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Wednesday, March 29, 2023

Dangote Sugar’s Problem Isn’t Cash, But How to Spend It

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Former Military head of state retired General Yakubu Gowon once said during the oil boom of the early 1970s that “Nigeria’s problem isn’t but how to spend it”

It is actually a boom period for Dangote Sugar Refinery Plc as the largest producer of the sweetener in Africa’s largest economy has been growing its free cash flow even amid the coronavirus pandemic that disrupted the demand and supply side of the market.

A very strong cash position means a firm can effortlessly pay its debt, distribute dividends to its owners, and fund future expansion plans.

The company’s strategic plans have yielded fruit, which paves the way for an attractive valuation, while there are positive prognoses about its future growth prospect since it produces essential goods that consumers cannot do without.

Indeed, cash is king! For the year ended December 2020, Dangote Sugar’s free cash flow surged by 79.70 percent to N25.68 billion from N14.06 billion as at December 2020, according to MoneyCentral calculations.

Cash and cash equivalents rose by 82.3 percent year on year (yoy) to N44.58 billion as at December 2020, on supportive working capital conditions, which buoyed net operating cash flow (NOCF).

The growth in NOCF (+57.6 percent YoY to N60.47 billion) can be attributed to the increase in trade & other payables by 114.3 percent YOY (to N135.52 billion), which implies delays in paying creditors and cash conservation.

The company’s free cash flow to sales ratio rose to 11.78 percent in the period under review from 8.72 percent the previous year, according to MoneyCentral calculations.

Free cash flow-to-sales is a measure to assess how much cash a company is generating off its sales.

A higher FCF-to-sales is better than lower, as it indicates a greater capacity of a company to turn sales into what really matters.

The company spent 41.31 percent of free cash flow on dividend, according to MoneyCentral calculation.

As a result of Dangote Sugar’s strong earnings growth and excellent working capital management, investment house Chapel Hill Denham Limited have retained Buy ratings on the company’s shares with a 12-month target price (TP) of N26.57.

On multiples, DSR trades at a FY-21E EV/EBITDA and P/E of 3.6x and 5.8x, which is behind EM and global peers’ average of 8.7x and 11.5x respectively.

The consumer goods giant has a steady dividend policy as it has proposed a total dividend of N1.50 (subject to shareholders’ approval), which implies a dividend yield of 8.40 percent.

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