ASI
F & B INDEX
DSR
1.7 1.5 1.3 1.1 0.9 0.7 0.5
Our Target Price range for DSR is between N15.79 N17.96 implying an upside potential of 20.5 percent…
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Source: Vetiva Estimates
Forecast We used the Discounted Cash-flow methodology for our valuation of DSR. We assumed a Cost of Equity of 16.6% and Terminal Growth Rate of 5.5%. Using Sensitivity Analysis to vary the Discount Factor and Growth Rate, we arrived at a Target Price range of N15.79 - N17.96 and mid-point target price of N16.88 ,implying an upside potential of 20.5 percent. We expect the stock to trade around this range in normal market conditions, but note however, the price movement remains susceptible to the volatility in raw sugar prices as established.
Our forecast was majorly based on the direction of raw sugar prices on the global market. We assumed raw sugar prices will continue to decline given the bumper harvest for 2011 and 2012 and expected increase in production and supply going forward. However, from 2013 we expect this trend to reverse and witness some tightening in raw sugar supply and hence higher prices. We have thus captured the cyclical nature of the industry into our forecast and arrived at our valuation based on these projections.
32
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Risks to Our Valuation Taking cognizance of the above, some major risk factors remain as threats to our valuation, these are: 1) The possibility of a turn of event sooner than expected, that is, volatility in raw sugar prices, which could be higher than we have modeled into our forecast 2) Fall in disposable income resulting in lower demand for company’s products 3) Adverse movement in exchange rate leading to foreign exchange losses.
Comparables for Dangote Sugar Refinery Plc
TABLE 4: Country Company
EBITDA EBIT Margin Margin
EV/ ROE EBITDA
P/E
Div Yield
S.A.
ILLOVO SUGAR LTD
20.6
12.7
3.1
8.2
23.9
2.1
S.A.
TONGAAT HULETT
21.7
13.9
74.9
7.4
12.0
1.0
Nigeria
DANGOTE SUGAR RE
17.9
16.2
25.9
10.0
14.9
4.3
Russia
RAZGULAY GR
4.8
0.1
-11.5
22.8
N.A.
N.A.
Thailand
KHONBURI SUGAR
9.8
8.2
14.8
N.A.
23.1
N.A.
Brazil
USIN C PINTO-PRF
11.7
7.2
39.3
11.4
8.5
N.A.
S.A.
CROOKES BROTHERS
16.0
8.6
28.9
12.9
21.4
4.4
Source: Bloomberg
33
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
INCOME STATEMENT (N'Mn) Income Revenue C ost of Sales Depreciation Gross Profit Distribution & Admin Expense
2008
2009
2010
80,671 49,790 924 29,957 3,588
82,395 61,636 1,567 19,192 4,927
89,980 71,882 1,570 16,527 3,498
2011F
2012F
2013F
98,499 68,004 1,198 30,495 5,143
110,475 76,272 1,345 34,203 5,370
111,975 77,308 1,508 34,667 5,606
Other Income Amortization EBIT Interest Payable & similar charges
2,877
3,754
1,549
29,246 19
18,019 0
14,578 2
25,352 0
28,834 0
29,062 0
EBITDA
30,170
19,587
16,148
26,550
30,178
30,570
19,586 6,401 13,185
16,146 4,865 11,282
25,352 7,352 18,000
28,834 8,362 20,472
29,062 8,428 20,634
Profit before taxation Taxation Profit after taxation
BALANCE SHEET (N'Mn) Assets Non current Asset Fixed Assets (PP&E) Investment in Subsidiary C urrent Assets Stocks Trade Debtors Other Debtors & Prepayments Due from related companies C ash and bank balances Total Assets Liabilities C urrent Liabilities Trade C reditors Bank Overdraft Other creditors Taxation Amount due to related companies Non C urrent Liabilities Deferred taxation Employees gratuity Total Liabilities
30,151 8,280 21870.664
2008
2009
2010
2011F
2012F
2013F
13,756 874 14,630
16,696 968 17,665
15,743 972 16,715
17,671 972 18,643
19,819 972 20,792
20,088 972 21,061
9,258 5,402 3,504 5533 19,847 43,544 58,173
14,094 5,946 790 17334 22,878 61,043 78,707
15,960 5,959 1,371 16049 6,240 45,579 62,294
15,342 6,304 3,507 16,040 23,746 64,939 83,582
17,207 7,070 3,933 16,040 27,883 72,134 92,926
17,441 7,166 3,986 16,040 33,201 77,834 98,895
9,000 12 5131 9,311 797 24,251
14,004 0 3587 15,117 2,331 35,039
9,794 0 2283 4,980 2,188 19,246
11,499 9,429 12,697 2,188 35,812
12,834 10,524 14,240 2,188 39,786
13,034 10,688 14,434 2,188 40,343
908 387.19 1,295 25546
1,453 603 2,056 37094
1,662 492 2,153 21399
1,662 492 2,153 37966
1,662 492 2,153 41940
1,662 492 2,153 42497
Net Asset
32,627
41,613
40,895
45,616
50,986
56,398
Equity Share capital Share premium Revenue Reserve SHF
6,000 6,321 20307 32,627
6,000 6,321 29292 41,613
6,000 6,321 28575 40,895
6,000 6,321 33296 45,616
6,000 6,321 38666 50,986
6,000 6,321 44078 56,398
34
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
GROWTH RATES Turnover growth Growth in EBITDA Growth in PBT Growth in PAT
2008 0.0% -1.6% -1.7% 1.8%
2009 2.1% -35.1% -35.0% -39.7%
2010 9.2% -17.6% -17.6% -14.4%
2011 9.5% 64.4% 57.0% 59.5%
2012 12.2% 13.7% 13.7% 13.7%
2013 1.4% 1.3% 0.8% 0.8%
PROFITABILITY Return on Avg Equity Return on Avg Assets Return on Net fixed assets Return on Invested C apital Growth rate (g)
2008 75% 40% 157% 243% 26%
2009 36% 19% 87% 89% 3%
2010 26% 16% 70% 40% 9%
2011 37% 25% 108% 56% 10%
2012 38% 23% 109% 76% 10%
2013 35% 22% 103% 75% 9%
MARGINS Net Profit Margin Gross Profit margin Operating profit margin (EBIT/revenue) Pretax Profit Margin EBITDA/Sales EBIT/Sales Return on total capital(EBIT/avg total capital) Interest bearing debt/Total assets
2008 27% 37% 36% 37% 37% 36% 90%
2009 16% 23% 22% 24% 24% 22% 43%
2010 12.5% 18% 16% 17.9% 17.9% 16% 36%
2011 18.3% 31% 26% 25.7% 27.0% 26% 56%
2012 19% 31% 26% 26% 27% 26% 57%
2013 18% 31% 26% 26% 27% 26% 52%
2008 8.07 5.00 5.33 45.26 72.99 68.48 1.39 5.70
2009 7.17 5.02 5.20 50.88 72.66 70.14 1.05 5.28
2010 7.55 5.48 7.38 48.36 66.56 49.45 1.44 5.94
2011 7.38 5.94 6.42 49.46 61.45 56.84 1.18 6.12
2012 7.52 6.51 6.77 48.56 56.05 53.88 1.19 6.43
2013 7.53 6.58 6.81 48.46 55.46 53.63 1.13 6.47
ACTIVITY RATIOS Inventory Turnover Receivables Turnover Payables Turnover Days In Inventory Days In Receivables Days of Payment Total Assets Turnover Fixed asset turnover
35
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
INVESTMENT RATINGS Vetiva uses a 5-tier ratings system for stocks under coverage: Buy, Accumulate, Neutral, Reduce and Sell. Buy ≥ +25.00% expected absolute price performance Accumulate +10.00% to +24.99% expected absolute price performance Neutral +5.00/+9.99% range expected absolute price performance Reduce -5.00% to +4.99% expected absolute price performance Sell < -5.00% expected absolute price performance Definition of Ratings Buy rating refers to stocks that are highly undervalued but with strong fundamentals and where potential return in excess of or equal to 25.00% is expected to be realized between the current price and analysts’ target price. Accumulate rating refers to stocks that are undervalued but with good fundamentals and where potential return of between 10.00% and 24.99% is expected to be realized between the current price and analysts’ target price. Neutral rating refers to stocks that are correctly valued with little upside or downside where potential return of between +5.00 and+9.99% is expected to be realized between current price and analysts’ target price. Reduce rating refers to stocks that are overvalued but with good or weakening fundamentals and where potential return of between -5% and +4.99% is expected to be realized between current price and analysts’ target price. Sell rating refers to stocks that are highly overvalued but with weak fundamentals and where potential return less than -5% is expected to be realized between current price and analysts’ target price.
36
DISCLOSURES SECTION Analyst Certification The research analysts who prepared this report certify as follows: 1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the companies, securities, industries or markets discussed in this report. 2. That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in this report. Other Disclosures Vetiva Capital Management Limited or any of its affiliates (collectively “Vetiva”) may have financial or beneficial interest in securities or related investments discussed in this report, potentially giving rise to a conflict of interest which could affect the objectivity of this report. Material interests which Vetiva may have in companies or securities discussed in this report are herein disclosed: Vetiva may own shares of the company/subject covered in this research report. Vetiva does or may seek to do business with the company/subject of this research report Vetiva may be or may seek to be a market maker for the company which is the subject of this research report Vetiva or any of its officers may be or may seek to be a director in the company which is the subject of this research report Vetiva may be likely recipient of financial or other material benefits from the company/subject of this research report. Disclaimer This research report is based on public information which the research analyst(s) consider credible and reliable. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Vetiva, including the investment banking team, as Vetiva has established information barriers between its Research team and certain business groups. Whilst reasonable care has been taken in preparing this document, no responsibility or liability is accepted either by Vetiva, its officers or any of its employees for any error of fact or opinion expressed herein. No reliance should be placed on the accuracy, fairness or completeness of the information contained in this report as it has not been verified by the research analyst(s) involved or the companies whose securities have been referred to except as otherwise disclosed. Neither Vetiva nor any of its officers or employees including the research analyst (s) warrant or represent the accuracy or completeness of information set out in this report. Any ratings, forecasts, estimates and opinions set forth in this report constitute the analyst(s) position as at the date of this report and may not necessarily be so after the report date as they are subject to change without notice. It is also instructive to note that a company’s past performance is not necessarily indicative of its future performance as estimates are based on assumptions that may or may not be realized. The value, price or income from investments mentioned in this report may fall as well as rise due to economic conditions, industry cycles, market indices, operational or financial conditions of companies or other factors. Thus, Vetiva and its officers and employees shall not accept liability for any loss arising from the use of this report or its contents in making investment decisions or recommendations. This report provides general information only. It is not intended to provide personal investment advice and does not take into account the specific investment objectives, financial situation and the particular needs of any specific person. Investments discussed in this report may not be suitable for all investors and the reader(s) should independently determine their suitability and evaluate the investment risks associated with such investments. All investors are solely responsible for their investment decisions. Any decision to purchase or subscribe for securities in any offering must be based solely on existing public information on such security or the information in the prospectus or other offering document issued in connection with such offering, and not on this report. Vetiva, through business units other than Vetiva Research, may have issued and may in the future issue trading ideas or recommendations that are inconsistent with, and reach different conclusions from, the information presented in this report. Such ideas or recommendations reflect the different time frames, assumptions, views and analytical methods of the persons who prepared them, and Vetiva is under no obligation to ensure that such other trading ideas or recommendations are brought to the attention of any recipient of this report.To the extent this report discusses any legal proceeding or issue, it has not been prepared as nor is it intended to express any legal conclusion, opinion or advice. Information relating to the tax status of companies whose securities are discussed in this report is not intended to provide tax advice or to be used by anyone to provide tax advice. By accepting this research report, you agree to be bound by the foregoing limitations. Vetiva Capital Management Limited is registered with the Securities & Exchange Commission to conduct Financial Advisory, Fund/Portfolio Management, and Trusteeship business in Nigeria. This document is for information purposes only and for private circulation. No portion of this document may be reprinted, sold or redistributed without the written consent of Vetiva Capital Management Limited. Vetiva research report is disseminated and available primarily electronically, and, in some cases, in printed form.
Additional information on recommended securities/instruments is available on request. © 2011 Vetiva Capital Management Limited. All rights reserved.
Vetiva Research Report
I Pg. 37
THE NIGERIAN SUGAR INDUSTRY
Analyst Adedoyin Adelakun [email protected]
June 16, 2011 Market Cap:
N168 bn(US$1.07bn)
Symbol: NSE Bloomberg Reuters:
As with most countries, the fortunes of the Nigerian sugar industry is hinged on the performance of raw sugar prices on the international scene, more so, as Nigeria is a net importer of raw sugar. Nonetheless, our optimism is based on the gradual strengthening of the upstream segment (cultivation and milling of sugar) which has the potential of minimizing the exposure of sugar refiners to volatile commodity prices as well as engender a stable supply of key input. We therefore take a look at the global trend, supply and demand dynamics of raw sugar and how it affects sugar refineries in Nigeria.
DANGSUGAR DANGSUGA.NL DANGSUG.LG
Metrics Forward 2011 P/E:
9.3x
EV/2011 EBITDA:
9.0x
2011 Div Yield:
6.5%
YTD perf:
Our Validation. Raw sugar prices are falling from record highs (from a 30year high of US$38.9/lb in January 2011 to US$29.1/lb a 27 percent easing), and are estimated to fall further in the coming months due to the robust harvest in sugar producing regions such as Brazil, Thailand and India, owing to favorable weather. This is expected to boost the performance of sugar refineries in Nigeria, given the inverse relationship between raw sugar prices and the earnings performance of sugar refiners. Expectations are that global sugar supply will outstrip demand in 2011 and most of 2012.
-9.09%
Favorable Demographics. Our optimism on sugar consumption is hinged
Shares Outstanding (Nbn):
12.00
Current Price (N):
14.00
Recommendation:
ACCUMULATE
mainly on increasing population and growing income levels. We note that the Nigerian population has been growing by c.2.8% annually over the years. This favorable demography further brightens the prospects for steady increase in sugar consumption. Further reinforcing the demand prospect is the currently low sugar consumption per capital of 9kg (Vs. 15kg for emerging African peers and a global average of 23kg), We have observed that in the last 6 years, sugar consumption has grown at a CAGR of 8%, albeit at a much slower pace in the last 3 years due to high raw sugar prices.
Share Price Performance Year High (NGN):
16.20
Year Low (NGN):
11.80
Government Policies. We expect that Government’s effort towards 30 Days (%):
6.46
Vetiva Research 90 Days [email protected] (%): Email:
(9.09)
52 weeks (%): (26.24) Plot 266B, Kofo Abayomi Street Victoria Island Lagos, NIGERIA Tel: +234-1-4617521-3 Vetiva Capital Management Limited Fax: +234-1-4617524 Plot 266B Kofo Abayomi Street Victoria Island Lagos, Nigeria Tel: +234-1-4617521-3 Fax: +234-1-4617524 Email: [email protected]
overhauling the agriculture value chain and in particular, the sugar industry will bode well for domestic refiners in the medium to long term. The Nigerian Government has put in place favorable regulations to support and protect local production of sugar (raw and refined). Such policies include the imposition of higher levies on importation of refined sugar in contrast to low duty on raw sugar (production capacity remains low) and the low duty on importation of sugar milling and refinery equipments. One of the major reasons for Government’s interest in the industry, apart from its ability to generate revenue, is to reduce external shocks from the volatility in global raw sugar prices. Nigeria spends an estimated N30 billion annually importing raw sugar.
Our Focus. Dangote Sugar Refinery (DSR) is the only quoted company in the Nigerian sugar refining industry. Our investment case for DSR is largely premised on its attractive valuation (using the DCF methodology) which gives a Target price range of N15.79 - N17.96; and its strengthening upstream segment. We think that DSR is ‘undervalued’ at its current trading price of N14.00, and thus place an ACCUMULATE rating on the stock.
Please see last page for important disclosures
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Table of Contents
Introduction: A world of Sugar
....................... 3
o Production o Types of Sugar o Uses of Sugar The Global Sugar Industry
....................... 7
o Demand and Supply Dynamics o Global Production and Consumption o Major Producers The Global Sugar Prices
..................... 9
o Price Trends o Global Sugar Prices Nigerian Sugar Industry
..................... 16
o Sugar Production o Sugar Consumption o Regulation o Industry Players o Industry Outlook Our Focus o Dangote Sugar Plc o Company Background o Operations o Five Year Financial Performance o 2010 Full Year Review o Valuation
2
.................... 23
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Introduction: A world of Sugar
There are two main sources of sugar; Sugar cane and Sugar beets but 79% of world sugar is sourced from sugar cane.
Sugar (sucrose) is the world’s predominant sweetener and is a carbohydrate that occurs naturally in every fruit and vegetable. It is the major product of photosynthesis, the process by which plants transform the sugar energy into food. Sugar occurs in the greatest quantities in sugar cane than in sugar beets. Sugar cane is a perennial crop in that it grows in the humid tropics (with at least 1,000 millimeters of rain annually) while sugar beet is a biennial root crop that grows in temperate regions. About 79% of total production is made from sugar cane while the balance of 21% is made from sugar beet, even though the end-product is the same (i.e. the source cannot be differentiated once converted to refined sugar); hence our focus on sugar cane. Sugar cane requires temperatures above 21° Celsius (C) for satisfactory growth, and the best results are obtained when the temperature exceeds 27° C. Although, growth ceases when the temperature falls below 11 — 13° C.
Production There are two stages involved in the sugar milling process they are; 1) The Sugar Milling 2) Sugar Refining. Mills extract raw sugar from freshly harvested cane, and sometimes bleach it to make "mill white" sugar for local consumption. Sugar refineries, produce refined white sugar, which is 99 percent sucrose. These two stages are slowly merging. Increasing affluence in the sugar-producing tropics increased demand for refined sugar products, driving a trend toward combined milling and refining. Sugar Milling: Newly arrived cane in sugar mills are tested for sugar content and trash percentage. The mill then washes, chops, and uses revolving knives to shred the cane. Shredded cane is repeatedly mixed with water and crushed; its juice is extracted, which is 10 - 15 percent sucrose. The remaining fibrous solids, called Bagasse, are burned for fuel in the mill's steam boilers; these boilers produce high pressure steam and the bagasse is passed through a turbine to generate electrical energy. Bagasse makes a sugar mill selfsufficient in terms of energy and can be made available for commercial purposes. The cane juice is next mixed with lime to adjust its pH to 7 (neutralized i.e. non-acidic and non-alkaline). This mixing arrests sucrose's decay into glucose and fructose, and precipitates some impurities. The mixture allows the lime and other suspended solids to settle. The clarified juice is concentrated in a multiple-effect evaporator to make syrup of about 60 percent sucrose by weight. This syrup is further concentrated under vacuum until it becomes supersaturated, and then seeded with fine sugar crystals. A batch type sugar centrifuge separates the sugar crystals from the mother liquor. The sugar from the centrifuges is dried and cooled and then stored in a silo or directly packed into bags for shipment.
3
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
The mother liquor from the first crystallization step (A-product) is again crystallized in vacuum pans and then passed through continuous sugar centrifugals. The mother-liquor is again crystallized in vacuum pans. Due to the low purity the evapo-crystallization alone is not sufficient to exhaust molasses, and so it is passed through cooling crystallizers until a temperature of about 45 °C is reached. Then the massecuite is re-heated in order to reduce its viscosity and then purged in the C-produced centrifugals. The spun-off sugar from the B-product and C-product centrifugals is re-melted, filtered and added to the syrup coming from the evaporator station. Raw sugar is yellow to brown. Bubbling sulphur dioxide through the cane juice before evaporation bleaches many color-forming impurities into colorless ones. The addition of sulphur produces sugar known as "mill white", "plantation white", and "crystal sugar". Such sugar is the most commonly consumed in sugarcane-producing countries. Sugar Refining: In the traditional refining process, the raw sugar is first mixed with heavy syrup and centrifuged to wash away the outer coating of the raw sugar crystals, which is less pure than the crystal interior. Many sugar refineries currently buy high quality sugar and can do without the affination process.
Sugar is used to grow penicillin and thus has antibiotic properties
The remaining sugar is then dissolved to make a syrup (about 70 percent by weight solids), which is clarified by the addition of phosphoric acid and calcium hydroxide that combine to precipitate calcium phosphate. The calcium phosphate particles trap some impurities and absorb others, and then float to the top of the tank, where they are skimmed off. After any remaining solids are filtered out, the clarified syrup is decolorized by filtration through a bed of activated carbon. The purified syrup is then concentrated to supersaturation and repeatedly crystallized under vacuum to produce white refined sugar. The sugar crystals are separated from the mother liquor by centrifuging. To produce granulated sugar, in which the individual sugar grains do not clump together, sugar must be dried. Drying is accomplished first by drying the sugar in a hot rotary dryer, and then by blowing cool air through it for several days in conditioning silos. The finished product is stored in large concrete or steel silos. The finished product is the sugar (sucrose) which most are familiar with and use sweeten food around the world. The main product of a sugar factory consisting of crystals of sucrose as removed from a massecuite and containing more or less impurities, depending on the type of sugar.
• Refined sugar: A white sugar • Very high pol sugar (VHP): Raw sugar with a pol of not less than 99,3°S. • High pol sugar (HP): Raw sugar with a pol between 98,0 and 99,3°S. • Low pol sugar (LP): Raw sugar with a pol below 98,0°S. • Brown sugar: A direct consumption raw sugar. • Tel quel sugar: The bulk product without reference to its quality.
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Uses of Sugar We use sugar in a variety of ways in our daily life. The most common form is granulated sugar which is used to sweeten food. However, this is only one of the important roles sugar plays. It can also be used in a variety of ways: In pharmaceuticals: It is used to grow Penicillin which is an antibiotic made by growing the mold Penicillium chrysogenum in a fermenter. The mold is grown in a liquid culture containing sugar and other nutrients. As the mold grows, the sugar is used up and only starts to make penicillin after using up most of the nutrients for growth.
Sugar is also used in pharmaceuticals for flavoring to mask the bitter taste of medicines.
Sugar possesses antibiotic properties and is effective in healing wounds. When it fills an open wound, it dissolves and prevents bacteria from growing as well as supplying nourishment to damaged tissues
In preservation: Sugar is used to preserve fruits, by cooking the material to be preserved in sugar to the point of crystallization and the resultant product is then stored dry. It can also help keep fresh flowers stay fresh longer. Other uses:
Sugar slows down the hardening of concrete.
Sugar is used in leather tanning and in the sizing and finishing of textiles.
Sugar is used as a hydrophilic agent in printing inks. Sugar can be used as an insect repellant.
Types of Sugar The three major types of sugar are: White, Brown and Liquid sugar.
Primarily, there are three types of sugar and they are; 1) White Sugar 2) Brown Sugar 3) Liquid Sugar. White Sugar There are many different types of granulated sugar. Some of these are used only by the food industry and professional bakers and are not available in the supermarket. The types of granulated sugars differ in crystal size. Each crystal size provides unique functional characteristics that make the sugar appropriate for a specific food’s special need. E.g. Bakers Special Sugar, Castor/caster sugar, Confectioners or powdered sugar (icing sugar), Coarse sugar, Date sugar, Fruit Sugar, Granulated sugar, Sugar cubes (moist granulated sugar pressed into molds and dried), Raw sugar ( tan colored sugar), Sanding sugar ( coarse sugar), Superfine, ultra fine, or bar sugar.
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Brown Sugar Brown sugar retains some of the surface molasses syrup, which imparts a characteristic pleasurable flavor. Dark brown sugar has a deeper color and stronger molasses flavor than light brown sugar. Demerara sugar - Popular in England, is a light brown sugar with large golden crystals, which are slightly sticky from the adhering molasses. It is often used in tea, coffee, or on top of hot cereals. Muscovado or Barbados sugar, a British specialty brown sugar, is very dark brown and has a particularly strong molasses flavor. The crystals are slightly coarser and stickier in texture than “regular” brown sugar. Free-flowing brown sugars - These sugars are specialty products produced by a co-crystallization process. The process yields fine, powder-like brown sugar that is less moist than “regular” brown sugar. Since it is less moist, it does not clump and is free-flowing like white sugar. Turbinado sugar - This sugar is raw sugar which has been partially processed, where only the surface molasses has been washed off. It has a blond color and mild brown sugar flavor, and is often used in tea and other beverages. Liquid Sugar There are several types of liquid sugar. Liquid sugar (sucrose) is white granulated sugar that has been dissolved in water before it is used. Liquid sugar is ideal for products whose recipes first require sugar to be dissolved. Amber liquid sugar is darker in color and can be used in foods where brown color is desired. Invert sugar - Sucrose can be split into its two component sugars (glucose and fructose). This process is called inversion, and the product is called invert sugar. Commercial invert sugar is a liquid product that contains equal amounts of glucose and fructose. Because fructose is sweeter than either glucose or sucrose, invert sugar is sweeter than white sugar. Commercial liquid invert sugars are prepared as different mixtures of sucrose and invert sugar. For example total invert sugar is half glucose and half fructose, while 50% invert sugar (half of the sucrose has been inverted) is one-half sucrose, one-quarter glucose and one-quarter fructose. Invert sugar is used mainly by food manufacturers to retard the crystallization of sugar and to retain moisture in the packaged food. Which particular invert sugar is used is determined by which function – retarding crystallization or retaining moisture – is required.
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The Global Sugar Industry Demand and Supply Dynamics Total World production of sugar ranges between 145 and 170 million tons annually, the total sugar production fluctuates every year depending largely on the harvest of sugar cane in sugar producing nations. The demand for sugar closely tails supply/production for sugar; hence in the years of thin harvest, demand usually outstrips supply which leads to volatile prices of sugar and ultimately results in the booms and burst in prices. Factors that influence the demand and supply for raw sugar on a global level are wide and varied. Some of the factors affecting demand include; the price of sugar, per capital real income, price of substitutes (sweeteners e.g. honey etc.), the demand for complements (bio-fuels, ethanol, power etc), the population, tastes, diets and preferences as well as health concerns. There is an inverse relationship between sugar price and demand for sugar, given that consumers tend to reduce demand in periods of high prices and opt for cheaper substitutes. The sectors that demand sugar the most are Soft Drinks, Beverages, Processed foods, Quick service restaurants (QSR) and households. On the other hand, factors influencing supply of sugar include; the weather condition, availability of arable lands, Government policies, natural disasters and sugar cane diseases in major producing nations, commercial farmers ability to migrate from one crop to the other due to profitability etc. The interaction of these factors largely affects the pricing of sugar and the dynamics of the industry. Booms, Bubbles and Burst
The sugar cycle may take about six to seven years to complete a full round from boom to bust and back to boom.
The interaction of demand and supply dynamics creates the booms, bubbles and burst cycles in the price of sugar. Cycles are a dominant feature of commodity prices, and there is no known consistency to the shape of these cycles. However, from past trends, the price slumps seem to last longer than the price booms. Irrespective of demand, this oscillatory pattern generally obtains in a seasonal industry like the sugar market. At the bottom of the cycle, prices trade at depressed level and at the top, they command significant premium, leading to bumper profits for the producers and suppliers who sell raw sugar to the sugar millers and refiners. The periods of high prices make sugar a major income earner for sugar producing nations. The sugar cycle may take about six to seven years (being a perennial crop that can be harvested two to ten times before replanting) to complete a full round from boom to burst and back to boom. Typically, a boom is witnessed when there is low sugar production relative to consumption, followed by lower inventory/stock, higher imports and higher sugar prices, leading to bumper profits for producers. But, once prices reach high levels, farmers perceive sugar cane cultivation as more attractive, which leads to increased availability, surplus sugar production and thus lower sugar prices, making it difficult for farmers to make profits.
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FIG 1: TYPICAL FOOD COMMODITY CYCLE Peak
Trough
There are two sides to this curve, the sugar farmers profit from high prices caused by the scarcity whilst sugar refiners profit from low prices…
Source: Vetiva Research
Generally, commercial farmers tend to be drawn towards commodities with high prices as the possibility of making bumper profits (which is more than enough to cover production costs, and make new investments in their farms) is higher than lower priced commodities. Hence, these farmers contribute to the cycle via their activities of migrating to a more profitable crop/commodity. This is further displayed for instance, when sugar prices begin to rise (shortly after a major price decline). These commercial farmers at this point perceive sugar as more lucrative and begin to cultivate more sugar than other commodities and consequently shoring up global supply (assuming other factors affecting supply are unchanged). However, there is a time lag between the time of cultivation and harvest this period still gives room for uptrend in sugar prices. By the next harvest season sugar prices are forced down from their previous highs by the supply glut. Hence, there are two sides to this curve. The sugar farmers profit from high prices (caused by the scarcity of sugar) by selling to the sugar millers and refiners at much higher prices which implies higher margins for farmers. The other side of the curve is the refiners, who profit from low prices. They have higher margins in the periods of low prices as the percentage decrease in the price of refined sugar is usually significantly lower than the percentage decrease in raw sugar prices and hence the higher margins. In most parts of the world, sugar milling is being integrated to sugar refining. More recently, most sugar refineries are acquiring sugar cane plantations to complete the value chain; entering the upstream segment and thereby riding the curve to minimize shocks from price uptrend.
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Global Production and Consumption World production of sugar is expected to increase in 2012, buoyed by increased production in India, bumper harvests in Brazil, Thailand and other sugar producing regions (even as Russia is due to lift ban on exportation in July 2011). We expect to see increased supply over the next year, as sugar prices still remain attractive (prices are not down to record lows yet), farmers will continue to plant and harvest sugar in order to ride on the boom and switch when prices are at the trough.
FIG 2: GLOBAL SUGAR PRODUCTION AND CONSUMPTION 2000 – 2012E (Million MT) 180
Production
Global production is expected to outstrip global consumption after more than two seasons of large deficit. The ISO revised the global sugar production for a third time putting 2011/12 production at 167mtrv
Consumption
160 140 120 100 80 60 40 20 0 2000/01
2002/03
2004/05
2006/07
2008/09
2010/11 Source: USDA; Vetiva Research
We expect to see increased supply over the next year, as sugar prices still remain attractive, farmers will continue to grow sugar.
Observation from the USDA chart above shows that in 2010/11 global production and ending stock is expected to outstrip global consumption after more than two seasons of large deficit. The sugar production for 2011/12 marketing year is forecast at 168 million MT, up 8 million MT from the previous year. Consumption is forecast at a record 162 million MT, up 2.7 million MT from a year earlier and ending stocks are forecast at 29 million tons, down over 400 thousand MT. The International Sugar Organization (ISO) revised the global sugar production for a third time putting 2010/11 (for Oct/Nov season) total world production at 167mtrv (million MT) up 5.7% from the previous season. Consumption on the other hand was revised upwards to 166.1mtrv and is expected to grow at 2.2%, slower than 10-year average of 2.5%. Despite the downward revision of global production, export availability still covers projected import demand. The global export availability is put at 51.3 million MT exceeding import demand estimated at 50.4 million MT. Surplus and Deficit As stated earlier, the cause of the volatility in sugar prices has been periods of deficit and surplus over the years. The observed trend in sugar prices therefore has been moving northward in the periods of global deficit and southwards in periods of surplus. Between 1985 and 2005, we witnessed relative stability in sugar prices in the world sugar market. However, the food crisis of 2008 further upset the sugar trend for the past 10 years.
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Major Sugar Producers More than 130 countries produce sugar around the world either from sugar beet or sugar cane. Approximately 79% of total production is made from sugar cane grown primarily in the tropical and sub-tropical zones of the southern hemisphere, and the balance from sugar beet which is grown mainly in the temperate zones of the northern hemisphere. Currently, 71% of the world’s sugar is consumed in the countries of origin, whilst the balance is traded on world markets. The world’s largest producers of sugar are: Brazil, India, EU, China, US, Thailand, South African Countries, Mexico, Australia and Pakistan in that order for the 2010/11 crop year. The countries with the largest consumption of sugar in the world are: India, followed by EU, China, South African Countries, Middle East, Brazil, US, Russia, Indonesia and Pakistan. However India consumes exactly all it produces while US, Mexico, EU, China, Russia, South African Countries and Indonesia consume much more sugar than they produce.
FIG 4: TOP CONSUMERS BY COUNTRIES
FIG 3: TOP PRODUCERS BY COUNTRIES
(Million MT)
(Million MT)
India
Brazil
EU
India
China
EU-21 China
Middle East
US
Brazil
Thailand
SADC
SADC
USA
Mexico
Russia
Australia
Indonesia
Central Americ…
Mexico
Production Consumption
Pakistan 20
40
60 Source: USDA
Consumption Export
Pakistan 20
40
60 Source: USDA
Brazilian Sugar: Every year Brazil produces over 10 million tons of sugar, most of which is exported. The majority of Brazilian sugar is VHP (very high polarized sugar) which is always produced for export and subsequently refined in other countries. The ICUMSA 45 sugar is also produced for both local consumption and export. The Brazilian sugar is grown largely in Sao Paulo region of Brazil, mostly from sugar cane.
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Global Sugar Prices Factors Influencing Sugar Price Trends The following are the factors that have increasingly contributed to the upheaval in sugar prices in the past few years; Climate Change: Unimpeded growth of greenhouse gas emission (CO2, Nitrogen etc) is raising the earth’s temperature, resulting in changing global climate. According to the United Nations, the term Climate Change refers to a change in climate which is directly or indirectly attributed to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods. According to the National Aeronautics and Space Administration (NASA) Research, global surface temperatures in 2010 tied 2005 as the warmest on record. In this analysis, the next warmest years are 1998, 2002, 2003, 2006, 2007 and 2009, which are statistically tied for third warmest year. The GISS (Goddard Institute for Space Studies) records begin in 1880. The analysis found 2010 approximately 1.13°F warmer than the average global surface temperature from 1951 to 1980. To measure climate change, scientists look at long-term trends. The temperature trend, including data from 2010, shows the climate has warmed by approximately 0.36°F per decade since the late 1970s. The clearest indication of impending radical climate change came in the form of an extraordinary oscillation between extremes of heat and cold, accompanied by exceptionally violent weather, especially in the crop production regions of the world. Some of the countries that were affected are; Climate change in key sugar producing nations led to the deficit observed in 2010
− Russia: The country experienced the worst drought in 2010 as an abnormally hot and dry weather swept over the nation. Most of its farmland was affected as crops were destroyed and the Government had to intervene to support farmers. This also led the Government to place a ban on grain exportation, according to the prime minister the ban will be lifted on the 1st of July 2011. − Ukraine: The world's largest exporter of grains, especially barley, experienced winter frosts and a scorching summer heat in the course of 2010 causing huge damage on harvest and crop stocks. − Australia: Following heavy rainfalls across drought-affected regions in inland Australia, there was an outbreak of locust due to prolonged periods of rains creating a suitable environment for the gestation of spur-throat locusts (one of the most destructive breeds). − Kazakhstan: The country also experienced severe heat-waves in 2010 which have affected most of it arable areas, especially in the West, with three-quarters of crops ravaged by drought. Although the Northern region of the country was spared from the drought and destruction. − Brazil: There was excessive rains and flooding in Sao Paulo during the 2009/10 season thereby restricting the production of sugarcane. This particularly affected the sugarcane crushing period, thereby affecting raw sugar production for export and consumption.
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Increasing Alternative Uses of Sugar: In recent times, sugar has been seen as an energy source, given its use in biofuels, and rising demand for alternative energy (cleaner energy/green energy) which has made demand for sugar to continue its northward movement and thereby weighing heavily on prices. Biofuels are fuels made from living organisms and are renewable (meaning their sources can be re-grown) and can be classified into three categories; i) First generation Biofuels which are made from edible sugars and starches. ii) Second generation Biofuels are made from non-edible plant materials. iii) Third generation are made from algae and microbes. Biofuels offer environmental benefits such as lower carbon emissions and lower sulfur compared with conventional petroleum-based fuels. As a result a number of regions have adopted the usage of sugar as a source of energy, especially in Brazil. This has over the years led to an increase in demand for sugar and the hence high sugar prices. The Oil Factor (Increasing Correlation of Oil and Sugar Prices):
As a result a number of regions have adopted the usage of sugar as a source of energy, especially in Brazil. This has led to an increase in demand for sugar and the hence high sugar prices
Following from the above, we have continued to observe that the increase in oil prices pull sugar prices. The increase in petroleum-based oil price leaves consumers with no other option than to search for alternative sources of energy such as Biofuels, thus, we see an increase in price of Biofuels driven by an increase in oil price which ultimately leads to an increase in sugar (one of the main inputs into the production Biofuels). Ethanol production, derived from starch and sugar crops such as sugar cane and cereals, expanded by 53 percent from 30 billion litres in 2000 to about 46 billion litres in 2005. Owing to the advances in technology and policy incentives, the ethanol fuel industry is no longer restricted to a few countries (i.e. Brazil, Japan and the United States) but is building momentum in other parts of the world, including China, India and Thailand.
FIG 5: CRUDE OIL AND SUGAR PRICES CORRELATION MAY2003 – MAY 2011 1.60
SUGAR
OIL
1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00
Source: Bloomberg
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Current Trend: Is Another Cycle Emerging? After reaching 30-year highs of US$38.9/lb to US$29.1/lb in June 2011, global raw sugar prices are beginning to fall, largely supported by the recent news about a bumper harvest in the 2010/2011 crop year and the Indian Food Ministry’s approval of the export of 500,000 metric tons of sugar under the Open General License for the first time in more than two years. Despite recent declines (down 25% since year high) raw sugar prices are still above 2008 food crisis levels of US$19.26/lb and 2010 levels. One of the major concerns about sugar prices is that the world population has been growing by approximately 4% yearly while global food production is increasing by 1% yearly. In 2006/2008, average world food prices rose by 217%, mainly due to drought in grain producing regions, and rising oil prices which led to high cost of food transportation. This was further exacerbated by increased use of food for animal feed and bio fuels in some developed countries, resulting in a shortage of global food stockpile as we had stated earlier. Global sugar supply and production as at the beginning of the food crisis in 2007/8 was still in surplus but sugar prices rose along with other commodities nonetheless, as a band wagon effect. When the food crisis abated, sugar prices began a further ascent to new highs in 2009, prodded by an actual deficit in global supply and stock of raw sugar.
FIG 6: GLOBAL RAW SUGAR PRICE TREND OVER FIVE DECADES January 1960 – February 28, 2011
Stockpiling due to supply shortage and prices transf erred to consumers.
Increased Mechanization of sugar production raises supply and cut prices.
Introduction of alternative sweeteners e.g. Clyclamate,(a sugar substitute)
World War II reduces sugar production and raised prices.
Jan-60
Jan-65
Jan-70
2006/2008 Food Crisis
Cyclamate pulled of f market due to studies that it could induce cancer.
Imposition of tarif f s by major consuming nation reduced demand and cut prices.
Global def icit due to climate change
Increasing concerns about negative health ef f ects of sugar reducing demand.
Hurricane season in the US destroys sugar production and refining. Increased technology and mechanization increases supply keeping prices down.
Jan-75
Jan-80
Jan-85
Jan-90
Jan-95
Jan-00
Jan-05
Jan-10
Source: Vetiva Research
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Falling Sugar Prices. According to the Food and Agriculture Organization (FAO), some food commodity prices have been trending lower and somewhat stabilized. Sugar has been leading the pack with steady declines month on month since February 2011. This has been largely due to infiltration of news about the increasing sugar production into the markets, although still somewhat fragile and volatile, as any negative news from any sugar exporting country may send prices back up.
Sugar has been leading the pack with steady declines month on month since February 2011…
In May 2011, the FAO Food Price Index (FFPI) averaged 2.3 percent, down 1 percent from April but 69 percent higher than May 2010. Declines in the international prices of cereal and sugar were majorly responsible for the slight decrease in the May average value of the index; more than offsetting increases in meat and dairy prices with oils largely unchanged. The FFPI has been hovering above 231 points since the start of the year and hit its all time high of 238 points in February. Unfavorable weather and planting delays resulted in international prices of grains to rebound after a decline in March, with wheat and maize prices gaining 4 percent and 11 percent respectively. However, large export supplies kept rice prices under downward pressure. The FAO Sugar Price Index averaged nearly 311 points, down 10 percent from April and 26 percent below its January record. The recent decline was prompted by prospects of increased market availability, as the new crushing season begins in Brazil, and larger than anticipated production in Thailand. However, strong short-term demand led international sugar prices to level off somewhat in the last week of May. In February 2011, the UN Food and Agriculture Organization’s (FAO) global food prices Index rose to a 20-year high but started to decline in March 2011. Sugar is the only food commodity that has shown a consistent and significant decline in price trend since February.
FIG 7: THE UNITED NATION’S FAO FOOD PRICE INDEX January 2006 – March 2011 250 2011 230
2008
2010
210 2007 190 2009
170 150 130
2006
110 Jan
Feb
Mar
Apr
May
Jun
Jul
Aug Sep
Oct
Nov
Dec
In May , the FAO Food Price Index (FFPI) averaged 2.3%, down 1.0% from April but 69% higher than May 2010. Declines in the global prices of cereal and sugar were majorly responsible for the slight decrease in the May Source: FAO
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Possible Direction of Prices
FIG 8: GLOBAL RAW SUGAR PRICE POSSIBLE DIRECTIONS OCTOBER 2006 - MAY 2011 45 40
1
35 30
2
25 20
The price of raw sugar are beginning to trend downwards but this recovery still remains fragile, as a turn of events could spark off volatility.
3
15 10 5 0 Oct-06
Aug-07
Jun-08
Apr-09
Feb-10
Dec-10
Oct-11
Source: Bloomberg
In a year in which sugar prices reached record highs, we have seen prices also begin to correct itself after years of volatility. At the point at which sugar prices are trading at present there are three possible distinct scenarios that could play out as indicated in the above diagram. Scenario 1 - suggests a sharp twist of fate, as sugar prices begin to climb from its current levels which can only occur given, anticipated shortfall in supply which could be attributed to conditions that affects arable land or storage facilities, Government policies regulations discouraging export in sugar producing nations (majorly Brazil and India). Scenario 2 - indicates that supply is just enough to meet demand or consumers and producers are still uncertain about the global stock of sugar and supply level, this could be as a result of information asymmetry. There may also be some underlying cause for worry and speculation involved in this scenario. Scenario 3 - would be that the current status quo is maintained, given the expectation of bumper harvest in Brazil and India. India has already begun increasing exports in 2011, by allowing 500,000 tons of sugar exports under its Open General License (OGL) which is above expectations of 200,000 tons.
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THE NIGERIAN SUGAR INDUSTRY Strong and Stable Demand: The demand for sugar in Nigeria has grown at a 6-year CAGR of c.8%, majorly driven by robust growth in the consumer goods sector, Quick Service Restaurants (QSR) and favorable demographics. Nigeria is the largest consumer of sugar in Sub-Saharan Africa (in absolute terms), excluding South Africa. The country’s consumption rate has grown annually, although consumption usually contracts in periods of high sugar prices as consumers adjust by searching for cheaper substitutes (such as synthetic sweeteners etc) to augment their use.
The combined installed capacity of 2.15 million MT exceeds the current demand for sugar at c.1.4 million MT…
Excess Refining Capacity Exists: Currently, the combined installed capacity of 2.15 million MT exceeds the current demand for sugar at c.1.4 million MT. However, based on capacity utilization rates, production remains at an average of 975,000 MT per annum, allowing room for imports. This has led to increasing infiltration by new players who also recognize the potential for growth in sugar demand. Nigeria is still a developing nation with per capita sugar consumption far below developed nations average of 35kg and world average of 23kg.
FIG 9: THE SUGAR INDUSTRY’S INSTALLED CAPACITY ‘000 TONNES
1500
1200
900
600
300
0 DSR
BUA
SAVANNAH
JOSEPDAM
Source: Vetiva Research
Supportive Government Policies: The Federal Government encourages local value addition by maintaining a levy of 35% on the importation of refined sugar and granting five year tax holidays to refineries. Some of these trading conditions, coupled with a high degree of concentration and low capacity utilization rates in local refineries, support a persistent gap between local and import parity prices of refined sugar. These tariff regimes were put in place to protect local sugar producers; because the cost of local production is high in comparison to imports, particularly as local producers have to generate their own power and deal with the other infrastructure challenges plaguing the Nigerian economy.
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High Entry Barriers: Due to the huge capital outlay required to set up a sugar refinery, entry barriers are high. However, we are aware that competition is gradually building up momentum with names such as the Flourmills Group, and Olam Group already constructing sugar refineries and positioning to commence operations in the next 2-3 years. Changing Consumer Diets and Preferences: The young generation (ages 15 - 64years represent 56 percent of the total population) has an increasing preference for western diet, due to the ease of preparation and their fastpaced lives. Most of these diets contain high quantities of sugar compared to the traditional Nigerian diet. On the other hand, older generations are becoming increasingly health conscious and are avoiding sugar in their diets. On the balance, the demographics point to increasing sugar consumption.
Sugar Production Most of Nigeria’s sugar production only goes through the refining stage due to the lack of capacity to process cane to raw sugar. Commercial Sugar cane cultivation in Nigeria is almost negligible, due to poor infrastructure and incentives to encourage cultivation.
Commercial Sugar cane cultivation in Nigeria is almost negligible, due to poor infrastructure and incentives to encourage cultivation…
Integration of Sugar Milling and Refining: At the global stage, these two separate processes are becoming more integrated as refiners are beginning to incorporate the Sugar milling process. A survey conducted by the National Sugar Development Council (NSDC) showed that more than 500,000 hectares of low land, suitable for sugar cane cultivation, exists nationwide in 40 locations, which are uncultivated. Raw sugar is imported in Nigeria, as the technological capacity needed to produce raw sugar is minimal. The Government attempted to bridge this gap by establishing sugar cane plantations and production companies in some states to produce raw sugar to serve as feedstock for sugar refineries. However, most of these companies became moribund and were mostly on a small scale compared to the capacity/quantities needed by refiners of raw sugar. Many of these companies have now been privatized. They include Savannah Sugar, Nigeria Sugar Company, Sunti Sugar plantation and Lafiaji Sugar etc. Raw Sugar Importation despite Favorable Weather for Cultivation: According to estimates, Nigeria imports about 80% of her raw sugar requirement in spite of the prevalent favorable agricultural climate for sugar cane cultivation. Nonetheless, the prospects for sugar cane production and milling remains bright, given the already growing capacity. In 2007, Savannah Sugar (which was acquired by Dangote Industries Limited) commenced production and is currently expanding its operations. The NSDC is currently partnering with government (such as Agricultural Development Projects in states) in organizing and supporting sugar cane farmers to expand and improve output. Furthermore, the Federal Government has put in place incentives for investment in agriculture and agro-processing. Such incentives include: 1) Full capital allowance for agro-allied companies 2) Processing of agricultural produce is a pioneer industry, consequently there is 100% tax-free period for 5 years. 3) All agricultural and agro-industrial machines and equipment are charged low import duty (1-3%). 4) The NSDC in collaboration with the Central Bank of Nigeria and local banks, introduced a scheme to deliver inputs and credit to sugar cane growers at sub 10% interest rates.
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FALLING PRICES; RISING PROSPECTS
Sugar Consumption Nigeria’s domestic sugar consumption has been hovering around the 1.4 million MT mark and accounts for c.50% of sugar consumption in the West African region: total installed production capacity stands at 2.15 million MT. Nigeria’s per capita sugar consumption ranks amongst one of the lowest in the world at 9kg. Annual consumption of sugar is expected to reach about 2.5 million MT (Vetiva’s forecast) mark in the next five years. The demand for sugar has been on the increase in Nigeria, largely due to the increase in largescale industrial usage, particularly in Food and Beverages manufacturing, as well as QSRs. The changing preference of both the elite and middle class from our traditional little or no sugar based diet to westernized, sugar-filled diet has further incited the demand for sugar.
FIG 10: NIGERIAN SUGAR CONSUMPTION & GROWTH RATE 2000 – 2015E Million MT 1.6
60%
1.4
50%
1.2
40%
1
This growth in industrial sugar is expected to continue, given the recent exploration of sugar for production of ethanol, electricity and alcohol…
30%
0.8 0.6
20%
0.4
10%
0.2
0%
0 -0.2
2000
2003
2006
2009
2012E
2015E -10% -20%
-0.4 -0.6
-30% Source: NSDC, Vetiva Research
FIG 11: AFRICA’S SUGAR CONSUMPTION PER CAPITA Kilograms 60
50
30
Nigeria 9kg
40
20
10
0
Source: Vetiva Research
18
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Nigeria’s overall sugar consumption in 2010/11 is forecast to rise to about 1.45 million MT up from 1.40 million MT in 2009/10. This forecast is based mainly on population growth and declining raw sugar prices, which is expected to culminate in increased demand, especially for industrial use. The use of sugar in industrial activities such as manufacture of beverages and confectionary products, pharmaceuticals and pastries, is rising rapidly. This growth in industrial use of sugar is expected to continue, given the recent exploration of sugar for production of ethanol, electricity and alcohol, albeit still on a small scale. On the other hand, household usage/demand for sugar is growing at a slow and steady rate compared to industrial demand. Refined Sugar Importation The retail segment of the Nigerian sugar market has been dominated for decades by importation of refined sugar for both cubed and granulated sugar. Although the story changed for granulated sugar with the advent of DSR into the industry in 2000, the situation remains unchanged for cubed sugar. Cubed sugar is preferred to granulated sugar because it helps consumers monitor their sugar intake. Consumer preference for the cube is also based on the perception that it is more appealing and refined for household consumption.
For many years, the cubed sugar market has been dominated by the St. Louis brand, France’s second leading sugar producer…
For many years, the cubed sugar market has been dominated by the St. Louis brand made by Saint Louis Sucre, France’s second leading sugar producer. France is one of the leading producers of both raw and refined sugar. Its sugar consumption is 2.2 million MT with a per capita consumption of 39kg, France’s sugar production is about 5 million tons annually majorly from sugar beets, hence the room for massive exportation to African countries.
Regulation Over the years, Government policies have been targeted at the protection of domestic refineries and millers. In a bid to discourage the importation of refined sugar, the Government imposed; 1) an import duty of 20%, 2) development levy of 10%, 3) VAT of 5% This therefore implies an effective duty of 35% on imported refined sugar. Nevertheless, imported refined sugar still finds its way into the Nigerian market through smuggling. The imposition of the levy may not be a strong enough deterrent, as foreign brands, given their ability to refine at very low costs, still find their way into the market. The quantity of imported refined sugar has however decreased over time, as local refining capacity has improved. Raw Sugar import attracts a much lower duty of 5% and is exempted from the payment of the sugar development levy. This beneficial tariffs on raw sugar, encourages the importation of c.90% of the total raw sugar demand in the country. The Government has also made it mandatory for retail sugar supplied within the borders of the country to be fortified with Vitamin A. However, sugar supplied to industrial consumers, who are the largest consumers, is not fortified with Vitamin A as this causes undesired coloration in the end produce.
19
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
The Industry Players There are two major players/refiners in the Nigerian sugar industry, both located at the Lagos port; Dangote Sugar Refinery and BUA Sugar. Dangote Sugar Refinery - Dangote Sugar has a refining capacity of 1.4 million (MT) per annum (forecast total, post expansion - 2.5 million MT), making it the largest sugar refinery in sub Saharan Africa and one of the largest in the world. BUA Sugar Refinery - BUA Sugar has an installed capacity of 720,000MT per annum, and 20,000MT per day. It is the second largest sugar refinery in Nigeria after Dangote Sugar Refinery. The company acquired the sugar milling plant at Lafiagi in Kwara State and also has a sugar refinery factory located at Tin Can Port industrial estate in Lagos. The refinery is structured to generate its own power during the process of converting molasses to sugar. The refinery is 100% Nigerian owned and 100% equity financed. In 2010, the Federal Government approved 20 licenses for the establishment of sugar refineries in Nigeria…
Together, both Dangote Sugar and BUA Sugar refineries have a combined capacity of 2.2 million MT per annum, exceeding national consumption of 1.4 million MT. However, both companies are operating at a combined utilization rate of c.75%, with BUA operating at even less than 20%. The Milan Group – The Milan Group is the largest distributor of refined cubed sugar in Nigeria, with distribution centers spread across 18 geographical locations in the country. Cubed sugar is imported in containers from St. Louis Sucre, one of the largest sugar manufacturers in France. Nigeria consumes about 10,000 MT of Cube Sugar in a year, usually consumed in offices, restaurants, clubs, etc., due to its simplicity & packaging. Besides sugar, the group also imports and distributes rice, tyres, fruit juice imported from Europe and Asia, and operates shipping and clearing services, handling approximately 500,000 MT cargoes of rice and sugar. A Changing Business Terrain - Upcoming Players In 2010, the Federal Government approved 20 licenses for the establishment of sugar refineries in Nigeria. However, only three companies have disclosed on-going plans to establish sugar refineries in the country over the next few years. They are: 1) Flour mills Nigeria Plc - The largest flour miller in Nigeria disclosed plans to invest in the construction of a sugar refinery in Lagos, under the name Golden Penny Sugar, with a production capacity of 750,000 MT per annum, with plans to eventually double capacity. The company acquired Kaboji Farms, a sugar plantation and miller, in preparation for its sugar refinery billed to start in 2012. 2) Olam Int’l Ltd - The Company entered into a Joint Venture with Lababidi Group to set up a 1,500 MT per day (450,000MT per annum) sugar refinery at the Tincan Island port in Lagos and is expected to be completed by mid 2013. The venture will see Olam take an 80% stake and Lababidi 20%. Half of the project costs is expected to be funded by equity and half by debt. 3) Josepdam Group of Companies - The Company took over the assets and operations of the moribund milling company, Nigerian Sugar Company (NISCO) and the main objective of the company is to go into full scale sugar production - milling, refining and distribution of sugar.
20
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Market Share
MARKET SHARE THE SUGAR INDUSTRY (Percent)
Dangote Sugar Refinery Plc has the largest market share of c.60% with its 1.4 million MT per annum sugar refinery operating at c.60% utilization rate. BUA Sugar follows with its 750,000MT capacity operating at c.20% utilization rate. Over the years, there has been an influx of foreign brands of refined sugar into the Nigerian market, thereby competing with local brands for market share and penetration. Even though there is a 35% import levy on the importation of refined sugar, the Nigerian market still remains attractive to foreign brands as they are able to compete on all levels. French brand, St. Louis, has dominated the Nigerian retail space for decades.
Industry Outlook
DSR
BUA
St Louis
Other Imports
Other Fringe Players Source: Vetiva Estimates
The Nigerian sugar industry has the capability to be self reliant in raw sugar production which could transform Nigeria into a net exporter.…
Building Capacity to be Self-Reliant: One of the factors that make the Nigerian sugar industry attractive is the drive toward self-reliance in the production of raw sugar. We have continued to see massive investments in backward integration by the big sugar refining companies, coupled with the Government’s efforts to support this initiative. The weather condition in Nigeria is favorable for sugar cane cultivation, as it is essentially a tropical crop. Sugarcane thrives best in warm, sunny, frost-free weather. It needs fertile, well-drained soil and at least 1,500 millimetres of rain each year or access to irrigation supplies. These ideal conditions are found in Nigeria, especially in the Northern region. Being self reliant will enable companies divert funds, erstwhile channeled towards importation, to further investment in the sector, as well as expand raw sugar production capacities. In addition, it will reduce external shocks from the volatility in international sugar prices. Export Potential: As we had earlier pointed out, Nigeria has excess sugar refining capacity. Although we expect this to be utilized over the coming years as sugar consumption increases, the African market still remains to be exploited, as most West African countries are in fact net importers of refined sugar. As Africa develops and population increases, per capita consumption of sugar is expected to rise. Average per capita sugar consumption in Africa is 15kg relative to a world average of 23kg and an average of 35kg for developed countries. Riding the Curve: The sugar industry is seasonal; hence it will continue to have periods of peaks and troughs, which will continue to affect the performance of the companies within the industry. Sugar producers can ride the curve of sugar prices, concentrating on either upstream or downstream as situation allows. This will enable sugar refineries (most of which are investing in sugar plantations and milling capacity) to hedge against risks - profiting from higher margins selling raw sugar when prices are high thereby offsetting loses from sugar refining at such times and vice versa. So far, Dangote Sugar remains the only company that has started significant production in sugar cultivation and milling.
21
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
TABLE 1: Africa 2009/10 Togo
the African market still remains to be exploited, as most West African countries are in fact net importers of refined sugar.
Import/ton 80,000
Consumption/ton 82,000
Sierra Leone
52,000
57,000
Senegal
90,000
150,000
Niger
91,000
100,000
Mali
80,500
105,000
Liberia
54,450
56,000
Guinea Bissau
32,500
14,500
Guinea
109,000
125,000
Ghana
265,000
215,000
Gambia
159,000
165,000
Cote D'Ivoire
120,000
250,000
Burkina Faso
52,500
168,000
Benin
81,000
83,000 Source: Olam
22
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
DANGOTE SUGAR REFINERY
ACCUMULATE
Developing Competitive Strength along the Value Chain Dangote Sugar (DSR) is the only quoted company in the Nigerian sugar refining industry. Our investment case for DSR is largely premised on attractive valuation (using the DCF methodology) which gives us a Target range of N15.79 - N17.98 and a midpoint of N16.88 with an upside potential of 20.5% relative to the current market price of N14.00. We think that DSR is ‘undervalued’ at its current trading price, and thus, place an ACCUMULATE rating on the stock. We see DSR as a stock to strategically position for ahead of the turn of events in FY’11.
Stock Data Bloomberg Ticker:
DANGSUGA:NL
Market Price (N)
14.00
Shares Outs (bn)
12,000
Market cap (N’bn)
168
Fair value range (N)
15.79 – 17.98
Rating
ACCUMULATE
Increasing Industrial Demand: According to NSDC, the demand for Price Perf.
Dangsugar
NSE
-26.24
-1.91
-9.1
3.08
2010A
2011F
12-month (%) YTD (%)
Financials Turnover (N'bn)
89.9
98.5
EBITDA (N'bn)
16.2
26.6
PAT (N'bn)
11.3
18.0
EBITDA Marg (%)
18%
27%
industrial sugar has remained quite strong and continues to grow, while retail demand remains quite stable in the periods of high sugar prices. However, with the changing landscape, we expect to see industrial and household demand for sugar pick up significantly, buoyed by falling prices. Furthermore, the spate of packaged drinks (fizzy drinks) and fast food businesses will continue to prop up the demand for sugar, especially on an industrial scale.
Expansion and Economics of Scale: DSR currently has an installed capacity of 1.4 million MT per annum with plans to increase to a total of 2.4million MT per annum. This would make DSR one of the largest sugar refineries in the world. Operating at c.60% installed capacity, DSR controls c.70% of the Nigerian sugar market. As the largest sugar refinery in Africa, DSR benefits from economies of scale, giving the company a competitive advantage over peers. DSR has also started the exportation of sugar to neighboring West African markets. The company has on-going construction of a 1.25 million MT sugar refinery in Algeria, a country which has one of the highest per capita consumption in Africa.
PBT Margin (%)
18%
23.4
PAT Margin (%)
13%
18%
2010A
2011F
14.9
9.3
4.1
4.1
EV/EBITDA (x)
10.0
5.4
Debut into the Retail Packaging Market: DRS’s is set to introduce new
Div. Yield (%)
4.3%
7.9%
packs of 1kg, 250g, 500g sugar and cubed sugar for the retail/household market in Q3’11. This segment had been dominated by St. Louis sugar which Dangote intends to challenge head on DSR invested a cumulative N569 million ($3.6 million) over the period 2008-2010 for the expansion of its Lagos factory to accommodate the retail packaging plant.
Valuation P/E (x) P/BV (x)
One of the Highest Margins in Food & Beverages sector: DSR has one of the highest margins in the Food & Beverage sector. We had earlier stated that the company’s performance is susceptible to the volatility in raw sugar prices, and have further established an inverse relationship between raw sugar prices and the performance of sugar refineries, i.e. when sugar prices are up, performance of sugar refineries decline and vice versa. On normalized earnings, DSR boasts the highest margin of 27%, compared to an average 11% in the Food & Beverages Sector.
Stable Dividend Payment Policy: DSR has maintained a stable dividend payment policy over the years even in periods of adverse economic conditions. Its payout ratio has averaged 75% over the last 5 years.
23
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
FIG 13: DSR SHARE PRICE Vs. VOLUME TRADED 21
52 week high:N20.97 52 week low:N11.80 Average Price:N16.25 Average Vol. Traded:3.89 Mn Beta: 1.03
16
11 Volume Traded (Millions) 120
80
40
0 May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11 Source: NSE
FIG 14: 5 YEARS BENEFIT DECLARATION OF DSR Percent 100%
Payout
14%
Div Yield
12% 80% 10% 60%
8% 6%
40%
4% 20% 2% 0%
0% 2006
2007
2008
2009
2010
2011F
Source: NSE; Company Financials
24
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
COMPANY BACKGROUND Dangote Sugar commenced business in 2000 as the sugar division of Dangote Industries Limited (DIL). The DIL Group was established in May 1981 as a trading business with an initial focus on cement. The Group diversified over time into a conglomerate trading cement, sugar, flour, salt and fish. By the early 1990s the Group had grown into one of the largest trading conglomerates operating in the country.
FIG 15: OWNERSHIP STRUCTURE OF DSR (Percent)
Others 32% DIL 68%
Source: Vetiva Estimates
DSR has a free float of about 32 percent, with DIL holding the majority shares of the company of 68%.
In 1999, following a visit to Brazil to study the emerging manufacturing sector, DIL made a strategic decision to transit from a trading based business into a fully fledged manufacturing operation. DIL embarked on an ambitious construction program, initially focused on a flour milling plant, a sugar refinery and a pasta factory. In 2006, DSR was spun-off as a separate legal entity following the transfer of all the assets, liabilities and undertakings attributable to DIL’s sugar division to DSR. Presently, DSR has a free float of about 32%, with DIL holding the majority shares of the company (68%). Business Overview DSR started out by importing raw sugar from Brazil, because at that time, the sugar milling companies in the country were government-owned and moribund. The sugar refinery, which is located at the Apapa port in Lagos had an initial installed capacity to process 600,000 MT of raw sugar per annum. The refinery was designed and built by Tate & Lyle, UK and the equipment mostly imported from UK and Brazil. The refinery has since undergone two expansions, increasing the production capacity to 1.4 million MT per annum, making it the largest sugar refinery in sub Saharan Africa and second largest in the world. DSR also has plans to increase the existing 1.4 million MT by an additional 1.1 million MT which is expected to result in a combined capacity of 2.5 million MT per annum.
25
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
In 2007, DSR began the exportation of sugar to Ghana and aims to increase coverage to other sub Saharan African countries. DSR is in the process of constructing a Greenfield refinery plant in Algeria (Dangote Sucreire Algerie SPA) with an installed capacity of 1.25 million MT per annum. DSR has over the last three years invested N1 billion in the project.
Operations DSR’s operations comprise two key areas which include: i) Refining Process; ii) Marketing & Distribution.
Refining and Production: DSR imports raw sugar from Brazil, refines and packages at its Apapa-port refinery for distribution to bulk distributors and suppliers. DSR typically packages sugar in 50kg bags for distribution and aims to break into the retail market with packages of 250g, 500g and 1kg. The company has storage facilities for its stock of raw su gar before the sugar is refined. The refinery employs talo-phosphatation and ion-exchange resin technology to purify raw sugar to internationally accepted standards which is ISO 9001:2000 international quality certified. Power/Energy - DSR generates its own power supply and runs its major equipments with either gas or low pour fuel oil (LPFO). Savannah Sugar generates its own power from the production of ethanol, but it can also supply power in commercial quantity. Freight Cost: In order to further reduce costs, the management of the company has been in discussions with some ship owners over acquiring vessels, as a strategy to guaranty availability. DSR imports raw sugar from Brazil, refines and packages at its Apapa-port refinery for distribution to bulk distributors and suppliers
Products - Vitamin A Fortified Sugar - Dangote Vitamin A fortified sugar is a fine white granulated sugar, refined to the highest quality and dissolves easily. This all-purpose white sugar is ideal for table use, baking, sweetening of beverages etc. Unfortified industrial sugar - Dangote unfortified sugar is a specially processed sugar grade used by pharmaceuticals, food and beverage manufacturing companies etc.
Marketing and Distribution: DSR supplies refined sugar to a variety of customers who can be grouped into large industrial users (this group typically accounts for 30% of the company’s sales) and the wholesale distributors, (this group accounts for about 70% of sales). DSR supplies molasses - a by-product of the sugar refining process - to companies who produce sweeteners etc. Logistics/Distribution: DSR owns over 250 trucks to compliment the service rendered by Dangote Transport and other haulage companies in distributing its products across the country.
26
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Five - Year Financial Performance Growth: DSR’s growth rate has been dampened over the years by the impact of volatile sugar prices on the company’s operations with sales growing at a CAGR of 9 percent. Sales grew 60 percent and 43 percent in 2005 and 2006, but then tapered in successive years to 9.2 percent in 2010. DSR’s performance shows a high correlation to sugar prices as expected. The company’s sustainable growth rate (g) was lowest 2009 at 3% but increased to 9% in 2010, indicating improved potential for growth.
TABLE 2: GROWTH RATES Turnover grow th
2005
2006
2007
2008
2009
2010
59.9%
43.2%
-3.7%
0.0%
2.1%
9.2%
Growth in EBITDA
34.0%
44.6%
74.7%
-1.6% -35.1% -17.6%
Growth in PBT
27.2%
69.3%
84.1%
-1.7% -35.0% -17.6%
Growth in PAT
1.8% -39.7% -14.4%
27.2%
69.3%
28.9%
Growth rate (g)
49%
17%
17%
26%
3%
9%
Return on Avg Equity
49%
61%
80%
75%
36%
26%
100%
72%
21%
34%
9%
36%
Retention ratio
Source: Company Financials
Liquidity Analysis:
Liquidity profile shows healthy positions as DSR exhibits capacity to meet its short term obligations.
DSR’s liquidity profile in 2006 stood at 2.29 showing the company could meet over a 100 percent of its current obligation with its current assets. However, through 2007 to 2009, we saw this position decline but remained healthy, but then picked up again in 2010. DSR has no outstanding debt in its books, making its liquidity position a lot more stable; we do note that parent company, DIL, provides the finance it needs for the running of the company.
FIG 16: LIQUIDITY METRICS CURRENT RATIO & WORKING CAPITAL 24,000
3
Working Capital
Current Ratio
19,000 2.7
14,000 2.4 9,000 2.1 4,000
1.8 (1,000)
(6,000)
2006
2007
2008
2009
2010
1.5
Source: Company Financials
27
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Profitability: DSR’s profitability indicators have shown healthy levels over the years, with Gross Profit margin, Operating Profit margin and Net Profit margin rising from 24, 20 and 16 percents respectively in 2005 to 37, 36 and 27 percents in 2008. The years 2007 and 2008 were particularly good years; however, the company’s profitability ratios began to nose dive in 2009 and 2010 (but remain at comfortable levels), as input cost continued to pressurize the company’s profit margins.
FIG 17: PROFITABILITY RATIOS Percent
45% 29% 37%
40%
37% 36%
35% 30% 25% 20%
27% 24% 20%
27%
23% 20% 20%
23%
16%
22%
16%
18% 16%
15%
13%
10% 5% 0% 2005
2006
Gross Prof it margin
2007
2008
Operating prof it margin
2009
2010
Net Prof it Margin
Source: Company Financials
Activity (Efficiency Analysis): DSR improved on the effectiveness of the utilization of its assets, as the total asset turnover and fixed asset turnover ratios rose from 1.31x and 4.00x respectively in 2005 to 1.44x and 5.55x respectively in 2010.
FIG 18: ASSET UTILIZATION 7.00 6.00 5.00 4.00 3.00 2.00 1.00 2005
2006
2007
Fixed asset turnover
2008
2009
2010
Total Assets Turnover Source: Company Financials
28
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS Receivables and Payables: Receivable days declined from 167 days in 2005 to 67 days in 2010, a significant improvement over the years, and lower than historic average of 98 days. Receivables turnover rose from 2x in 2005 to 5x in 2010, with historic average at 4x. The development in receivables relative to historic figures, reflects DSR’s improving a credit policy. On the other hand, creditors tightened trade terms, as payable days declined from 80 days in 2005 to 49 days in 2010. Payable turnover was highest in 2006 and 2010 at c.7x (historic average: 5.5x). We note that 2006 and 2010 are years of sustained volatility in raw sugar prices, thus indicating that this ratio is quite sensitive to the volatility in raw sugar prices. On the balance DSR’s trade terms improved over the last five years. Inventory: A look at the trend here shows that turnover rate is slowing down over the last 5 years. Inventory turnover stood at 14.7x in 2005,19.7x in 2006, but declined to an average of 12x in 2008-2010. This shows that the company’s rate of turning inventory into sales gradually slackened over time. We do note the impact of rising global sugar prices on the activity of the company.
TABLE 3: ACTIVITY RATIOS
2005
2006
2007
2008
2009
2010
Inventory Turnover
14.71
19.68
13.41
8.07
7.17
7.55
Receivables Turnover
2.18
5.18
4.99
5.00
5.02
5.48
Payables Turnover
4.59
7.13
5.94
5.33
5.20
7.38
Days In Inventory Days In Receivables Days of Payment
24.82
18.55
27.22
45.26
50.88
48.36
167.60
70.48
73.08
72.99
72.66
66.56
79.50
51.21
61.45
68.48
70.14
49.45
Cash Conversion Cycle 112.93
37.82
38.85
49.76
53.41
65.48
Source: Company Financials; Vetiva Research
Market Positioning Optimal Positioning in the Sugar Industry: DSR is the leading supplier of refined sugar in Nigeria, operating a pseudo monopoly in the industry. The only other major competition to DSR is BUA which still remains a fringe player relative to the market size and share of DSR. We think competition will begin to heat up with the gradual entry of foreign and local firms (Flourmills, Olam, Josepdam). Nonetheless, DSR still possesses the scale and positioning to continue to dominate.
Backward Integration: DSR plans to expand its business horizon via its combination with sister company and subsidiary of Dangote Industries Limited (DIL), Savannah Sugar, to enable it consolidate on massive local production of sugar and further entrench its leadership position. Savannah sugar was acquired by DIL in 2002 as a sugar milling company. DIL has injected over N12 billion, making Savannah the only company in Nigeria that produces both raw and refined sugar from own-grown sugar cane plantations at its location in Numan, Adamawa state.
29
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
The proposed combination will create synergies and increase DSR’s overall capacity by 1 million MT per annum, and create in-road into the northern and eastern regions.
Potential for servicing deficient Sub-Saharan markets: The ECOWAS market, which is a free trade zone, offers an attractive market for DSR. The region, excluding Nigeria, imports 1 million MT of refined sugar per annum, the strategic location of DSR at the Apapa port offers easy access to the ECOWAS and other markets.
FIG 19: GLOBAL RAW PRICE VS DANGSUGAR PRICE TREND ON NSE MARCH 2007 - JUNE 2011 63
DSR
Raw sugar
56 49 42 35 28 21 14 7 0 Mar-07
Aug-07
Jan-08
Jun-08
Nov-08
Apr-09
Sep-09
Feb-10
Jul-10
Dec-10
May-11
Source: NSE; Bloomberg
30
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
FULL YEAR 2010 UPDATE DSR’s financial performance in the year 2010, fell below expectations as After Tax Earnings dipped from N13.18 billion to N11.28 billion (-14.4%), despite the 9% growth in Sales to N89.98 billion from N82.39 billion in the period under review.
Key Headlines
FY'10
FY'09
Chg
2010F
FY as %
%
NGNbn
of 2010F
Turnover
NGNbn 89.9
82.4
9%
86.5
104%
EBITDA
16.2
19.5
-17%
17.7
92%
EBIT
14.6
18
-19%
n/a
n/a
PBT
16.2
19.5
-17%
17.7
92%
Tax
-4.9
-6.9
-29%
-5.3
PAT
11.3
13.2
-14%
12.4
92% 91%
− Sales Growth propped by Price Increase. Sales was predominantly driven by price increases. As we had earlier stated, price increases leads to a fall in demand for sugar. This is coupled with the increasing competition within the industry (the sugar market is over supplied). Furthermore, the company has engaged in backward integration through its subsidiary Savannah Sugar which mills and refines sugar and generates power and ethanol from its activities. Savannah Sugar basically serves the northern region, where its sugar cane plantation and mill facility is located.
Pressured Earnings Profile. The company’s Before and After Tax Earnings fell short of our expectations, missing by 8.4% and 8.6% respectively. This, however, did not come as a surprise. We had earlier noted that earnings and margins would come under pressure, given the high prices of raw sugar on the international market in the course of 2010 (up 32%). The prospects for sugar in 2011 is much brighter as prices have moderated in recent months (down 19%), given improved weather conditions and bumper harvests in most producing nations.
Margins remain pressured Before and After Tax margins declined to 17.9% and 12.5%, from 23.8% and 16.0% respectively. As earlier stated, margins may have been pressured by increasing input cost. DSR’s effective tax for the period under review came in slightly lower at 30% compared to 33% in the previous year.
Dividend – lower than we expected The proposed dividend of N 0.60 fell short of our estimate of N0.82 by 27%. The proposed dividend translates to a yield of 4.3% (based on the trading price of N13.96) and payout ratio of 63.8%. We had anticipated an 80% payout ratio, in line with averages over the last three years.
31
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Valuation Our optimism is based on the company’s long term plans which make the investment case for DSR much more endearing. The company has proven to be proactive with the move towards integration and is much more aggressive in its strategy towards the retail market and product segmentation. This would broaden the company’s scope and increase market penetration and entrench market dominance in lieu of the entrance into the industry by some competitors. We therefore recommend an ‘Accumulate on the stock at current prices, based on our target price range of N15.73 - N17.98 and an upside potential of 20.4 percent.
FIG 20: NSE VS F&B VS DANGSUGAR MOVEMENT JANUARY 2010 - JUNE 2011
1.9 NSE ASI
F & B INDEX
DSR
1.7 1.5 1.3 1.1 0.9 0.7 0.5
Our Target Price range for DSR is between N15.79 N17.96 implying an upside potential of 20.5 percent…
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Source: Vetiva Estimates
Forecast We used the Discounted Cash-flow methodology for our valuation of DSR. We assumed a Cost of Equity of 16.6% and Terminal Growth Rate of 5.5%. Using Sensitivity Analysis to vary the Discount Factor and Growth Rate, we arrived at a Target Price range of N15.79 - N17.96 and mid-point target price of N16.88 ,implying an upside potential of 20.5 percent. We expect the stock to trade around this range in normal market conditions, but note however, the price movement remains susceptible to the volatility in raw sugar prices as established.
Our forecast was majorly based on the direction of raw sugar prices on the global market. We assumed raw sugar prices will continue to decline given the bumper harvest for 2011 and 2012 and expected increase in production and supply going forward. However, from 2013 we expect this trend to reverse and witness some tightening in raw sugar supply and hence higher prices. We have thus captured the cyclical nature of the industry into our forecast and arrived at our valuation based on these projections.
32
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
Risks to Our Valuation Taking cognizance of the above, some major risk factors remain as threats to our valuation, these are: 1) The possibility of a turn of event sooner than expected, that is, volatility in raw sugar prices, which could be higher than we have modeled into our forecast 2) Fall in disposable income resulting in lower demand for company’s products 3) Adverse movement in exchange rate leading to foreign exchange losses.
Comparables for Dangote Sugar Refinery Plc
TABLE 4: Country Company
EBITDA EBIT Margin Margin
EV/ ROE EBITDA
P/E
Div Yield
S.A.
ILLOVO SUGAR LTD
20.6
12.7
3.1
8.2
23.9
2.1
S.A.
TONGAAT HULETT
21.7
13.9
74.9
7.4
12.0
1.0
Nigeria
DANGOTE SUGAR RE
17.9
16.2
25.9
10.0
14.9
4.3
Russia
RAZGULAY GR
4.8
0.1
-11.5
22.8
N.A.
N.A.
Thailand
KHONBURI SUGAR
9.8
8.2
14.8
N.A.
23.1
N.A.
Brazil
USIN C PINTO-PRF
11.7
7.2
39.3
11.4
8.5
N.A.
S.A.
CROOKES BROTHERS
16.0
8.6
28.9
12.9
21.4
4.4
Source: Bloomberg
33
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
INCOME STATEMENT (N'Mn) Income Revenue C ost of Sales Depreciation Gross Profit Distribution & Admin Expense
2008
2009
2010
80,671 49,790 924 29,957 3,588
82,395 61,636 1,567 19,192 4,927
89,980 71,882 1,570 16,527 3,498
2011F
2012F
2013F
98,499 68,004 1,198 30,495 5,143
110,475 76,272 1,345 34,203 5,370
111,975 77,308 1,508 34,667 5,606
Other Income Amortization EBIT Interest Payable & similar charges
2,877
3,754
1,549
29,246 19
18,019 0
14,578 2
25,352 0
28,834 0
29,062 0
EBITDA
30,170
19,587
16,148
26,550
30,178
30,570
19,586 6,401 13,185
16,146 4,865 11,282
25,352 7,352 18,000
28,834 8,362 20,472
29,062 8,428 20,634
Profit before taxation Taxation Profit after taxation
BALANCE SHEET (N'Mn) Assets Non current Asset Fixed Assets (PP&E) Investment in Subsidiary C urrent Assets Stocks Trade Debtors Other Debtors & Prepayments Due from related companies C ash and bank balances Total Assets Liabilities C urrent Liabilities Trade C reditors Bank Overdraft Other creditors Taxation Amount due to related companies Non C urrent Liabilities Deferred taxation Employees gratuity Total Liabilities
30,151 8,280 21870.664
2008
2009
2010
2011F
2012F
2013F
13,756 874 14,630
16,696 968 17,665
15,743 972 16,715
17,671 972 18,643
19,819 972 20,792
20,088 972 21,061
9,258 5,402 3,504 5533 19,847 43,544 58,173
14,094 5,946 790 17334 22,878 61,043 78,707
15,960 5,959 1,371 16049 6,240 45,579 62,294
15,342 6,304 3,507 16,040 23,746 64,939 83,582
17,207 7,070 3,933 16,040 27,883 72,134 92,926
17,441 7,166 3,986 16,040 33,201 77,834 98,895
9,000 12 5131 9,311 797 24,251
14,004 0 3587 15,117 2,331 35,039
9,794 0 2283 4,980 2,188 19,246
11,499 9,429 12,697 2,188 35,812
12,834 10,524 14,240 2,188 39,786
13,034 10,688 14,434 2,188 40,343
908 387.19 1,295 25546
1,453 603 2,056 37094
1,662 492 2,153 21399
1,662 492 2,153 37966
1,662 492 2,153 41940
1,662 492 2,153 42497
Net Asset
32,627
41,613
40,895
45,616
50,986
56,398
Equity Share capital Share premium Revenue Reserve SHF
6,000 6,321 20307 32,627
6,000 6,321 29292 41,613
6,000 6,321 28575 40,895
6,000 6,321 33296 45,616
6,000 6,321 38666 50,986
6,000 6,321 44078 56,398
34
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
GROWTH RATES Turnover growth Growth in EBITDA Growth in PBT Growth in PAT
2008 0.0% -1.6% -1.7% 1.8%
2009 2.1% -35.1% -35.0% -39.7%
2010 9.2% -17.6% -17.6% -14.4%
2011 9.5% 64.4% 57.0% 59.5%
2012 12.2% 13.7% 13.7% 13.7%
2013 1.4% 1.3% 0.8% 0.8%
PROFITABILITY Return on Avg Equity Return on Avg Assets Return on Net fixed assets Return on Invested C apital Growth rate (g)
2008 75% 40% 157% 243% 26%
2009 36% 19% 87% 89% 3%
2010 26% 16% 70% 40% 9%
2011 37% 25% 108% 56% 10%
2012 38% 23% 109% 76% 10%
2013 35% 22% 103% 75% 9%
MARGINS Net Profit Margin Gross Profit margin Operating profit margin (EBIT/revenue) Pretax Profit Margin EBITDA/Sales EBIT/Sales Return on total capital(EBIT/avg total capital) Interest bearing debt/Total assets
2008 27% 37% 36% 37% 37% 36% 90%
2009 16% 23% 22% 24% 24% 22% 43%
2010 12.5% 18% 16% 17.9% 17.9% 16% 36%
2011 18.3% 31% 26% 25.7% 27.0% 26% 56%
2012 19% 31% 26% 26% 27% 26% 57%
2013 18% 31% 26% 26% 27% 26% 52%
2008 8.07 5.00 5.33 45.26 72.99 68.48 1.39 5.70
2009 7.17 5.02 5.20 50.88 72.66 70.14 1.05 5.28
2010 7.55 5.48 7.38 48.36 66.56 49.45 1.44 5.94
2011 7.38 5.94 6.42 49.46 61.45 56.84 1.18 6.12
2012 7.52 6.51 6.77 48.56 56.05 53.88 1.19 6.43
2013 7.53 6.58 6.81 48.46 55.46 53.63 1.13 6.47
ACTIVITY RATIOS Inventory Turnover Receivables Turnover Payables Turnover Days In Inventory Days In Receivables Days of Payment Total Assets Turnover Fixed asset turnover
35
VETIVA
Equity |Nigeria |Food & Beverages
CAPITAL MANAGEMENT LIMITED
FALLING PRICES; RISING PROSPECTS
INVESTMENT RATINGS Vetiva uses a 5-tier ratings system for stocks under coverage: Buy, Accumulate, Neutral, Reduce and Sell. Buy ≥ +25.00% expected absolute price performance Accumulate +10.00% to +24.99% expected absolute price performance Neutral +5.00/+9.99% range expected absolute price performance Reduce -5.00% to +4.99% expected absolute price performance Sell < -5.00% expected absolute price performance Definition of Ratings Buy rating refers to stocks that are highly undervalued but with strong fundamentals and where potential return in excess of or equal to 25.00% is expected to be realized between the current price and analysts’ target price. Accumulate rating refers to stocks that are undervalued but with good fundamentals and where potential return of between 10.00% and 24.99% is expected to be realized between the current price and analysts’ target price. Neutral rating refers to stocks that are correctly valued with little upside or downside where potential return of between +5.00 and+9.99% is expected to be realized between current price and analysts’ target price. Reduce rating refers to stocks that are overvalued but with good or weakening fundamentals and where potential return of between -5% and +4.99% is expected to be realized between current price and analysts’ target price. Sell rating refers to stocks that are highly overvalued but with weak fundamentals and where potential return less than -5% is expected to be realized between current price and analysts’ target price.
36
DISCLOSURES SECTION Analyst Certification The research analysts who prepared this report certify as follows: 1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the companies, securities, industries or markets discussed in this report. 2. That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in this report. Other Disclosures Vetiva Capital Management Limited or any of its affiliates (collectively “Vetiva”) may have financial or beneficial interest in securities or related investments discussed in this report, potentially giving rise to a conflict of interest which could affect the objectivity of this report. Material interests which Vetiva may have in companies or securities discussed in this report are herein disclosed: Vetiva may own shares of the company/subject covered in this research report. Vetiva does or may seek to do business with the company/subject of this research report Vetiva may be or may seek to be a market maker for the company which is the subject of this research report Vetiva or any of its officers may be or may seek to be a director in the company which is the subject of this research report Vetiva may be likely recipient of financial or other material benefits from the company/subject of this research report. Disclaimer This research report is based on public information which the research analyst(s) consider credible and reliable. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Vetiva, including the investment banking team, as Vetiva has established information barriers between its Research team and certain business groups. Whilst reasonable care has been taken in preparing this document, no responsibility or liability is accepted either by Vetiva, its officers or any of its employees for any error of fact or opinion expressed herein. No reliance should be placed on the accuracy, fairness or completeness of the information contained in this report as it has not been verified by the research analyst(s) involved or the companies whose securities have been referred to except as otherwise disclosed. Neither Vetiva nor any of its officers or employees including the research analyst (s) warrant or represent the accuracy or completeness of information set out in this report. Any ratings, forecasts, estimates and opinions set forth in this report constitute the analyst(s) position as at the date of this report and may not necessarily be so after the report date as they are subject to change without notice. It is also instructive to note that a company’s past performance is not necessarily indicative of its future performance as estimates are based on assumptions that may or may not be realized. The value, price or income from investments mentioned in this report may fall as well as rise due to economic conditions, industry cycles, market indices, operational or financial conditions of companies or other factors. Thus, Vetiva and its officers and employees shall not accept liability for any loss arising from the use of this report or its contents in making investment decisions or recommendations. This report provides general information only. It is not intended to provide personal investment advice and does not take into account the specific investment objectives, financial situation and the particular needs of any specific person. Investments discussed in this report may not be suitable for all investors and the reader(s) should independently determine their suitability and evaluate the investment risks associated with such investments. All investors are solely responsible for their investment decisions. Any decision to purchase or subscribe for securities in any offering must be based solely on existing public information on such security or the information in the prospectus or other offering document issued in connection with such offering, and not on this report. Vetiva, through business units other than Vetiva Research, may have issued and may in the future issue trading ideas or recommendations that are inconsistent with, and reach different conclusions from, the information presented in this report. Such ideas or recommendations reflect the different time frames, assumptions, views and analytical methods of the persons who prepared them, and Vetiva is under no obligation to ensure that such other trading ideas or recommendations are brought to the attention of any recipient of this report.To the extent this report discusses any legal proceeding or issue, it has not been prepared as nor is it intended to express any legal conclusion, opinion or advice. Information relating to the tax status of companies whose securities are discussed in this report is not intended to provide tax advice or to be used by anyone to provide tax advice. By accepting this research report, you agree to be bound by the foregoing limitations. Vetiva Capital Management Limited is registered with the Securities & Exchange Commission to conduct Financial Advisory, Fund/Portfolio Management, and Trusteeship business in Nigeria. This document is for information purposes only and for private circulation. No portion of this document may be reprinted, sold or redistributed without the written consent of Vetiva Capital Management Limited. Vetiva research report is disseminated and available primarily electronically, and, in some cases, in printed form.
Additional information on recommended securities/instruments is available on request. © 2011 Vetiva Capital Management Limited. All rights reserved.
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