Nigeria’s largest sugar refiner and retailer have seen revenue and operating profit drop by 29 per cent and 17 per cent respectively in the first half of 2018 off the back of a steady decline all year in sugar prices.

A surge in sugar production since last September when the European Union abolished production led to a supply glut causing sugar prices to drop 33 per cent year to date.

The resulting problem isn’t just local, it’s global. Reuters reports that at current price level, there is hardly a sugar company in Europe which can still produce at a break-even.

Analysts expect the global sugar market to remain in surplus for at least two seasons and possibly longer following a sharp rise in production particularly in India and Thailand. This could cause revenue for sugar producing companies to continue to decline for the foreseeable future.

In the first quarter of the year, Dangote Sugar acknowledged that the sharp decline in sugar prices was putting a strain on their financial performance but in the second quarter after performance failed to improve, they threw most of the blame in the profit shortfall on sugar smugglers and Apapa gridlock.

According to a press release by the company, “The decline in sales volumes was due mainly to the continued presence of lower quality, unlicensed sugar being smuggled into the country and sold in key markets. It provides a ready alternative to trade customers who are not mindful of the quality implications of the product.

Due to its lower price, it continues to exert a downward pressure on prices and sales volumes. Year on year there has been a reduction in the average selling price (currently ₦13,160/50kg bag vs ₦16,170/50kg bag in 2017) as the impact of the downward trend in global sugar prices comes through.”

“Also, the Apapa access road traffic gridlock has had an adverse impact on our logistics and product distribution activities. Group revenue declined by 29.2 per cent was as a result of the decline in sales volume and price. Gross margin, however, showed a year on year improvement due to the positive impact of raw sugar purchases and efficiencies in energy utilisation.”

Cost of sales declined year on year by around N31 billion per cent due to a proportional drop of N31 billion in costs of purchasing raw materials. With sugar prices dropping rapidly, operational cost efficiency may be the best strategy to defend the firm’s profit margin.

Dangote Sugar is down 26 per cent this year, compared to the -9.36 per cent return in the broader market.

“The stock is trading at only 5.01 times trailing earnings, a significant discount to industry price to earnings ratio of 19.46. With the stock market shedding billions this year in losses, it is hard to place if the downward trend in Dangote Sugar is solely based on fundamental or if the stock also got caught in the broad-based market selloff,” said Faith Ogedengbe, Research Analyst, GDL Asset Management.

Dangote Sugar closed on Monday at N14.80 up 1.72 per cent but the market consensus 12 months target price for the stock is currently N20.91, meaning analysts’ see a 41.2 per cent upside in the stock price over the next one year.

•Sourced from a BusinessDay report

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