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Dangote Sugar Commits to Backward Integration

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Dangote Sugar Refinery Plc
  • Dangote Sugar Commits to Backward Integration

Dangote Sugar Refinery (DRS) is Nigeria’s largest producer of household and commercial sugar with 1.44 million tonnes of refining capacity. The company was spun out of Dangote Industries in 2006 and got listed on the Nigerian Stock Exchange (NSE) about 10 years ago. With its factory at Apapa, Lagos State, DSR currently imports raw sugar from Brazil and refines it into white, Vitamin A fortified sugar suitable for household and industrial uses.

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

In order to successfully execute that strategy, the company is making significant investment in its backward integration programme (BIP). Already, the company’s Savannah cane sugar factory located near Numan, in Adamawa State has an installed factory capacity of 50,000 tonnes.

Covering 32,000 hectares in extent, the Savannah estate has considerable opportunity for expansion which is underway.

Last week, the acting Managing Director/Chief Executive Officer of DSR, Abdullahi Sule told the capital market community that the company would be investing about N106 billion in the next six years to achieve BIP and make Nigeria sugar self-sufficiency.

Impressive financial performance

Despite the economic headwinds in 2016, DSR posted impressive results and has consolidated that performance with improved first quarter (Q1) results ended March 31, 2017. Profit before tax stood at N19.61 billion, up from N16.16 billion, while PAT grew to N14.4 billion as against N11.4 billion in 2015. Earnings per share similarly rose from 93 kobo to 120 kobo. The board of directors of the company recommended a dividend of N7.2 billion, which translates into 60 kobo per share.

Its sugar sales volumes was 778,518 metric tonnes(mt) in 2016, compared with 778,000 mt in 2015. The increase in total revenue by 68 per cent over that of the previous year was predominantly driven by increase in price as just about same volume of 778,518 mt and 778,000 mt were achieved in 2016 and 2015 respectively.

Commenting on the results, Sule said: “We are very pleased with the results for the period under review, our revenue grew by 68 per cent and improve sales volume compared to 2015 despite the current macro-economic challenges. Our focus in the current year and for the future remains leveraging our strengths to maximize every opportunity to generate sales, increase our market share and create sustainable value for our stakeholders.”

He added that concerted efforts are being made towards the actualisation of the company’s BIP.

“The implementation strategy has changed and the full focus is now on the expansion of the Savannah Sugar Estate to its full potential, and development of the new site at Tunga in Nasarawa State,” Sule said.

The company explained that group sugar sales volumes was 778,518 metric tonnes(mt) in 2016, compared with 778,000 mt in 2015.

Sule stated that “Achievement of our BIP plan and growing our market share remains our focus, and efforts are geared towards achievement of effective resource optimisation and cost management; drive for greater efficiency especially in supply chain; human capacity building and route to market redefinition. Others are improved security in the north, consolidation of our position as the largest sugar producer in west African, with 1.5 million MT/PA local sugar production, creation of a robust export market, production of ethanol. And surplus power for supply to national grid and animal feeds production.”

Although investors received a dividend of 60 kobo per share for 2016, the Chairman of DSR, Alhaji Aliko Dangote assured shareholders that the company remained committed to the delivery of superior returns to shareholders.

According to him, the company was in a position to pay a higher dividend but it retained some part of its earnings for investment in the company’s BIP.

“Our focus is the actualisation of our backward integration plans, your board will continue with the effective management of resources to achieve this target, sustainable financial future for the company, and in the turn drive sustainable returns to shareholders,” he said.

Improved First Quarter results

For its first quarter (Q1) result ended March 31, 2017, revenue was up by 83 per cent to N59.5 billion from N32.6 billion in 2016 and 71 per cent of Q1budget achieved.

Cost of sales went up 100 per cent, due to increase in gas, gross profit increased 16 per cent to N7.84 billion as against N6.77 billion. Gross profit rose to N7.84 billion, from N6.77 billion.
Profit before tax increased 28 per cent to N7.04 billion, while profit after tax went up to N4.76 billion from N3.34 billion in 2016, indicating a growth of 42.5 per cent.

Analysts’ comments

According to analysts at Cordros Capital, DSR’s revenue and PAT beat their estimates by 16 per cent and eight per cent respectively.

“Annualised, revenue and PAT are above consensus by 30.9 per cent and 1.4 per cent respectively. The revenue growth was driven by the significantly higher average price (121 per cent), which more than compensated for relatively lower sales volume (17 per cent). Management said it sold 174,981 tonnes of sugar during the period, seven per cent more than the 164,129 tonnes achieved in Q4-16, and 13 per cent above our estimate,” they said.

Cordros Capital said the quarter/quarter (q/q) volume growth is consistent with the encouraging demand the management guided to during the 2016FY conference call.

“That said, the management’s reported average selling price of N17,010/50kg bag is above our computed N16,775/bag, and is not consistent with the N1,000/bag reduction (implemented in March) from the N17,000/bag as at end of 2016. Also positively impacting PAT was the significant increase in investment income (N971.4 million vs. N7.1 million in Q1-16), enabled by growing cash generation, and consequent investments in short term money market instruments (N40.3 billion). Management said it earned 11.5 per cent (vs. 7 per cent in Q1-16) average interest on its bank deposits,” they said.

The analysts noted that although gross margin improved from the trough of 7.3 per cent in Q4-16, the 13.2 per cent realized during the period was significantly shy of the 20 per cent guided by management, and lower than their 14.7 per cent estimate.

“Management had cited the purchase of forex at a relatively lower average rate (compared to Q4-2016) and higher output from Savannah where margins are higher, as the potential enablers of margin recovery. Overall, DSR Q1-17 PAT is consistent with our strong growth expectation (22 per cent) for 2017F. We look for lower PAT growth in subsequent quarters as narrowing y/y price differential (with sales volume unlikely to improve significantly from current level) forces revenue growth to taper. We maintain HOLD rating on the stock,” they said.

Similarly, analysts at FBN Quest said the strong sales growth more than offset the negative impact of a gross margin contraction of -758bps y/y to 13.2 per cent and opex growth of 29 per cent, leading to the improvement in profitability.

“PAT was up by 43 per cent due to a comparatively lower effective tax rate of 32.4 per cent compared with 34.7 per cent in the corresponding quarter of 2016. Sugar price increases over the last 12 months were the primary driver behind the sales growth recorded during the quarter as the company pushed through increasing production costs. We estimate that prices were raised by around 75 per cent over the period from c.N7,500/50kg of finished sugar. Higher imported raw sugar (a key raw material) prices were the primary driver behind the gross margin contraction,” they said.

The explained that compared with their forecasts, sales were ahead by 23 per cent, while PBT and PAT were broadly in line.

“A negative surprise on the gross margin line was completely offset by positives on both the opex and other income lines. DSR’s sales and PBT are tracking ahead of consensus’ sales and PBT estimate of N181.

billion and N22.5 billion respectively, as such we expect upward adjustments to consensus 2017E estimates. Looking ahead, DSR’s focus remains its backward integration projects,” FBN Quest said.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

Brent Crude Falls to $84.12, WTI Rises to $80.19

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Brent crude oil - Investors King

In a cautious market, oil prices showed mixed movements in Asian trade on Tuesday.

Global benchmark Brent crude oil, against which Nigerian oil is priced, experienced a slight decline of 13 cents, or 0.15%, to settle at $84.12 per barrel.

Meanwhile, U.S. West Texas Intermediate (WTI) crude oil saw a modest increase of 14 cents, or 0.17% to $80.19 per barrel.

The recent fluctuations come after both benchmarks posted significant gains of around 2% on Monday, marking their highest closing prices since April.

The market’s attention has now shifted back to fundamental factors, which have exhibited signs of softness for some time.

Francisco Blanch, a commodity and derivatives strategist at Bank of America, noted in a client note that global crude oil inventories and refined product storage in key locations such as the United States and Singapore remain elevated.

“The oil market shifted its focus back to fundamentals, which have been soft for some time,” Blanch stated, highlighting the broader concerns about global demand growth.

Data from the first quarter of the year indicated a deceleration in global oil demand growth to 890,000 barrels per day year-on-year, with further slowing likely in the second quarter.

Also, according to the country’s statistics bureau, China’s oil refinery output fell by 1.8% year-on-year in May due to planned maintenance and higher crude costs.

Market participants are also keenly watching for further indications on interest rates and U.S. demand trends, with several U.S. Federal Reserve representatives scheduled to speak later on Tuesday.

Despite the mixed signals, some analysts remain optimistic about the impact of OPEC+ supply cuts.

Patricio Valdivieso, vice president and global lead of crude trading analysis at Rystad Energy, said, “The latest guidance provided by OPEC+, as well as their unchanged 2.25 million barrels per day demand growth outlook, signals a stagnation in oil supply growth for 2024 and an apparent downside risk to production in 2025.”

Valdivieso further noted the disconnect between OPEC+’s demand outlook and those of other agencies, making it challenging to adopt a fully bearish stance on the market.

This sentiment has been reinforced by recent investor behavior, with hedge funds and other money managers purchasing the equivalent of 80 million barrels in key petroleum futures and options contracts over the week ending June 11.

Support for the market has also come from a rebound in refining margins, particularly in Europe and Asia.

Sparta Commodities analyst Neil Crosby pointed out that refining margins at a typical complex refinery in Singapore averaged $3.60 a barrel for June so far, up from $2.66 a barrel in May.

As the market navigates these dynamics, the cautious optimism among investors and analysts suggests a period of continued volatility and adjustment, with fundamental factors and policy decisions playing pivotal roles in shaping future price movements.

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Energy

Dangote Refinery’s Power Production Dwarfs National Grid’s 11-Year Progress

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The stark contrast in power generation between Nigeria’s national grid and Dangote Refinery has come into sharp focus as Dangote Refinery generates twice the national power production.

Over the past eleven years, Nigeria has managed to add a mere 760 megawatts (MW) to its national grid, while the Dangote Refinery has outpaced this growth significantly with  1,500 MW in a much shorter timeframe.

For decades, Nigeria has grappled with chronic power shortages, an issue that has repeatedly dominated election campaigns and policy debates.

Data from the Nigeria Electricity System Operator revealed that power delivery from Generation Companies (Gencos) to Distribution Companies (Discos) via the Transmission Company of Nigeria (TCN) has seen only a modest increase.

From an average of 3,400 MW in November 2013, it has risen to 4,160 MW as of June 12, 2024, marking a 22 percent increase.

In stark contrast, the Dangote Refinery, which began construction in 2018, now produces 1,500 MW of power for its operations.

This significant output not only surpasses the national grid’s decade-long expansion but also emphasizes the private sector’s ability to address Nigeria’s power challenges more efficiently.

“We don’t put pressure on the grid. We produce about 1,500 megawatts of power for self-consumption,” stated Aliko Dangote at the Afreximbank Annual Meetings and AfriCaribbean Trade & Investment Forum in Nassau, The Bahamas.

This development underscores concerns regarding the slow pace of growth in Nigeria’s power sector despite substantial investments and an 11-year-old privatisation effort.

“The government and some operators in the sector may claim there has been some form of growth since 2013, but in actual terms, how many people are benefiting from the privatised power sector?” questioned Charles Akinbobola, a senior energy analyst at Sofidam Capital.

He added, “The challenge of the power sector has not entirely been the scarcity of funds. Several trillions of naira have been pumped into that industry. The sector has been plagued by the shortcomings of its managers.”

Comparatively, Nigeria’s power production capacity of 13,000 MW falls significantly short of South Africa’s 58,095 MW, despite having a similar-sized economy and a quarter of Nigeria’s population.

The ageing national grid, however, delivers only about 4,000 MW to over 200 million citizens—roughly the power consumption of Edinburgh’s 548,000 residents.

Other African nations have made more significant strides in addressing their power needs.

Egypt, for instance, added 28,229 MW to its national grid between December 2015 and December 2018, achieving a total installed capacity of 58,818 MW.

This was accomplished through a fast-track project and a substantial partnership with Siemens, adding 14,400 MW in just 2.5 years.

The sluggish growth of Nigeria’s power sector is not just a technical issue but a significant economic one. Rising energy costs and unreliable power supply have disrupted productive activities, forcing many factories to self-generate more than 14,000 MW of electricity.

According to the Manufacturers Association of Nigeria, member companies spent N639 billion on alternative energy sources between 2014 and 2021, further highlighting the inefficiencies within the public power supply system.

“The power sector’s inefficiencies cost consumers billions of naira and stifle economic growth,” noted Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise. “There are issues of technical and commercial losses which are yet to be addressed. These inefficiencies are costs that consumers are compelled or expected to pay for as part of the cost recovery argument.”

The stark contrast in power generation between the Dangote Refinery and the national grid serves as a wake-up call for Nigeria’s power sector.

It underscores the urgent need for comprehensive reforms, better management, and increased investment to meet the growing energy demands of the nation’s burgeoning population.

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Crude Oil

Nigerian Oil Theft Escalates to 400,000 Barrels a Day, Exposing Systemic Corruption

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A recent report has revealed that Nigeria’s daily oil losses surged to 400,000 barrels as efforts to curb crude oil theft remain ineffective.

This escalation from 100,000 barrels per day in 2013 underscores the severe and worsening challenge facing the nation’s oil sector.

The report, produced by the public policy firm Nextier, is the result of several months of in-depth investigation.

It reveals a complex web of sophisticated networks involving powerful actors, foreign buyers, security personnel, transporters, and government officials.

This elaborate system facilitates the large-scale theft of crude oil, which has been a significant drain on Nigeria’s economy.

From 2009 to 2021, Nigeria lost 643 million barrels of crude oil, valued at $48 billion, due to theft. This loss represents more than half of the nation’s national debt as of 2021.

The situation has also severely impacted Nigeria’s ability to meet its OPEC quotas, which have dwindled from 2.5 million barrels per day in 2010 to just 1.38 million barrels per day.

The report, authored by Ben Nwosu, an associate consultant at Nextier, and Ndu Nwokolo, a managing partner at Nextier, paints a grim picture of the local dynamics fueling this crisis.

It highlights the involvement of multiple small-scale artisanal actors, who are often supported by local political and security forces. These local actors contribute to the creation of underground economies, further complicating efforts to curb theft.

Environmental hazards are another grave concern. Illegal refining processes, characterized by uncontrolled heat and poorly designed condensation units, have led to numerous explosions. Between 2021 and 2023 alone, these operations resulted in 285 deaths.

Despite these dangers, illegal refineries continue to thrive due to economic necessity and systemic corruption.

Nigeria’s four refineries, which have a combined capacity of 445,000 barrels per day, are currently operating at only 6,000 barrels per day due to mismanagement and corruption.

This shortfall forces the country to rely heavily on imported refined products, further exacerbating the situation.

Massive corruption in oil importation and subsidies has led to billions of naira being unaccounted for between 2016 and 2019.

Moreover, the government’s inability to support modular refineries has perpetuated reliance on illegal operations.

Security forces are often implicated in the theft, providing protection for a fee. Although recent measures, such as the destruction of illegal refineries, have offered temporary relief, these efforts have been short-lived.

New illegal operations quickly emerge, perpetuating the cycle of theft and corruption.

The authors of the report emphasize that addressing this complex issue requires more than punitive measures. They call for a comprehensive approach that tackles the root causes, including the need for effective governance and economic opportunities for affected communities.

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