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How Dangote Sugar lifted profit without growing sales- THE CITIZEN

By The Citizen

Dangote Sugar Refinery's operating result for the 2012 shows that it has ended a three-year downslide in profit. The company's profit had been falling against moderate improvements in sales revenue. The rebound in profit in 2012 happened against a decline in turnover. The sugar refining company had reported a drop in profit each year for the past three years to 2011.

The company raised net profit by 41.9% to N10.74 billion at the end of the 2012 financial year. After tax profit had fallen by 33% in the preceding year. Over the preceding three years, the company's after tax profit dropped from the peak of N21.87 billion. Despite the recovery in 2012, the company's profit still stands at about one-half of the 2008 peak.

The strength in the profit recovery therefore does not reflect improving ability to sell or increase market share but an unusual success in cutting cost. This does not give a comforting outlook for the future. The critical cost saving came from a decline in cost of goods sold during the year. Cost of sales declined by 8.4% to N85.8 billion in the year against a slip of 0.3% in sales revenue.

The company's full year full year sales figure shows there was a slow down in sales revenue growth in the final quarter and it closed the year with a marginal decline in turnover at N106.87 billion. The company has been facing a major challenge moving sales for several years now, as sales revenue growth has been generally slow.

There was a relatively strong growth of 19.2% in sales revenue in 2011 but this could not be sustained last year. Dangote Sugar's flat growth in revenue contrasts with the best industry performances reported by Nestle Nigeria and Nascon. Nestle raised sales revenue by 19.1% in 2012 and Nascon grew sales revenue by 27% at the end of its third quarter.

Slowly moving and declining sales volume and revenue seem to be an industry wide problem within the food/beverage group – that deals on what are otherwise considered basic consumer products. Apart from Nascon and Nestle, other operators appear to be struggling to defend market share.

7-up grew sales revenue by 9.5% in its 2011/12 operations, a slow down from 23.3% growth in the preceding year. Its revenue growth has slowed down further to 3.6% at the end of its third quarter in December.

Dangote Flour lost 13.3% of sales revenue at the end of its third quarter in September, a worse performance than the decline of about 2.0% in the 2011 full year. Flour Mills was only able to improve sales revenue by 1.6% in its third quarter and Cadbury reported a decline of 1.6% in sales revenue at the end of its 2012 operations.

Market shares of food/beverage companies have come under attack from comparatively cheap imported food products. Considerable market share is also lost due to switch over to local alternatives and out right product avoidance. Resort by consumers to cheap products has been induced by declining household incomes and the sustained monetary policy stringency of the Central Bank of Nigeria.

Amid the disappointing sales revenue performance, Dangote Sugar was left with the only option of cutting cost to end a sustained profit fall that had been on since 2009. Cost management helped the company to push up profit while sales stagnated. The proportion of sales revenue claimed by cost of sales declined from 87.3% in 2011 to 80.2%. The effect of this is an improvement in gross profit margin from 12.7% in 2011 to 19.8% in 2012.

With the cost saving, the company saved more than N7.5 billion into profit during the review period. Profit performance was further supported by a high growth in other income, which rose from N469 million in 2011 to N2.1 billion in 2012.

There was however a sharp growth in distribution/administrative expenses during the year, which claimed part of the revenues saved through reduced cost of sales. This cost item more than doubled at 118.7% to N6.88 billion. This means the distribution/administrative cost of generating a unit of sales rose during the year from about 29 kobo in 2011 to over 64 kobo in 2012.

The general cost behaviour of the company was nevertheless favourable in 2012, which enabled it to improve its ability to convert revenues into profit. Net profit margin improved from 7.1% in 2011 to 10% in 2012. Profit margin still remains far below the 2008 peak of N21.1%.

Nascon's net profit margin of 22.2% in the third quarter is more than twice that of Dangote Sugar. Nestle is also ahead with net profit margin of 18.1% in the 2012 full year. Cadbury ranks with Dangote Sugar with a net profit margin of 10.3% at the end of 2012 while Flour Mills and 7-up are well below with profit margins of 4.0% and 3.1% in the third quarter respectively.

Dangote Sugar grew earnings per share from 62 kobo to 90 kobo over the period and dividend per share also improved from 30 kobo to 50 kobo. The register of shareholders is scheduled to close on 24th April while payment has been fixed for 14th May 2013. The company is paying out 55.6% of its earnings in dividend and the dividend yield comes to about 6.0%.

There are two main concerns for the company's operating prospects in the 2013 financial year. The first is that the company has not demonstrated the ability to grow sales revenue, which is critical to defending the improved profit margin recorded in 2012. The second is that cost cutting cannot be relied upon to improve profit performance for the second year.

The dicey situation seems to increase the investing risk on the company's stock in view of the uncertainty of its earnings outlook. A significantly improved ability to grow sales revenue seems to be the critical factor in whether the company sustains profit recovery or slums back into a falling profit situation in 2013.