Dangote Sugar Refinery Plc has seen contrasting fortunes over the previous two years.
In 2023, shareholders loved outstanding positive aspects, with the inventory value hovering over 255% year-to-date.
Nonetheless, the tide turned in 2024 because the inventory misplaced over 38% of its worth as of December 12, rating it 149th on the Nigerian Trade.
The corporate’s monetary efficiency has been equally turbulent. Important pre-tax losses in 2023 and 2024, pushed by overseas alternate losses, high-interest bills, and surging prices of imported uncooked supplies, have left Dangote Sugar in a precarious place.
In 2023, the corporate recorded a pre-tax lack of N108.922 billion, up 232% year-on-year. The scenario worsened within the first 9 months of 2024, with pre-tax losses ballooning to N275.583 billion, a big 567% improve year-over-year.
These losses have severely impacted the corporate’s steadiness sheet. By September 2024, retained losses had grown to N117.465 billion, and shareholders’ funds turned adverse reaching N105.111 billion.
The vital query now’s how the corporate can navigate this turbulent scenario and return to profitability.
The Backward Integration Plan (BIP): A method ahead?
To fight these challenges, Dangote Sugar has positioned important bets on its Backward Integration Plan (BIP), a technique geared toward decreasing its dependence on imported uncooked supplies and mitigating foreign exchange volatility.
The BIP includes remodeling Dangote Sugar from a port-based refining firm into a completely built-in sugar manufacturing powerhouse.
Chairman Aliko Dangote has reiterated the transformative potential of BIP, stating, “The objective of the Backward Integration Plan is to provide 1.08 million tonnes of refined sugar yearly in six years and finally attain 1.5 million tonnes from sugarcane plantations masking greater than 150,000 hectares throughout Nigeria.”
This formidable challenge features a phased enlargement of its sugar estates in Numan, Adamawa State, and greenfield initiatives in Nasarawa and Taraba. By 2024, the Numan property’s milling capability is anticipated to succeed in 9,800 tonnes per day, whereas the Nasarawa property will characteristic a completely built-in 12,000 tons per day sugar mill.
Regardless of the promise of BIP, its influence appears muted to this point given the corporate’s monetary efficiency.
Within the first 9 months of 2024, Dangote Sugar reported a powerful income of N484.427 billion.
Nonetheless, the price of gross sales consumed an amazing 96% of this determine, amounting to N464.607 billion.
This left the corporate with a gross revenue of simply N19.820 billion, decreasing its gross revenue margin to a mere 4%.
The price of uncooked supplies, which constitutes about 86% of the whole value of gross sales, stays a vital stress level right here.
A considerable portion of those prices is tied to the importation of uncooked supplies, evidenced by the N44.991 billion curiosity on letters of credit score, 67% of the whole curiosity bills within the first 9 months of 2024.
This starkly highlights the influence of its dependency on imported uncooked supplies and underscores the vital position the Backward Integration Plan (BIP) ought to have performed.
The rise in Leverage
In 2023, the corporate’s present ratio, which measures its capability to pay short-term money owed with its short-term property, dropped to 0.77 from 1.09 in 2022.
Because of this for each N1 of short-term debt, the corporate had solely 77 kobo in property to cowl it, signaling a possible battle to satisfy its short-term monetary obligations.
- To handle this, the corporate turned to short-term borrowing in 2024, together with a N150 billion industrial paper program.
- In mid-June, the corporate collectively raised N42.79 billion at aggressive charges of 23% and 25%. Sequence 4, with a tenure of 181 days, raised N12.93 billion, whereas Sequence 5, with an extended tenure of 265 days, raised a bigger sum of N29.86 billion.
- Because of its borrowing actions, within the first half of 2024, the corporate needed to pay N5.5 billion in curiosity on the industrial papers it issued, together with a further N74 million to cowl the prices of issuing these papers.
- By the tip of September 2024, Dangote Sugar’s whole debt elevated considerably by 51.15%, reaching N616.303 billion in comparison with N412.267 billion at the start of the 12 months.
- Consequently, the price of servicing this debt additionally grew sharply. Curiosity bills rose by 276% year-on-year to N66.675 billion, with N14.5 billion attributed to the curiosity and prices related to its industrial paper borrowings within the first 9 months of 2024.
The corporate’s monetary well being has taken successful resulting from rising curiosity bills. Its curiosity protection ratio dropped sharply to 0.12 from 3.17x within the first 9 months of 2023, highlighting difficulties in assembly debt obligations.
Moreover, the debt-to-assets ratio climbed to a worrying 92.31%, whereas the present ratio dropped to 0.49 signalling liquidity challenges.
In December the corporate returned to the market with Sequence 6 and seven, in search of to lift a further N50 billion.
Whereas these funds are essential for quick operational wants, it might pressure the steadiness sheet additional.
What’s the method out?
Dangote Sugar’s present monetary place paints a difficult image. Rising debt, FX losses, and shrinking profitability spotlight the urgency of implementing transformative measures.
- The Backward Integration Plan (BIP) stays a vital long-term technique to mitigate foreign exchange dangers and scale back dependence on imported uncooked supplies.
- Nonetheless, its success will depend upon well timed execution.
- On the monetary entrance, reliance on costly short-term funding, equivalent to industrial papers, seems unsustainable, as mirrored within the deteriorating curiosity protection and liquidity ratios.
- A shift in direction of longer-term, or fairness elevating is perhaps essential to alleviate the debt burden and rebuild shareholders’ fairness.
- The corporate’s lack of profitability, the excessive probability of no dividend payouts, and the bearish pattern in its share value collectively paint a grim near-term image for traders.
- Establishing a clearer timeline for BIP milestones, together with a concerted effort to deal with mounting debt challenges, could possibly be pivotal in restoring investor confidence.
- Till then, Dangote Sugar’s journey is considered one of resilience and calculated optimism, leaving traders to weigh the numerous dangers in opposition to the potential promise of a brighter, extra built-in future.
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