Government plans London Eurobonds roadshow
auctions at the start of the week, healthy system liquidity supported buying activity in the T-bills market, with yields declining 30bps d/d on average. Meanwhile, activity was more mixed in the bond space, with benchmark yields advancing 3bps on average. On Tuesday, the CBN held an OMO auction, selling N322 billion (N500 billion offered). Following the liquidity mop up, trading turned negative in the T-bills space, with selling observed across most tenors and heaviest at the short end of the space. Meanwhile, sell pressure was dominant in the bond market, with yields advancing across board. Trading persisted bearish in the T-bills space at midweek, with yields advancing 16bps on average. The bond space was however mixed with a positive tilt, with buying observed on the midend of the space. Following a N360 billion OMO maturity, the CBN held another OMO auction on Thursday, selling N365 billion (N600 billion offered). Driven by this, selling intensified across the secondary T-bills space, with yields advancing 13bps on average while the bond space remained mixed. Finally, the week closed negative, with yields declining 6bps in the T-bills space on Friday but advancing 15bps w/w. Meanwhile, the bond space saw yields advance 4bps on Friday and 9bps w/w with investor sentiment remaining tepid.
The CBN injected $210 million at the Interbank Foreign Exchange on Tuesday. The Naira appreciated N0.14 w/w at the I&E FX Window to settle at N363.60 against the dollar and depreciated N0.50 w/w to settle at N361.50 in the parallel market.
What will shape markets in the coming week? Equity market: With weak sentiment continuing to drive tepid activity, we foresee another mixed to negative start to next week’s trading.
With the CBN keeping a lid on system liquidity, we expect trading to remain muted in the T-bills space at week open. Meanwhile, we expect mild demand in the bond space next week as the announcement of a Eurobond issuance this month is likely to increase the expectation of reduced bond supply.
We expect the naira to remain stable across the various windows of the currency space as the CBN continues to intervene in the FX market.
Focus for the week
smuggled into the country that has continued to gain ground. The company also reported a deterioration in the Apapa traffic gridlock which continued to hamper evacuation and distribution of finished products from the refinery in the quarter. On a y/y basis, we note that prices have declined by 19% y/y, in line with the 31% y/y downtrend in global sugar prices as at Q3’18, while sugar volumes have moderated 16% y/y driven by the aforementioned factors. Bucking the trend of gross margin improvement recorded in previous quarters, Q3’18 gross margin came in 952bps weaker q/q at 21% (Vetiva: 27%), the lowest level since Q1’17. We believe this was due to lower prices in the period, and possibly efficiency losses. As such, Q3’18 EBIT declined 54% q/q to N5.4 billion (Vetiva: N9.4 billion), weakest EBIT in eight quarters. Overall, 9M’18 PAT came in at N16.7 billion, 37% and 11% lower when compared to 9M’17 and Vetiva estimate respectively.
• Earnings revised lower, BUY rating maintained Despite the more competitive operating environment, we expect DANGSUGAR’S volumes to improve 20% q/q in Q4’18 supported by the seasonal boost from the festive season. Nonetheless, we revise our revenue estimate for the year to N156 billion (Previous: N171 billion) to account for the Q3 results as well as lower sugar prices for the rest of the year. After revising our gross margin estimate lower following the sharp variance in Q3, our FY’18 EBIT margin comes to 23% (Previous: 25%). Driven by this, our FY’18 PAT figure is revised lower to N23.6 billion (Previous: N26.4 billion). With this, our 12-month target price is revised to N21.46 - reiterating our BUY rating on the stock. DANGSUGAR currently trades at a FY’18 P/E of 7.1x and dividend yield of 7.0% (FY’18E DPS: N0.98). Overall, we highlight that most of the challenges facing DANGSUGAR in the current financial year are more external with respect to the Nigerian operating environment. While these factors should be transient in nature, efforts to curtail the smuggled sugar by government authorities as well as improve traffic flow in the Apapa axis have yielded very dismal results and we are less optimistic about the timeline for improvement in these conditions.
Nonetheless, we highlight that DANGSUGAR has noted its independent efforts to bypass these impediments, with Management stating new initiatives to explore waterways for product logistics. Meanwhile, we highlight possible upside for domestic sugar prices in the near term given recent uptick in global sugar prices (up 25% QTD).
• After being appointed as the substantive Group Managing Director of Dangote Sugar Refinery Plc in June 2018, DANGSUGAR reported the resignation of Engr. Abdullahi Sule effective 1st of August 2018. We note that Engr. Sule had served in the company for seven years and had been Acting Group Managing Director since 2015. He has reported resigned for personal reasons. Following this, the company announced the appointment of Mr Ravindra Singh Singhvi as the Chief Operating Officer effective 13th of August 2018. Mr Singhvi holds 37 years of experience in Manufacturing and Processing of Sugar, Petrochemicals, Cement and Textiles in India.
Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the ratings, forecasts, estimates and opinions also contained herein are objective, reasonable and fair, no responsibility or liability is accepted either by Vetiva Capital Management Limited or any of its employees for any error of fact or opinion expressed herein.