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IMARAINVESTINGIN AFRICA

SSA Sugar Industry Report | October 2013SSA producers facing EU hangover….

Asset Management | Corporate Finance | Securities | Trust Services


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Table of Contents

Executive Summary…………………………………………………………………….…………………….…...2

Valuation Metrics……………….…………………………………………………………....................3

Sector Charts…………………………………………………………………………………….…………………….4

Sugar Industry Developments…………….…………………………………..….……………………....5

Companies:

Mumias Sugar of Kenya…………………………………...………………….………………….12

Dangote Sugar Nigeria.…………………………….…..…………………….………………….17

Illovo Malawi………………………………………………………………………………………………22

Omnicane Mauritius………………………………………………………………...............25

ENL Mauritius………………………………………..……………………………….…………………29

Hippo Valley Zimbabwe………….………..…………………………………….……………….33

Zambia Sugar……..…………………………………………………………..………..............37

Analysts:

Addmore Chakurira [email protected]

Chenge Besa [email protected]

Loyiso Hoza [email protected]

Dexter Mahachi [email protected]

Christopher Kisyombe [email protected]

Tonderai Maneswa [email protected]

mailto:[email protected]






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This year’s sugar report takes a look at the global sugar

industry which is essentially a “managed market” with

most developed countries having protective

tariffs/quotas in place. Global consumption of sugar

has risen at an approx. CAGR of 2% over the past five

years and the current top sugar producer in the world

is Brazil. In Africa, Egypt and South Africa are the top

sugar producers, currently producing over 40% of the

total sugar on the continent per annum according to

ISO Statistics.

Some of the main themes which have been affecting

the fundamentals of the sugar industry in SSA include:

Sector theme 1:

Over production of sugar has led to lower

international prices…worldwide production and supply

of sugar has risen significantly over the past few years.

Sector theme 2:

Preferential EU market access for ACP/ LDC will be

phased out by the end of 2017… The gradual removal

of import quotas for African countries is expected to

result in lower prices and higher competition within the

European Union, EU, market.

Sector theme 3:

Legislative developments…We expect several

significant changes in legislation to have a material

impact on several sugar producers across SSA.

We have also identified three key drivers for the

growth of sugar consumption in SSA which are:

Rising population: SSA is home to some of the most

populous countries in Africa such as Nigeria.

Population growth rates for the region as a whole

have averaged over 2.6% for the past 10 years.

Rising income levels: SSA countries have generally

been growing their economies at rates above 4.88%

for the past thirteen years.

Rising Urbanisation rates: The increased affluence

in SSA has also coincided with a rapidly urbanising

population.

Regional Outlook

West Africa

Rapid urbanisation and population growth across West

Africa is contributing towards rising sugar consumption

in the region. We look at Dangote Sugar in Nigeria

which has significant plans to expand distribution and

production across the West African region, capitalising

on the positive outlook for sugar consumption.

East Africa

Demand for sugar in East Africa remains high, similar to

the rising consumption trends across West Africa.

Despite a combined sugar shortfall of 430,000MTt for

Kenya, Tanzania, Rwanda and Uganda, the lifting of

COMESA restrictions will negatively impact high cost

sugar producers such as Mumias Sugar of Kenya due to

the influx of regional exports from neighbouring

COMESA states including Zambia and Malawi from

March 2014.

Southern Africa

Overall, Southern Africa is the leading regional

producer in Africa and hosts some of the world’s most

efficient sugar producers. In Mauritius we examine ENL

Land and Omnicane which have both moved to

diversify their revenue streams away from sugar. In

Zambia we take a look at Zambia Sugar which recently

expanded capacity and is looking to grow its regional

exports. Illovo of Malawi faces similar challenges to

Zambia Sugar with respect to its exports to the EU

market whilst Hippo Valley Zimbabwe’s outlook

remains rather cloudy due to a dispute over its land

holdings allied to the country’s indigenisation

legislation.

In summary, our long term outlook for sugar

consumption and sugar producers in SSA remains

positive due to the impact of the three key drivers

identified earlier (i.e., rising population, rising income

levels in developing countries, and rising urbanisation

rates). These drivers are also assisting in galvanising

demand for sugar globally, and consequently we do not

expect the current global sugar surplus to be

sustainable in the long run.

Executive Summary

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Valuation Metrics

Company Country Mkt Cap (USD m) PER (x) PER (T +1) P/BV (x) EV/ Ebitda EV/ Tn (USD) cost/tn (USD) Div Yield (%) ROE (%) PBT Margin (%) Net Margin (%)

Mumias Sugar Kenya 64.92 n/a 223.40 0.40 2.20 256.13 481.58 0.00 (11.50) (16.76) (14.00)

Dangote Sugar Nigeria 803.00 9.60 9.00 2.80 8.10 *1,153.45 *808.77 4.70 23.40 15.28 10.10

Illovo Malawi Malawi 501.00 8.30 9.20 5.30 8.40 1 705.49 197.04 6.00 78.80 30.73 22.20

Omnicane Mauritius 186.90 11.90 11.70 0.70 8.40 1 716.71 n/a 3.30 5.40 13.95 12.30

ENL Mauritius 357.54 7.00 7.60 0.70 9.40 n/a n/a 2.60 10.00 9.10 119.70

Hippo Valley Zimbabwe 193.02 14.50 12.30 0.90 8.40 853.38 369.75 n/a 6.70 13.40 7.80

Zambia Sugar Zambia 418.00 16.20 14.80 2.40 8.50 1 239.19 335.41 3.10 15.80 20.60 8.90

Average 360.63 11.25 10.77 1.89 7.63 1 154.18 345.95 3.28 18.37 12.33 23.86

Illovo Sugar South Africa 1 463.79 16.95 13.98 2.30 11.20 1 260.61 475.41 2.15 15.99 11.50 6.70

Tongaat Hulett South Africa 1 308.57 12.50 10.83 1.43 10.80 1 785.11 833.85 1.79 12.00 10.00 8.60

Tate & Lyle London 5 665.42 13.49 13.54 3.60 19.68 n/a n/a 2.44 24.80 12.27 11.20

Sao Martinho Brazil 1 479.53 30.91 15.71 1.59 23.10 n/a n/a n/a 3.50 13.10 8.70

Tereos Int. Brazil 1 099.41 n/a 9.80 0.67 6.80 1 451.89 315.95 n/a (0.06) 2.80 0.00

Average 2 203.34 18.46 12.77 1.92 14.32 1 499.20 541.74 2.13 11.25 9.93 7.04

Sources: Bloomberg, * IAS Estimates, Capital IQ - 25 Sept 2013

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S&P Frontier vs. Sugar producers (Rebased)

Dangote has been the only sugar stock in our universe

to out-pace the S & P African Frontier index YTD…

RoAE (%)

Dangote is also the second best performer for 2012

based on return on average equity…

RoAA (%)

And is similarly placed in terms of return on average

assets

EV/Tonne

Omnicane Mauritius currently has the highest EV/

tonne rating in our universe…

Total production (Tonnes)

Dangote produces the largest amount of refined

sugar….

Revenue / sales

Dangote Sugar also has the largest gross USD sales

revenue within our stock universe…

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S&P Frontier Illovo Dang Sugar Mumias

Omnicane ENL Hippo ZamSugar

Source: Bloomberg, IAS Research

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IllovoMalawi

Omnicane ENL HippoValley

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2011 2012

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MumiasSugar

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IllovoMalawi


ZambiaSugar

2011 2012

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IllovoMalawi


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m)

2011 2012

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IllovoMalawi


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2011 2012

Sector Charts

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Industry overview

The global sugar economy over the past century has

been dominated by regulation, protection and

subsidies which have prevented the development of

free trade.

Essentially this has resulted in the creation of a

“managed market” for sugar, and most developed

countries (e.g. USA, EU, and Japan), have protective

tariffs/quotas in place to assist their high cost

domestic beet/cane sugar industries. Over 120

countries globally currently produce sugar with most

of the world’s supply coming from cane whilst the

balance comes from sugar beet.

Fig 1: World sugar producing countries…

Latin American countries, dominated by Brazil, are

currently the world’s top per capita producers of

sugar as seen in the graph below from the FAO.

Fig 2: Per capita production of sugar

Fig 3: African Sugar Producers

In Africa, Egypt and South Africa are the top sugar

producers and were responsible for c41% of the total

sugar produced on the continent in 2012 according to

ISO statistics.

Fig 4: African regional sugar production

Overall, besides being the leading regional producers

in Africa, Southern Africa also contains some of the

world’s most efficient sugar producers. At present,

companies in SADC countries such as Zimbabwe,

Swaziland and Malawi manage to produce sugar at

globally competitive rates of less than cUSD 300 per

tonne. (Source: USDA)

In the following pages we briefly discuss the three

key sector themes which we believe are currently

driving developments in the African sugar industry.

Sugar Industry Developments & Key themes

Source: FAOSTATS 2012

Source: FAO STATS BOOK 2013

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

North Africa East Africa CentralAfrica

West Africa SouthernAfrica

tonnes

(000's

)

Regional African Sugar production

2009 2010

Source: FAO Stats Book, 2013

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Key Sector Theme 1:

Over production of sugar… international pricing

negatively affected…

Worldwide production and supply of sugar has risen

significantly over the past few years, partly in

response to increasing demand for sugar for

consumption and also as a response to rising global

bio-fuel/ethanol production.

Fig 5: USDA forecasts record global production of

sugar of over 175 million in 2013/14

According to recent statistics from the US

Department of Agriculture (USDA), seen in the chart

above, global sugar production is expected to reach

record levels of over 175m tonnes in the 2013/14

season. The high global production is partly

attributed to a recovery in the world’s largest

producer, Brazil, coupled with large harvests of sugar

in the EU, United States, Mexico, India and China.

The overproduction of sugar has created bearish market conditions…leading to downward pressure on sugar prices in international open markets…

As a result of the glut in world sugar supply, raw sugar prices have been at their lowest levels in the past few months due to the over-supply of sugar from the major producers such as Brazil. Out-of-quota beet sugar and imports from developing countries, at reduced import duties and levies, have also filtered into and affected the sugar market in the EU.

Fig 6: The FAO Sugar price index below shows how sugar

prices have evolved over the past ten years…

This current market dynamic has placed pressure on international sugar prices in general such that the sugar prices in the coming years are not expected by the USDA, FAO and the Economist Intelligence Unit (EIU) to be able recover due to high stock levels as supply exceeds demand. Below is a chart illustrating EIU forecasts for the next four years. Fig 7: EIU forecasts show sugar prices are not expected to

recover dramatically in the next four years…

We forecast prices to remain weak over the medium

Given the low price expectations that most SSA

producers have for global markets, SSA producers

have started to look at exporting more sugar to

African regional markets, which are closer and

cheaper to transport products to.

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FAO Sugar Price Index

Source: FAOSTATS

Source: USDA FAS report 2013

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EIU forecasts (% p in USD prices): Sugar

Source: Economics Intelligence Unit

EIU forecasts sugar prices to remain

depressed for the next few years…

Sugar prices currently in

downward trend since

2012…

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Key Sector Theme 2:

Preferential EU market access under threat… due to

be phased out by end of October 2017…

Although white sugar prices in the EU remain firmly above world market prices, the programmes under which African countries have been exporting to Europe are being phased out and the preferential price benefit of selling into the EU is being eroded. This came about directly as a result of a ruling made by the WTO in 2005/6 which found the EU sugar protocol for ACP/LDC to be contrary to free trade. As a result, the EU was obliged to phase out the old tariff/quota structure and craft a more inclusive tariff structure which catered for sugar imports from other global manufacturers such as Brazil, Australia and Thailand. The EU is currently the world's biggest producer of beet sugar and the principal importer of raw cane sugar for refining. Fig 8: Top 10 global importers of Raw Sugar…

Currently nearly all of the EU’s sugar imports continue to occur under the special government to government preferential arrangements due to extensions that have been negotiated, however these are set to expire over the next few years. These arrangements include those made with the African, Caribbean and Pacific (ACP) sugar group which supplies the largest volume of sugar to the EU. 19 former European colonies make up the ACP grouping, (Barbados, Belize, Congo, Fiji, Guyana, Ivory Coast, Jamaica, Kenya, Madagascar, Malawi, Mauritius, Saint Kitts and Nevis, Suriname, Swaziland, Trinidad and Tobago, Tanzania, Uganda, Zambia, and Zimbabwe). All of these countries receive preferential access to EU markets and are currently at risk from the phasing out of the sugar quota.

The EU’s sugar policy uses production quotas, import controls, and export refunds (subsidies) to support producer prices at levels which are well above international prices. The program has primarily been financed by EU consumers who have paid higher prices for sugar than the prevailing world market prices over the years. The sugar policy was initiated in 1965 as part of the Common Agricultural Policy (CAP) for Europe which dates back to 1956 and was then carried on under the banner of the EU once it was formed. Fig 9: EU sugar price is currently above the world sugar

price...

Fig 10: Average EU prices for African, Caribbean and Pacific

Countries have been above EUR 700 in 2013…

As a result of the sugar quota/ tariff policies in the EU, African

countries producing and exporting sugar have largely been

sheltered this year from the lower global prices due to the

international sugar glut…

Source: Europa

Source: Europa

Country 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14F

EU 27 3,180 2,561 3,755 3,410 3,800 3,800

Indonesia 2,197 3,200 3,082 3,027 3,565 3,700

USA 2,796 3,010 3,391 3,294 2,633 3,119

UAE 1,490 2,100 1,969 2,154 2,580 2,700

China 1,077 1,535 2,143 4,430 2,800 2,600

Algeria 1,159 1,260 1,193 1,594 1,942 2,000

Malaysia 1,504 1,527 1,813 1,720 1,850 1,900

South Korea 1,687 1,617 1,688 1,668 1,780 1,820

Iran 973 1,643 1,292 1,079 1,703 1,805

Nigeria 1,250 1,400 1,399 1,450 1,500 1,600

Source: USDA **NB: Figures for 2013/14 are forecasts

World Top Importers of Raw Centrifugal Sugar

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Fig 11: Recent EU export quota’s granted to Key SSA

countries…

Out of all the African countries we currently cover,

we expect producers in Mauritius, which has

traditionally been one of the biggest African

exporters into the EU, to be affected the most as the

gradual quota removal will impact most of its major

producers’ revenues significantly.

Nevertheless, most of the sugar producing companies

we cover in SSA will be affected to varying degrees by

the phasing out of export quotas by the EU over the

medium term. As a result, they may need to overhaul

and restructure their operations significantly in order

to remain profitable and competitive. These

companies are shown in the graph below:

Fig 12: SSA companies currently exporting to the EU

Key Sector Theme 3:

Legislative developments …

We expect several significant changes in legislation to

occur that will have a material impact on several

sugar producers across SSA. The first of these are the

expiry of the COMESA tariffs and safeguards in

Eastern and Southern Africa in March 2014.

The removal of duties and tariffs for COMESA

countries is expected to materially impact

competition within Kenya, one of the region’s main

markets. Kenyan sugar producers such as Mumias will

be negatively affected due to current high costs of

production for sugar.

Below is an illustrative table from the Kenyan Sugar

Board which shows the dilemma faced by Kenyan

Sugar producers.

Fig 13: Costs of producing sugar per tonne amongst various

EA countries…

As seen from the table above, Kenya’s neighbouring

countries such as Uganda and Tanzania have far lower

production costs making it easier for them to use

pricing as a method of entering and entrenching

themselves within the Kenyan market.

This will intensify the competitive landscape in

eastern and southern Africa as some of the sugar

producing companies in the region have indicated

that they are actively looking at growing their

regional exports which will be made easier for the

more efficient regional producers once the COMESA

free trade tariffs are implemented and restrictions

are lifted.

Source: Europa

Source: Kenya Sugar Board 2012 report

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50,000

100,000

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200,000

250,000

Hippo ENL Omnicane Illovo Malawi Zambia Sugar

Tonnes

Sugar Company EU exports (tonnes)

2010 2011 2012

Source: Annual reports; IAS estimates

9

We expect a different and more positive legislative

environment to prevail for sugar manufacturers in

West Africa, a sugar deficit region where

consumption and demand levels have regularly

exceeded production levels over the last few years.

Fig.14: Total consumption vs. production levels amongst

ECOWAS countries in 000’s of tonnes.

…Nigeria, the most populous West African country,

currently ranks as one of the top importers of raw

sugar in the world, greatly exceeding the imports

of other WA countries as shown below.

Fig.15. Nigeria vs. West African countries…

The tables and charts above highlight the large

discrepancy between consumption and production

levels amongst several West African countries, and

according to a recent presentation by Dangote Sugar,

the entire region imports close to 1.1m metric

tonnes of sugar annually due to a shortage of sugar

production facilities.

Production levels of sugar in West Africa have largely

been stagnant in the past five years whilst sugar

consumption has been rising consistently. For

example, Nigerian sugar consumption rose by

100,000mt from 1.15m metrics tonnes in 2006 to

1.25m metrics tonnes by 2012 and yet raw sugar

production remained below 65,000 tonnes per annum

as illustrated in Fig 16 below.

Fig.16: Nigerian sugar consumption is currently in excess of 1.25

million metric tonnes p.a. and has risen at a CAGR of 1.9% for the

past 7 years whilst sugar production has risen at 0.4%…

With strong drivers for consumption growth remaining

in place, we see potential for West African

consumption to continue expanding as the region’s

population grows and urbanisation rates rise. The

current per capita sugar consumption of most West

African countries remain significantly below the world

average as shown below and we believe that this

leaves scope for further growth in consumption:

Fig.17: West African per capita consumption of sugar remains

far below the world average...leaving room for further growth.

Source: Dangote Sugar H1 13 presentation

Country Total Sugar Demand Total Sugar Production as a % of

Demand (MT) Production (MT) Demand

Benin Republic 39 062 10 000 25.6%

Burkina Faso 85 106 40 000 47.0%

Cote d' Ivoire 226 565 145 000 64.0%

Senegal 188 000 99 000 50.0%

Mali 130 030 34 000 33.0%

Nigeria 1 994 175 30 000 3.0%

Source: NSMP 2012 presentation

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Benin

Burkina faso

Cam

eroon

Ghana

Guinea

Guinea Bissau

Ivory Coast

Liberia

Mali

Nigeria

Senegal

Sierra Leone

Togo

World A

verage

Consumption per capita (kgs)

Source: DSR H1 13 presentation

Source: USDA

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Significant barriers have prevented investors from

capitalising on the deep seated need for additional

sugar production in West Africa. Some of these

include:

- High costs of capital and land;

- Land rights issues;

- Infrastructure limitations and;

- High levels of bureaucracy.

Given the existing market dynamics, legislators in

governments across West Africa have slowly begun to

try and eliminate these impediments. In the largest

West African consumer market, Nigeria, the

government has embraced a “New Sugar Industry

Policy” (NSIP) which is meant to promote self-

sufficiency in sugar through backward integration

within the Nigerian sugar manufacturing industry.

Significant fiscal incentives have been introduced for

sugar refineries to move into raw sugar production as

Nigeria’s current sugar refining capacity of roughly

2.1m tonnes p.a. greatly exceeds the country’s

current demand levels of around 1.45m tonnes p.a.

Some of these incentives are shown in the table

below:

Fig.18: Examples of fiscal incentives for investors in the sugar

industry…

Source: Nigeria Sugar Master Plan

The above are only a small section of the incentives

which the Nigerian government is implementing to

encourage investors to take up production of raw

sugar in Nigeria and which are expected to result in

rising production levels of sugar.

However, due to the current large gap between

production and consumption levels, it may require

further long term investment into public

infrastructure (roads etc), materials and human

resources for production to catch up with

consumption levels in Nigeria.

Dangote Sugar, Nigeria’s top sugar refining company,

is one of the firms which is actively participating in

the government’s backward integration plans and has

taken on the challenge of increasing its investments

into sugar production. Dangote Sugar’s management

have been strong advocates for the NSIP and in

December 2012 the company purchased Savannah

Sugar from its parent company, Dangote Holdings, as

part of a group restructuring exercise meant to bring

focus to its sugar producing efforts.

Savannah Sugar is a fully integrated sugar

manufacturing company and Dangote is currently

implementing plans to expand its sugar production

capacity from 50,000 metric tonnes per annum to

over 1m metric tonnes of sugar by 2020.

As a result of the company’s investment into sugar

milling and farming, its tax rates are expected to fall

dramatically over the next five years as it benefits

from some of the fiscal incentives which have been

announced for sugar industry investors.

Fig. 19: Timeline of DSR’s production plans for Savannah

Sugar…

Source: DSR H1 13 Presentation

Nigeria currently ranks amongst the top five

producers of sugar in West Africa but will outpace the

rest should its expansion plans come to fruition...

A new duty and tariff structure which escalates over time

and promotes local sugar production;

Zero % duty on local sugar manufacturing machinery &

equipment.

Five year “tax holidays” for ‘sugar cane to sugar’ value

chains and sugar industry investors;

Outright ban on the importation of refined sugar

Up to 30% tax credit on the cost of provision of critical

infrastructure by sugar cane to sugar investors.

FY 2012

Completed

Savannah Sugar

acquisition

FY 2014

Savannah starts

contributing to

turnover,

additional farm

land acquired

FY 2017

Savannah to

produce 250 000

MT of sugar

11

The outlook for sugar demand and consumption in SSA

remains positive, in part due to several key drivers

which have impacted positively on demand. Some of

the key drivers for the growth of sugar consumption

in SSA have been:

Rising populations: SSA is home to some of the most

populous countries in Africa such as Nigeria.

Population growth rates for the region as a whole

have averaged over 2.6% during 2000-2013 with

Nigeria currently containing over 19% of SSA’s total

population. The rapid population growth rate of the

region has been partially behind the rising

consumption rates of sugar within SSA.

Rising income levels: SSA countries have generally

been growing their economies at rates around 4.88%

for the past thirteen years and this average growth

rate and increased affluence has created additional

demand for sugar and sugar related products.

Rising Urbanisation rates: The increased affluence

in SSA has also coincided with a rapidly urbanising

population. With rising urbanisation comes demand

for more processed foods containing sugar…

Fig:21. Rapid urbanisation across West Africa contributing

towards growing sugar consumption and a positive outlook for

sugar producers across the region…

Fig:22. Demand for sugar in East Africa remains high and in line

with rising consumption trends across West Africa. In 2012 Kenya,

Tanzania, Rwanda and Uganda faced a combined sugar shortfall of

nearly 430,000 tonnes….

Globally, sugar production is at record levels and in

2013/14 is forecast by the USDA to be around 175m

tonnes with demand at 167.35m tonnes, leaving a

record surplus. Brazil for example, the world’s largest

producer and exporter, managed to ship an estimated

record 15.4m tonnes of sugar from January to August

alone this year. Due to the persistent surplus, raw

sugar futures are estimated to have declined by over

37% in the past two years and so far this year, sugar

prices in New York have fallen by over 15%.

However, some of the factors driving demand for

sugar in SSA are also impacting positively on

global demand…

Along with the increased use of sugar cane in bio-

energy production, global population levels are rising

at a steady pace. According to estimates from the

United Nations, global population levels will increase

by up to 33% to 9.6 billion people by 2050. This will

mean that the world may require up to 70% more

food by 2050, according to the UN’s Food &

Agriculture Organisation.

Historically global sugar consumption has been

growing at a CAGR of c2% for the past 5 years. Should

these trends continue in the long run, we do not see

the current sugar market surpluses as being

sustainable. As a result, we expect the international

price of sugar to recover, adding to a positive long

term outlook for sugar companies in SSA which are

able to withstand the current price volatility and

bleak market conditions.

Source: FAO Stats

SSA Sugar Outlook

Source: USDA Stats

12

In 1967, the Government of Kenya commissioned Booker Agriculture and Technical Services to do a feasibility study on the viability of growing sugarcane in Mumias and then initiated a pilot project. Upon accepting the findings, on 1 July 1971 the government incorporated Mumias Sugar Company as the body to implement the project. The company is currently Kenya’s largest sugar manufacturer with a market share of c60%.

Headwinds from the expiry of the COMESA agreement still loom…

A COMESA agreement that allows Kenya to limit the amount of sugar imports from other COMESA countries is set to expire in March 2014. Mumias Sugar is expected to lose market share in sugar as sugar producers from neighbouring countries are more cost effective than Mumias, placing Mumias’ margins under pressure.

Diversification efforts still too slow to plug sugar revenue gap…

The company has embarked on a number of revenue diversification efforts given the challenges it faces. These include electricity generation, water bottling and ethanol production. However, as at the FY 13 results, electricity sales, contributed only c2.8% of revenues. The company’s CEO has previously stated he expects the water bottling and ethanol businesses to contribute c5% - c10%, respectively, to revenue.

Valuation Using a DCF valuation we arrive at a target price of KES 2.8, representing downside of 24.1% from the current price. Due to losses sustained in FY 13, Mumias is currently trading at a negative PER and P/BV of 0.4x. Given the looming competition from regional low cost producers and Mumias Sugar’s own operational issues regarding cane supply, we see the company’s earnings outlook as weak and uncertain with strong risks to the downside. As a result, we find it difficult to justify holding the stock and recommend that

investors SELL.

Equity Research Kenya October 2013 Sugar

Recommendation SELL

Bloomberg Code MSUG:KN

Current Price (KES) 3.7

Current Price (USc) 4.2

Target Price (KES) 2.8

Target Price (USc) 3.2

Upside (%) (24.1)

Liquidity

Market Cap (KES bn) 5 661

Market Cap (USD m) 64.92

Shares (m) 1 530.0

Free Float (%) 72.6

Ave. daily vol ('000) 689.8

Price Performance

Price, 12 months ago 6.2

Change (%) (40.4)


Change (%) (18.0)

Financials (KES m) 30 Jun Current 2014F 2015F

Turnover 11 944 11 644 11 939

EBITDA 297 373 561

Net Finance Income 269 (331) 250

Attributable Earnings (1 670) 25 221

EPS (KES) (1.09) 0.02 0.14

DPS (KES) - - -

NAV/Share (KES) 8.69 4.96 1.04

Ratios

RoaA (%) (7.0) 0.8 0.4

RoaE (%) (11.5) 0.2 4.8

EBITDA Margin (%) 2.5 3.2 4.7

Valuation Ratios Current 2014F 2015F

Earnings Yield (%) (29.5) 0.4 3.9

Dividend Yield (%) - - -

PE (x) (3.4) 223.4 25.6

PBV (x) 0.4 0.4 0.7

EV/EBITDA (x) 2.2 2.6 27.0

0.40

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0.80

1.00

1.20

1.40

1.60

3-Sep-12

17-Sep-12

1-Oct-12

15-Oct-12

29-Oct-12

12-Nov-12

26-Nov-12

10-Dec-12

24-Dec-12

7-Jan-13

21-Jan-13

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18-Feb-13

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27-May-13

10-Jun-13

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8-Jul-13

22-Jul-13

5-Aug-13

19-Aug-13

2-Sep-13

16-Sep-13

S & P Frontier index vs. Mumias Sugar (Rebased)

S & P Frontier Index Mumias

Strengths Weaknesses

Market leader in Kenya Cane cultivation is rain dependent

Diversification should help hedge against Longer cane growing cycles

volatile sugar earnings Overdependence on outgrowers for cane supply

Branded sugar leads to consumer loyalty

Opportunities Threats

Sale of carbon credits Expiry of Comesa safeguards

Regional diversification due to EAC intergration Expiry of EU quotas may also heighten

Sugar demand in Kenya currently outstrips supply competition from regional competitors.

Cane poaching by competitors

13

In FY 13, gross revenues were down 20.15% y-o-y to KES 14.9bn with sugar sales contributing KES 14.02bn, i.e. close to 94% of revenues. The company produced a total of 147,320 tonnes of sugar, down 14.65% y-o-y when compared to 172,614 tonnes of sugar produced in 2012, and this was attributed to the lower sugar cane availability in FY 13 where only 1.72m tonnes of sugar cane was processed compared to the 1.92m tonnes processed in FY 12. Cost of sales fell by 6.01% y-o-y to KES 10.4bn from the previous year’s KES 11.1bn. Consequently, gross profit fell by 65.50% to KES 1.6bn with the gross margin weakening to 10.37% from 24.00% in the previous year. Total operating expenses were up 18.07% y-o-y to KES 3.7bn compared to the previous period’s KES 3.1bn. Net finance costs came in at a negative KES 330.7m, a decline from a positive KES 269.4m in the previous year due to higher finance costs. The PBT margin for the year fell from 11.35% in FY 12 to -18.70% in FY 13 as the lower revenues and rise in operating costs led to a loss before tax of KES 2.2bn, down from a profit of KES 1.8bn in FY 12. A tax credit of KES 566.28m aided the business slightly and led to an after tax loss of KES 1. 7bn, down from a KES 2.0bn profit in FY 12. The net income margin for the year was consequently a negative 19.96%, down from a margin of 12.95% achieved in FY 12. A loss of KES 1.09/share was realised in FY 13 compared to a profit of KES 1.32/ share achieved in FY 12. Net cash generated from operations fell dramatically y-o-y from KES 2.1bn in FY 12 to KES 932.4m in FY 13 as the lower revenues achieved in FY 13 affected cash flows. Net cash used in investing activities fell from KES 4.4bn to KES 1.2bn in FY 13. Net cash from financing activities was a positive KES 641.6m, up 87.19% y-o-y from KES 342.7m in FY 12 due to increased borrowings. As a result, cash and cash equivalents improved to -KES 940.3m from –KES 1.3bn in the prior year. Total assets fell slightly by 0.92% to KES 27.2bn as at the end of FY 13 from the comparative period’s KES 27.4bn. The company’s debt-to-equity ratio worsened to 45.45% in FY 13 from 34.27% marking the third year in which the company’s debt rose. The current ratio weakened fell to 0.84x from 1.25x as at the end of the previous financial year reflecting the company’s diminished ability to settle short term debts from its current assets. Management has attributed 2013’s weak results to a number of challenges which include; shortages in the quantity of cane supplied and the resultant low plant utilisation, an influx of imported sugar which depressed local prices and led to higher stock holdings, declining cane yields, alternative land use, and cane poaching by competitors. The political climate before the 4 March elections in Kenya also hampered the harvesting of sugar cane from the fields leading to higher

operating costs.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2007 2008 2009 2010 2011 2012 2013

RoAE & RoAA

RoAA RoAE

Source: Company Reports

FY 13 Financial & Operational Review

14

Outlook

On balance, Kenya’s sugar sector as a whole seems under prepared for the expiry of COMESA safeguard measures, beginning March 2014. The high cost of production and taxation make Kenyan sugar producers uncompetitive when compared to other sugar producers from within the COMESA trade bloc. For example, it is estimated that Kenyan producers currently pay an overall total of 24% of total production costs as taxes to the government, something which was scrapped by regional producers like Mauritius, Zambia and Malawi. We forecast Mumias sugar division to remain under pressure in the near term as the industry struggles to reform ahead of COMESA expiry… The average cost of production for sugar in Kenya is estimated by the USDA to be around USD 600 per tonne, far above the world average of around USD 300-400 per tonne. Normally high retail prices compensate producers in Kenya such as Mumias for the high cost of production as shown in the table below.

Fig. 23: Kenya average sugar prices…

In FY 13 however, the prices of sugar in Kenya plunged by over 30% as duty free imports from Ugandan and Tanzania producers flooded the market, wiping out part of Mumias sugars’ gross margins in the process. We believe that this scenario serves as a precursor of what could potentially happen in a few months when Comesa restrictions end in March 2014...

2011 2012 2011 2012 2011 2012

5,203 4,911 6,121 5,160 6,750 6,100

Source: USDA

Kenyan Monthly average sugar prices per 50 kg bag in KES.

Ex Factory Wholesale Retail

Fig. 24: As of March this year, out-growers supplied close to 94% of

Mumias raw sugar cane…

Source: Kenya Sugar Board

Mumias is currently heavily dependent on out-growers for c94% of its sugarcane. Out of the 49,314ha under cane cultivation in March 2013, 45,946ha is with out-growers and this reliance on smallholders brings about greater variability in input use and field preparation. The resultant high costs of production are part of the reason Mumias is at present uncompetitive against regional competitors. In order to assist in addressing the current problems, management decided to implement a backward integration strategy through a joint venture with the Tana and Athi River Development Authority (TARDA). This project consists of a plan to develop a parcel of land for a sugar factory with the capacity to crush 6,000 tonnes of cane per day. Of significance is that this venture will be supplied by a nucleus estate, giving the company control of the cane growing process. The sugar cane will also be grown under irrigation instead of the rain fed system currently in place at its main factory in Western Kenya. This project however, is expected to take a significant amount of time before the throughput makes a difference to Mumias’ unit costs of production. With Mumias main revenue generating division under threat, management has also identified revenue diversification as a possible solution. It has embarked on a number of diversification projects such as establishing an electrical co-generation plant, a water bottling plant and an ethanol distillery. However, the water bottling industry in Kenya is highly competitive making it a very difficult market to enter. The production of ethanol instead looks more promising but the revenues may take a while to come on stream.

15

In our opinion, revenues from other divisions are growing at too slow a pace to compensate for the loss of sugar sales making sugar the main revenue contributor for the foreseeable future. As shown in the FY 2013 revenue contribution graph below, sugar continues to provide the bulk of the company’s sales.

Mumias FY 2013 Divisional Revenue Split

Source: Company FY 13 Results On the bright side, Kenya’s sugar consumption remains high. Kenya currently faces a structural sugar deficit with consumption standing above 700,000 metric tonnes per year, whilst production remains below 500,000 metric tonnes. Below is a chart from the USDA showing the estimated gap between production and demand for sugar in Kenya.

Estimates show that this trend is set to continue as the country’s population will increase by roughly one million people per year which will see the population rise to 77 million by 2030 from the present 41 million. In addition, sugar demand by Kenya’s food-processing sector is also growing. Kenya is thus expected to continue to rely on imports to meet increased demand for sugar.

We expect Mumias sugar division to continue facing strong challenges in FY 14 and beyond. These include the following:

- expiry of Comesa guidelines,

- ensuring consistent supplies of good quality cane from out-growers,

- cane poaching by competitors,

- high harvesting and transportation costs. All of these weaken the company’s earnings outlook for the foreseeable future. As part of the new measures to turn around its fortunes, Mumias management has introduced early maturing cane varieties; implemented a new fertiliser regime and; re-modelled farmer service delivery channels in order to increase the area under cane and cane yields. The company also intends to increase the quantities of its branded sugar in order to increase its market share. Cane delivery has proven to be a challenge for Mumias and the company is setting up additional cane buying centres in its cane zone in order to facilitate sugar cane collection from the fields. The company expects the additional cane-buying centres to minimise in-transit losses and reduce the incidence of cane poaching

Valuation and Recommendation Using a DCF valuation we arrive at a target price of KES 2.8 representing downside of 24.1%. Mumias currently trades on a PER of -3.4x due to its losses in FY 13 and is at a relative discount to its peer average of c11.3x due to its uncertain earnings outlook. Margins of the business are expected to contract over the next two years and significant restructuring may need to be effected to reduce operating costs. As a result, we believe that the risks to the downside make it difficult to justify holding the stock and recommend that investors SELL the stock. As of March this year, Mumias was the main domestic supplier of refined sugar in Kenya

CHEMELIL0% MUHORONI

6%

MUMIAS33%

NZOIA11%

BUTALI9%

SOUTH NYANZA9%

WEST KENYA15%

SOIN0%

KIBOS7%

SUKARI4%

TRANSMARA6%

Sugar Production for the 1st Quarter of 2013

Source: Kenya Sugar Board

Demand & Supply of Sugar in Kenya

760

765

770

775

780

785

790

795

800

805

0

100

200

300

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500

600

700

800

900

2011 2012 2013 est.

Cons

umpt

ion

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's)

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ly (0

00's)

Total Imports Total Production Consumption

Source: USDA

16

KES Millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 E 2015 E

Revenues 11 515 10 318 11 954 11 750 15 568 15 789 15 548 11 944 11 644 11 939

Y-o-Y % (10.4%) 15.9% (1.7%) 32.5% 1.4% (1.5%) (23.2%) (2.5%) 2.5%

Gross Profit 4 082 3 588 4 266 3 323 4 885 5 447 4 488 1 548 1 980 2 209

Y-o-Y % (12.1%) 18.9% (22.1%) 47.0% 11.5% (17.6%) (65.5%) 27.9% 11.6%

EBITDA 2 336 2 364 2 220 1 641 2 972 3 581 3 111 (296.8) 373 561

Y-o-Y % 1.2% (6.1%) (26.1%) 81.1% 20.5% (13.1%) (90.5%) (25.5%) 50.6%

EBIT/Operating Profit, exlc exceptionals 2 059 1 880 1 666 1 084 2 145 2 797 1 495 (1905.3) (214.1) 103

Y-o-Y % (8.6%) (11.4%) (34.9%) 97.8% 30.4% (46.6%) (27.5%) (88.8%) (51.7%)

Attributable Net Income/Profit After Tax 1 527 1 394 1 214 1 610 1 572 1 933 2 013 (1669.7) (25.3) 221

Y-o-Y % (8.7%) (12.9%) 32.6% (2.3%) 22.9% 4.1% (17.0%) (98.5%) (771.6%)

Per Share data

Attributable Diluted EPS 2.99 0.91 0.79 1.05 1.03 1.26 1.32 (1.09) 0.02 0.14

Y-o-Y % (69.6%) (12.9%) 32.6% (2.3%) 22.9% 4.1% (183.0%) (101.5%) -(771.6%)

Dividend Per share (DPS) 1.00 0.50 0.40 0.40 0.40 0.50 0.50 - - -

Y-o-Y % (50.0%) (20.0%) 0.0% 0.0% 25.0% 0.0% (100.0%) NA NA

NAV/Basic Share 15.12 5.45 5.91 6.56 7.19 9.46 10.28 8.69 4.96 1.04

Y-o-Y % (63.9%) 8.4% 11.0% 9.6% 31.6% 8.6% (15.5%) (42.9%) -79.0%

Margin Performance

2006 2007 2008 2009 2010 2011 2012 2013 2014 E 2015 E

Gross Margin 35.4% 34.8% 35.7% 28.3% 31.4% 34.5% 28.9% 13.0% 17.0% 18.5%

EBITDA margin % 20.3% 22.9% 18.6% 14.0% 19.1% 22.7% 20.0% (2.5%) 3.2% 4.7%

EBIT margin% 17.9% 18.2% 13.9% 9.2% 13.8% 17.7% 9.6% (16.0%) (1.8%) 0.9%

Net Income Margin % 13.3% 13.5% 10.2% 13.7% 10.1% 12.2% 12.9% (14.0%) (0.2%) 1.8%

Ratios

ROaA 17.3% 15.8% 12.8% 6.9% 12.0% 13.5% 5.9% (7.0%) (0.8%) 0.4%

ROaE 19.8% 17.4% 14.0% 16.9% 14.9% 15.2% 13.3% (11.5%) (0.2%) 4.8%

Earning yield on current price 80.9% 24.6% 21.4% 28.4% 27.8% 34.1% 35.6% (29.5%) (0.4%) 3.9%

Dividend yield current price 27.0% 13.5% 10.8% 10.8% 10.8% 13.5% 13.5% 0.0% 0.0% 0.0%

Financial Summary

17

Equity Research Nigeria October 2013

Sugar

Dangote Sugar Refinery PLC commenced business in March 2000 as the sugar division of Dangote Industries Limited. The sugar-refining factory at Apapa port was commissioned in 2001 with an initial installed capacity to process 600,000 MT of raw sugar per annum. The refinery has since undergone two expansions increasing the production capacity to about 1.44 million MT per annum, making it the largest sugar refinery in sub Saharan Africa and second largest in the world.

Nigerian market offers huge potential With a population of +160m, GDP growth rate of 6.5% in 2012 and a World Bank growth rate forecast of 6.7% for 2013, the Nigerian market is ideal for an FMCG company like Dangote Sugar. Demand for the company’s products is likely to remain high from both industrial and domestic consumers as diposable incomes rise. The company currently has a market share of c70% and does not seem to have any significant competitive threat at the moment.

Legislative incentives to impact margins positively… The sugar industry in Nigeria has been identified as a target for backward integration by the Nigerian authorities. This will result in the industry being targeted with significant incentives so that companies invest in sugar production and milling. As Dangote is the current market leader, we believe that it is well positioned to benefit materially with margins expanding as it begins to grow its own raw sugar instead of importing.

Valuation Using a DCF valuation, we value Dangote at NGN 12.3. This provides a 15.2% upside from the current price of NGN 10.71. We believe that at the current TTM PER of 9.6x and P/BV of 2.8x, Dangote Sugar is an attractive investment for medium to long term investors looking for sustainable growth in the consumer markets of West Africa. BUY

Recommendation BUY

Bloomberg Code DANGSUGA:NL

Current Price (NGN) 10.7

Current Price (USC) 6.7

Target Price (NGN) 12.3


Upside (%) 15.2

Liquidity

Market Cap (NGN bn) 128 400

Market Cap (USD m) 803

Shares (m) 12 000

Free Float (%) 19.6

Ave. daily vol ('000) 4 037.7

Price Performance


Change (%) 121.9


Change (%) 31.1

Financials (NGN m) 31 Dec FY2012 2013F 2014F

Turnover 106 868 114 465 124 478

EBITDA 15 087 18 200 22 194

Attributable Earnings 9 992 14 203 17 858

EPS (NGN) 0.83 1.18 1.49

DPS (NGN) 0.50 0.71 0.89

NAV/Share (NGN) 3.86 4.21 4.66

Ratios Current 2013F 2014F

RoaA (%) 19.9 24.9 28.3

RoaE (%) 23.4 29.3 33.6

EBITDA Margin (%) 14.1 15.9 17.8

Earnings Yield*(%) 10.5 11.1 13.9

Dividend Yield (%) 4.7 6.6 8.4

PE*(x) 9.6 9.0 7.2

PBV (x) 2.8 2.5 2.3

EV/EBITDA (x) 8.1 6.7 5.5 * trailing


Market share of c70% Reliance on raw sugar imports leads to

High demand for products due to Nigeria's high exposure to volatile global sugar prices,

population and robust GDP growth rate lower gross margins and forex risk.

High dividend yield

Strong parent company in Dangote Industries


Expansion to regional and other markets Entry of competitors

Cane growing and sugar milling at Savannah Sugar Production overcapacity

should lead to fatter gross margins.

0.50

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S & P Africa Frontier Index vs. Dangote Sugar (Rebased)

S & P Africa Frontier Index Dangote Sugar

18

Dangote Sugar released its FY 12 results in which both the top-line and cost of sales numbers of NGN 106.87bn (FY 11: NGN 107.22bn) and NGN 85.76bn (FY 11: NGN 93.62bn), respectively, were significantly lower than our forecasts. The former was due to constrained discretionary income on the Nigerian consumer while the latter was primarily as a result of lower raw sugar prices, the main input cost, in FY 12 relative to FY 11. The average raw sugar price in 2012 was 18.5% lower than in 2011. Furthermore, factory improvements led to increased efficiencies which were reflected in yields increasing to c96% from c92% in FY 11 and a decrease in molasses sold. Gross profit of NGN 21.11bn (FY 11: NGN 13.60bn) was much closer to our expectation of NGN 25.56bn with gross margins coming in at 19.75% (FY 11: 12.68%). Distribution/admin and other expenses more than doubled to NGN 6.88bn due to higher staff costs (+25.45 y-o-y), and a management fee of NGN 2.1bn leading to relatively slower PBT growth of 49.54% to NGN 16.33bn. PAT came in at NGN 10.80bn, 45.83% higher than the corresponding figure in FY 11. EPS of 90k was 10.0% lower than our 100k forecast. A 50k DPS was declared, implying a yield of 4.7% at the current price of NGN 10.7. On the balance sheet, working capital increased by 23.57% y-o-y to NGN 31.76bn. The company remained debt-free. Net cash generated from operating activities almost trebled to NGN 25.06bn while cash outflows to investing activities were up 26.44% y-o-y to NGN 2.59bn. Cash outflows from financing activities of NGN 3.60bn were exactly half those for the corresponding period. Consequently, cash and cash equivalents at the end of FY 12 stood at NGN 24.96bn (FY 11: NGN 6.10bn). Dangote Sugar Refinery (DSR) released its H1 13 results to 30 June 2013 in which gross profits rose by 22.45% to NGN 13.60bn, largely as a result of a lower cost of sales due to falling import costs of sugar. The significant drop in input costs led gross margins to improve to 24.62% from 20.72% in H1 12. Administrative expenses rose by 17.86% to NGN 3.6bn in H1 13 from NGN 3.0bn in H1 12. Other income rose dramatically from NGN 31.4m in H1 12 to NGN 977.97m in H1 13. Consequently, EBIT was up 11.04% y-o-y to NGN 8.94bn with EBIT margin improving to 16.31% from 15.01% in H1 12. PBT margins rose by 475 basis points resulting in a PBT of NGN 10.89bn, up 21.28% y-o-y from NGN 8.11bn in the previous period with EPS coming in at 135 kobo (H1 12: 95 kobo). On the balance sheet, cash and cash equivalent at H1 13 were NGN 23.24bn, down 6.51% from NGN 24.96bn at FY 12. Cash flow from operating activities declined by 65.05% y-o-y to NGN 5.52bn at H1 13 from NGN 15.80bn. Cash flow from investing activities rose from NGN 241.28m to NGN 1.09bn in H1 13. As a result, cash and cash equivalents grew by 29.29% to NGN 23.34bn at the end of H1 13 from NGN 18.05bn in H1 12.

FY 12 & H1 13 Financial & Operational Review

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2006 2007 2008 2009 2010 2011 2012

Turnover (NGN 'bn)

Source: DSR

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5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

2006 2007 2008 2009 2010 2011 2012

Net Income Margin % Gross Margin EBITDA margin %

Source: DSR

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20

40

60

80

100

120

140

160

180

200

2006 2007 2008 2009 2010 2011 2012

EPS (kobo)

Source: DSR

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2006 2007 2008 2009 2010 2011 2012

ROaA ROaE

Source: DSR

19

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100

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140

160

Cameroon Senegal Ivory Coast Nigeria Mali

Tonnes

(000's

)

2011 2012

Sources: USDA, indexmundi.com

Despite having the highest consumption of sugar in

West Africa (c1.2m MT), Nigeria is only the fourth

largest producer of raw sugar producing circa 60,000

MT of sugar p.a. whilst importing the rest from major

exporters such as Brazil. The new sugar master plan of

the government hopes to turn this around over the

next few years and in so doing help to save up to USD

350m in foreign currency per annum.

Outlook Dangote Sugar is currently implementing significant expansion plans in Nigeria and beyond. Within Nigeria, the company intends to expand its present production capacity of 1.44m metric tonnes per annum to 2.5 m metric tonnes per annum. The intentions of management are to use the additional capacity to export refined sugar and its products to the West African region. To help achieve its expansion goals, Dangote has also bolstered its management team by hiring the ex-MD of Illovo Sugar of South Africa, Mr. Graham Clark, to become the new group MD of Dangote Sugar. Mr. Clark has a strong background in managing integrated sugar companies and is expected to help guide the company as it expands throughout Africa. Below are a table and a map illustrating the company’s expansion plans for the next few years and beyond.

Dangote Sugar Expansion Plans

Enter neighbouring African markets focus on the ECOWAS region

Increase production capacity to capture regional , domestic and product growth

Acquire Savannah Sugar & replicate in Kogi, Jigawa, Taraba and Sokoto to produce 1,000,000MT of sugar by 2020

Target production yield of 97% Conversion of molasses to ethanol

Increase warehouse capacity and stocks

Diversify distribution chain, Packaged sugar for retail consumers

Vessel acquisition for transportation and storage


Fig. 25: Map of Dangote Sugar’s planned areas of expansion in West

Africa: The company is currently exporting to Ghana, Mali, Burkina

Faso, Togo and Gambia and intends to extend this market reach to

Senegal, Liberia and Mauritania by 2014.


Backward Integration plans at advanced stage…

Dangote’s backward integration plans have seen the company purchase the Savannah Sugar Company from its parent company Dangote Industries Limited. This acquisition was completed in December 2012 in order for Dangote Sugar to develop its capability of growing sugar cane. The Savannah Sugar Company is a fully integrated sugar producer located on 32,000ha in Numan Adamawa state. It currently has 5,200ha under production, a refining capacity of 50,000MT p.a., and can process up to 4,000 MT of sugar cane per day. Plans are underway to increase the land under cultivation to over 100,000ha and in the process produce over 1m metric tonnes of sugar. To achieve this DSR intends to identify suitable sites aided by information provided by the government under its “New Sugar Master Plan, (NSMP).” Growing its own sugar cane will also provide Dangote with a way of protecting itself against the volatility of international sugar prices as well as increase the company’s margins substantially as it will rely less on raw sugar imports which will be subject to higher tariffs and levies under the NSMP.

Fig. 26: Top Sugar producing countries in West Africa

20

Valuation & Recommendation Using a DCF valuation, we value Dangote Sugar at NGN 12.3. This provides a 15.2% upside from the current price of NGN 10.7. Dangote Sugar has significant expansion plans which are expected to result in material growth in revenues over the next five years. As a result we believe that the current TTM PER of 9.6x and P/BV of 2.8x make it an attractive investment for medium to long term investors. BUY

DSR Nigerian Market Share

DSR currently has over 70% of domestic market share & is a key

supplier to 5 of 6 large blue chip industrial companies in Nigeria

Source: DSR H1 2013 results Presentation

Sugar consumption rising steadily…

Nigeria’s per capita sugar consumption remains low at 7kg compared to a global average of 31kg. Its population is currently over 160 million and is growing at a steady pace of around 2.7% p.a.. Fig.27 Domestic consumption of sugar remains strong and has

been growing at an 8 year CAGR of 3.2% pa… We expect the rising population, coupled with an economic growth rate of 6.7% (World Bank 2013 est.) to continue to drive demand for sugar over the next few years, offering steady growth for consumer goods companies such as Dangote Sugar as the Nigerian market expands. Further to this, we expect the current legislative developments around the NSMP to help entrench Dangote’s position as the market leader in Nigeria due to its aggressive take up of investment opportunities and incentives provided under the NSMP. As a result of the above growth drivers, our outlook for Dangote is positive for the next five years, making it, in our view, an attractive investment for medium to long term shareholders.

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1,050.00

1,100.00

1,150.00

1,200.00

1,250.00

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1,400.00

1,450.00

2005 2006 2007 2008 2009 2010 2011 2012 2013est.

Tonnes

(000's

)

Nigerian Sugar Consumption, Production & Imports

Consumption

2 per. Mov. Avg. (Consumption)

Source: NSDC, USDA

21

NGN Millions 2006 2007 2008 2009 2010 2011 2012 2013 E 2014 E

Revenues 11 515 80 649 80 671 82 396 89 980 107 219 106 868 114 465 124 478

Y-o-Y % 0.0% 2.1% 9.2% 19.2% (0.3%) 7.1% 8.7%

Gross Profit 4 082 33 462 30 881 20 760 18 098 13 598 21 111 25 182 30 099

Y-o-Y % (7.7%) (32.8%) (12.8%) (24.9%) 55.3% 19.3% 19.5%

EBITDA 2 336 30 262 28 218 17 401 16 171 11 183 15 087 18 200 22 194

Y-o-Y % (6.8%) (38.3%) (7.1%) (30.8%) 34.9% 20.6% 21.9%

EBIT/Operating Profit, exlc exceptionals 2 059 30 662 27 297 15 843 14 696 10 171 15 527 21 198 25 512

Y-o-Y % (11.0%) (42.0%) (7.2%) (30.8%) 52.7% 36.5% 20.3%

Attributable Net Income/Profit After Tax 1 527 21 479 21 871 13 186 11 282 7 112 9 992 14 203 17 858

Y-o-Y % 1.8% (39.7%) (14.4%) (37.0%) 40.5% 42.1% 25.7%

Per Share data

Attributable Diluted EPS 2.99 2.15 1.82 1.10 0.94 0.59 0.83 1.18 1.49

Y-o-Y % (15.2%) (39.7%) (14.4%) (37.0%) 40.5% 42.1% 25.7%

Dividend Per share (DPS) 1.00 1.70 1.20 1.00 0.60 0.30 0.50 0.71 0.89

Y-o-Y % (29.4%) (16.7%) (40.0%) (50.0%) 66.7% 42.1% 25.7%

NAV/Basic Share 56.86 2.60 2.72 3.47 3.26 3.26 3.86 4.21 4.66

Y-o-Y % 4.8% 27.5% (6.1%) 0.1% 18.2% 9.2% 10.6%

Margin Performance

2006 2007 2008 2009 2010 2011 2012 2013 E 2014 E

Gross Margin 35.4% 41.5% 38.3% 25.2% 20.1% 12.7% 19.8% 22.0% 24.2%

EBITDA margin % 20.3% 37.5% 35.0% 21.1% 18.0% 10.4% 14.1% 15.9% 17.8%

EBIT margin% 17.9% 38.0% 33.8% 19.2% 16.3% 9.5% 14.5% 18.5% 20.5%

Net Income Margin % 13.3% 26.6% 27.1% 16.0% 12.5% 6.6% 9.3% 12.4% 14.3%

Ratios

ROaA 6.6% 75.3% 50.4% 23.4% 19.7% 14.1% 19.9% 24.9% 28.3%

ROaE 5.3% 78.2% 74.7% 35.5% 28.0% 18.2% 23.4% 29.3% 33.6%

Earning yield on current price 28.0% 20.1% 17.0% 10.3% 8.8% 5.5% 7.8% 11.1% 13.9%

Dividend yield current price 9.3% 15.9% 11.2% 9.3% 5.6% 2.8% 4.7% 6.6% 8.4%

Financial Summary

22

Illovo is Malawi’s only sugar producer with significant agricultural and milling assets at Nchalo Sugar Estate in the South of the country and at Dwangwa Sugar Estate in the mid-central region. The agro-processing company grows about 2.5 million tonnes of sugar cane per annum with another significant 360,000 tonnes grown by smallholder out-grower farmers. Approximately 65% of the sugar produced is sold to local markets, 22% into preferentially priced markets in Europe and the US and the remainder into regional markets. Illovo has a virtual monopoly in terms of sugar production in Malawi. However, this is set to change in the medium term as more companies which are into cane growing and sugar production have been licensed.

Sterling FY 13 Performance Pre–tax profits for FY 13 increased 158% to MWK 30.0bn (cUSD 73.0m), while PAT leapt 159% to MWK 21.1bn (cUSD 51.0m). The strong FY 13 performance was boosted by the devaluation of the local unit, good prices under preferential pricing in the Euro-zone and cost containment. Operating costs soared as about 78% of its costs are exchange related (mostly fertiliser and fuel imports). Favourable domestic pricing (five domestic price increases) helped cushion against the increase in costs and protected the margins and increased cane root revaluation (due to the devaluation and depreciation of the local unit).

Margins improved on revaluations, and increased and better prices

Operating profit improved by 170% to MWK 33.0bn, implying a 51% operating margin, and an improvement from 33% in FY 12. Accounting revaluations helped boost earnings with a 600% jump in fair value on growing crop (value of cane root is calculated by multiplying the amount of cane grown by the approx.value of sucrose in the next harvest period). Operating profit before changes in fair value of biological assets was at MWK 17.4bn (up 82% y-o-y), implying that about 46% of the operating profit was unrealised.

Valuation Our DCF and relative valuations give us a value of MWK 278.17 a share or USD 501.0m. We rate Illovo as ACCUMULATE as it is a bell weather blue chip with strong cash generation, a healthy dividend policy, monopolistic qualities, and strong management and volume growth prospects. Furthermore, the company has an extensive distribution and marketing network throughout

Malawi.

Equity Research Malawi October 2013 Sugar

Recommendation ACCUMULATE

Bloomberg Code ILLOVO:MW

Current Price (MWK (t)) 24 600


Target Price (MWK (t)) 27 817


Upside (%) 13.1

Liquidity

Market Cap (MWK m) 175 507

Market Cap (USD m) 501

Shares (m) 713

Free Float (%) 42.7


Price Performance

Price, 12 months ago (MWK) 15 000

Change (%) 64.0

Price, 6 months ago (MWK) 17 000

Change (%) 44.7

Financials (MWK m) 31 Mar Current 2014F 2015F

Turnover 63 185 73 523 82 525

EBITDA 31 908 31 247 30 947

Net Finance Income (408) (939) (513)


EPS (MWK) 29.55 26.79 26.33

DPS (MWK) 14.65 18.75 18.43

NAV/Share (MWK) 46.12 60.16 73.90

Ratios

RoaA (%) 59.2 39.3 30.7

RoaE (%) 78.8 50.4 39.3

EBITDA Margin (%) 50.5 42.5 37.5


Earnings Yield (%) 12.0 10.9 10.7


PE (x) 8.3 9.2 9.3

PBV (x) 5.3 4.1 3.3

EV/EBITDA (x) 8.4 5.6 5.6

STRENGTHS WEAKNESS

Currently has monopoly power Poor quality of earnings

Strong management team

First mover advantage

low cost producer Strong brands even at regional level

OPPORTUNITIES THREATS

Rising population & Unpredictable weather and rainfall patterns

Increasing disposable income in local market

New entrants are expected to be licensed in the short term.

Ending of EU quota system & preferential pricing.

Exchange rate risk (although this is expected to recede but it remains a significant risk due to cyclical nature of economy)

-

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Sep-13

S & P Africa Frontier Index vs. Illovo Malawi (Rebased)

S & P Africa Frontier Index ILLOVO Malawi

23


Illovo posted a stellar set of financials, which saw profit before tax for FY 13 increase 158% to MWK 30.0bn (cUSD 73.0m), while PAT leapt 159% to MWK 21.1bn (USD 51.0m). Sugar production improved to 299,494 tonnes from 283,487 tonnes on higher cane throughput. Despite the challenging economic environment which was associated with high inflation, interest rates and high importation costs (78% of costs are in foreign currency – fertiliser and fuel), operating margins still improved to 51% from 33% in FY 12 as increased costs were offset by five successive increases in prices and improvement in export realisations. As a result, revenue improved by 74% to MWK 63.2bn from MWK 36.5bn in FY 12. Despite accounting for about 67% of the total cane growing area, Nchalo still registered lower cane yields and sucrose content (15.20 for Dwangwa against 13.72 for Nchalo). This could be attributed to unfavourable weather conditions in Nchalo compared to Dwangwa and lower machine efficiency at Nchalo. The balance sheet grew by 55% to MWK 63.8bn (FY 12 : MWK 41.2bn) mainly buoyed by the fair value adjustments on cane growing which resulted in the carrying amount of cane root increasing to MWK 21.6bn from MWK 11.0bn (95% increase).

Outlook A flat performance is expected in FY 14, as FY 13 results were greatly influenced by the devaluation of the local currency which is unlikely to recur given the relative stability of the local unit against the USD. Despite significant focus on out grower farmers, the company expects no significant increase in land under cane growing. Management says it will focus on improving efficiencies and removing the bottlenecks in production and distribution as well as increasingly focusing on the export market (although the domestic market will remain the main market). With the expected entry of competition in the domestic market in the near term, the company plans to improve on quality, rebranding and packaging. There will be refurbishment work at the mills (especially at Nchalo) to improve efficiencies with management targeting a post refurbishment extraction rate of approximately 89% from the current 84%. Nevertheless, the company is still set to benefit from its first mover advantage in the sugar sector.

Illovo ranks amongst the lowest cost sugar producers in the region at approximately USD 215 per tonne against a regional average of USD 275 per tonne, a result of the benefits of irrigation, low labour costs and high yields. Within the Illovo Group, Malawi has the highest EBIT margin at approximately 37%. Due to the mill’s high level of fixed costs, Illovo’s unit cost of production declines as volumes of sugar produced increase.

Valuation and Recommendation At MWK 246, Illovo is currently trading on a P/E of 18.2x, P/BV of 5.3x and dividend yield of 6.0%. Using a combination of a DCF & relative valuation method, we obtain a fair value for Illovo of MWK 278.17 a share or cUSD 501m which places the counter on a 13.1% upside to current price. We regard Illovo as a bell weather blue chip with strong cash generation, healthy dividend policy, monopolistic qualities and recommend that investors look at ACCUMULATING the stock.

240

250

260

270

280

290

300

310

1.9

2.0

2.1

2.2

2.3

2.4

2.5

2008 2009 2010 2011 2012 2013

'000 tonnesm tonnes

Cane Processed (m) LHS Sugar produced ( '000t) RHS

Cane processed and sugar produced

30.0

35.0

40.0

45.0

50.0

55.0

0

5

10

15

20

25

30

35

2008 2009 2010 2011 2012 2013

EBITDA Margin %EBITDA (MWKbn)

EBITDA (MWKbn) LHS EBITDA Margin (RHS)

EBITDA and EBITDA margins

24

Financial Summary

MWK Millions 2008 2009 2010 2011 2012 2013 2014 E 2015 E

Revenues 21 173 26 090 28 643 30 809 36 450 63 185 73 523 82 525

Y-o-Y % 23.2% 9.8% 7.6% 18.3% 73.3% 16.4% 12.2%

Gross Profit 10 591 13 448 14 717 13 631 17 136 42 966 44 114 45 389

Y-o-Y % 27.0% 9.4% (7.4%) 25.7% 150.7% 2.7% 2.9%

EBITDA 7 945 9 740 10 915 9 736 12 034 31 908 31 247 30 947

Y-o-Y % 22.6% 12.1% (10.8%) 23.6% 165.1% (2.1%) (1.0%)

EBIT/Operating Profit, exlc exceptionals 7 663 9 323 10 361 9 340 11 584 31 121 28 244 27 350

Y-o-Y % 21.7% 11.1% (9.9%) 24.0% 168.7% (9.2%) (3.2%)

Attributable Net Income/Profit After Tax 5 025 6 353 7 116 6 425 8 080 21 083 19 113 18 786

Y-o-Y % 26.4% 12.0% (9.7%) 25.8% 160.9% (9.3%) (1.7%)

Per Share data

Attributable Diluted EPS 7.04 8.90 9.97 9.01 11.33 29.55 26.79 26.33

Y-o-Y % 26.4% 12.0% (9.7%) 25.8% 160.9% (9.3%) (1.7%)

Dividend Per share (DPS) 4.90 6.25 7.00 6.30 7.95 14.65 18.75 18.43

Y-o-Y % 27.6% 12.0% (10.0%) 26.2% 84.3% 28.0% (1.7%)

NAV/Basic Share 15.32 18.84 22.10 24.10 28.92 46.12 60.16 73.90

Y-o-Y % 23.0% 17.3% 9.1% 20.0% 59.5% 30.4% 22.8%

Margin Performance

2008 2009 2010 2011 2012 2013 2014 E 2015 E

Gross Margin 50.0% 51.5% 51.4% 44.2% 47.0% 68.0% 60.0% 55.0%

EBITDA margin % 37.5% 37.3% 38.1% 31.6% 33.0% 50.5% 42.5% 37.5%

EBIT margin% 36.2% 35.7% 36.2% 30.3% 31.8% 49.3% 38.4% 33.1%

Net Income Margin % 23.7% 24.4% 24.8% 20.9% 22.2% 33.4% 26.0% 22.8%

Ratios

ROaA 34.7% 38.4% 36.9% 29.7% 31.2% 59.2% 39.3% 30.7%

ROaE 46.0% 52.1% 48.7% 39.0% 42.7% 78.8% 50.4% 39.3%

Earning yield on current price 2.9% 3.6% 4.1% 3.7% 4.6% 12.0% 10.9% 10.7%

Dividend yield current price 2.0% 2.5% 2.8% 2.6% 3.2% 6.0% 7.6% 7.5%

25

Omnicane Ltd, formerly Mon Tresor and Mon Desert Limited, is a Mauritius-based company engaged in electricity generation, raw and refined sugar production. In addition, it offers logistics services for the transportation of cane, sugar, molasses, and rocks. It operates through its subsidiaries, including Omnicane Milling Holdings Limited, Floreal Limited, FAW Investment Limited and Exotic Exports Limited, amongst others. In December 2012, it acquired a 25% interest in a Kenyan sugar company, Kwale International Sugar Company.

Continued reduction in sugar cane yields. There is a noticeable trend in the reduction of sugar cane yields in Mauritius due to the challenges apparent in the sugar industry of limited land and high cultivation costs, hence the diversification to other agricultural produce and energy production. A major 67% portion of Omnicane’s income is now derived from non-sugar production activities

Revenue diversification & new project investment on-going…

Omnicane is currently on a drive to diversify its revenues further away from sugar. In the past year the group’s debt increased by 12.5% to MUR 6.9bn due to a MUR 2.0bn bond issue for the investment into Real Good Food (RGF) and the acquisition of Alcodis. In addition an MUR 2.6bn investment into energy projects was also undertaken. Omnicane also has other “new projects” that are due for completion in the next year such as a 22.5 million litre producing Bioethanol distillery and a 4-star full service Air Hotel situated near the airport.

Valuation Our valuation of the stock using a DCF model provides a downside of 13.4% on the current trading price of MUR 84.5 relative to our target price of MUR 72.7. Therefore we recommend investors REDUCE their exposure to the stock as we believe that it is currently fully valued.

EQUITY RESEARCH

MAURITIUS

August 2012

SUGAR

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S & P Africa Frontier Index vs. Omnicane (Rebased)

S & P Africa Frontier Index Omnicane

Recommendation REDUCE

Bloomberg Code MTMD:SEM

Current Price (MUR) 84.5

Current Price (US c) 2.8

Target Price (MUR) 73.2

Target Price (US c) 2.4

Downside (%) (13.4)

Liquidity

Market Cap (MUR m) 5 662.5


Shares (m) 67.0

Free Float (%) 19.6


Price Performance


Change (%) 15.8


Change (%) 19.0

Financials (MUR m) 31 Dec Current 2013F 2014F

Turnover 3 871 4 282 4 702

EBITDA 1 200 1 285 1 411


Attributable Earnings 393 485 572

EPS (MUR) 5.86 7.24 8.53

DPS (MUR) 2.75 3.40 4.01

NAV/Share (MUR) 124.02 139.41 157.50

Ratios

RoaA (%) 4.3 4.4 4.6

RoaE (%) 5.4 5.5 5.7

EBITDA Margin (%) 31.0 30.0 30.0


Earnings Yield*(%) 8.4 8.6 10.1


PE*(x) 11.9 11.7 9.9

PBV (x) 0.7 0.6 0.5

EV/EBITDA (x) 8.4 8.3 7.6

* trailing


Product diversification helps hedge against any volatitilty in Declining trend in cane and sugar production in

sugar earnings. Mauritius.

Own electricity generation High gearing.


Regional diversification e.g. Kenya, Rwanda e.t.c. Sugar market price volatility.

Property development. Adverse weather conditions.

Ethanol production.

Equity Research

Mauritius

October 2013

Sugar

26

In H1 13, revenues declined by 1.36% for the 6-months to MUR 1.57bn from MUR 1.59bn in H1 12. Sugar sales made up 16.9% of revenues due to lower sugar yields, whilst energy sales constituted the remaining 82.4%. These amounted to MUR 276.0m and MUR 1.3bn respectively. Operating profit for the half year improved by 14.6% to MUR 147.8m due to cost containment measures implemented by management. The company’s operating profit margin subsequently improved to 9.37% from 8.06% in the previous half year.

Finance costs went up 14.2% y-o-y from MUR 275.4m in H1 12 to MUR 314.77m in H1 13, mostly due to a 15.1% y-o-y increase in long-term borrowings which were augmented to help finance the group’s investments into new projects.

Losses before exceptional items decreased by 11.76% to MUR 126.1m in H1 13 compared to a negative MUR 142.9m in H1 12. Meanwhile, exceptional items were 453.8% higher y-o-y to MUR 72.1m in H1 13 due to profits on sale of land of MUR 24.6m, and share of results in associate company RGF of MUR 67.6m.

The loss before tax thus declined by 58.1% to MUR 54.0m from –MUR 129.4m and the after tax loss improved to MUR 85.8m compared to -MUR 178m y-o-y after accounting for the sugar segment finance costs stated above. The loss per share went from MUR 2.65 in H1 12 to –MUR 1.40 in H1 13 while NAV per share increased by 23.86% y-o-y to MUR 111.00 from MUR 89.62 in H1 12 due to new investments. On the balance sheet, non-current assets increased by 6.94% during the first half of the year, as investments in associates more than doubled from MUR 563.5m at FY 12 to MUR 1.24bn at H1 13 resulting in total assets increasing to MUR 18.0bn. Shareholders equity declined slightly by 1.05% during the half to MUR 7.44bn. This was in part due to a 1.18% decline in retained earnings in to MUR 6.6bn. On the liabilities side, non-current liabilities rose by 15.0% in the first half, while current liabilities declined by 13.9% from MUR 4.4bn at FY 12 to MUR 3.7bn at H1 13. Cash flows from operating activities were positive, rising from -MUR 9.22m at H1 12 to MUR 219.4m at H1 13 while those from investing activities were a negative MUR 1.2bn at H1 13, an increase from -MUR 485m at H1 12. Cash flows from financing activities were a positive MUR 598.3m, up from a negative MUR 306.9m in H1 12. Cash and cash equivalents thus remained negative at -MUR 1.3bn at H1 13 compared with -MUR 1.8bn at H1 12. On the operations side there were y-o-y declines in the area harvested, cane produced, sugar production and sugar yields of 4.6%, 11.9%, 12.7% and 8.25%, respectively, due to high cultivation costs and adverse weather conditions compared to the same period in 2012.

H1 13 Financial & Operational Review

2 779 2 759

2 632

2 500

2 600

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2 800

2 900

2010 2011 2012

Area Harvested Ha

Data Source: Omnicane

24 645 24 879

21 707

20 000

21 000

22 000

23 000

24 000

25 000

26 000

2010 2011 2012

Sugar Produced per/Ha


8.879.02

8.25

7.50

8.00

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9.00

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2010 2011 2012

Sugar Yields per/Ha


527 544 582115 145 135

0100200300400500600700800

2010 2011 2012

Energy produced GWh

Coal Bagasse


27

Outlook

The chosen way forward for Omnicane Mauritius is clearly one of diversification into areas like property and energy production driven by various factors such as shrinking land for sugar production, high cultivation costs, and extreme climate conditions. Mauritius’ sugar trade exports to the EU are no longer protected which poses a threat of sugar price volatility and competition from major sugar exporting countries such as Brazil and Thailand. Omnicane has done well so far in adjusting to these changes by expanding into energy production and now owns the largest (717 GWh) Bio-thermal Electricity production plant in Mauritius, which led to the company’s energy segment contributing more than 60% of group revenues. Other business segments of the group include, transportation and potato farming, where it produces c12% of the country’s total potato production. The Bioethanol Distillery, which was built on a 5ha plot at a cost of USD 22.0m, currently has an estimated output of 22.5m litres of ethanol which are earmarked for export to the EU. The plant has good potential and we expect it to have a positive impact on revenues going forward. A full service 4-star Air Hotel, situated near the airport and comprising of 140 rooms, is amongst the projects that are under way. This development is expected to take advantage of the tourism market in Mauritius which is generally recognised as a top Southern African holiday destination. However, the returns from this project are expected to be realised over the long-term since the country’s tourism sector is currently experiencing sluggish returns. With major urban construction developments occurring in the country there is a need to fast track increasingly efficient energy supply. Omnicane is seen as being in the forefront of developing these supplies and will benefit from these changes. Economic stability is also slowly returning to the Eurozone, although the long term outlook for Mauritian sugar exports still looks uncertain due to the removal of sugar quotas and move towards a freer market.

Valuation & Recommendation

The company is aiming to ensure its survival beyond sugar manufacturing and there are prospects for stable earnings in the future as the company’s diversification efforts in the energy and the property sectors start to mature. Using a combination of a DCF and a SOTP valuation, we come up with a value for Omnicane of MUR 72.7. This represents a downside of 13.4% from the current trading price of MUR 84.5. As a result, we regard Omnicane as being fully valued. REDUCE.

2010 2011 2012

DPS % 2.50 2.75 2.75

EPS % 3.71 5.88 5.86

ROE % 4.49 6.41 5.23

NAV 82.69 91.76 112.18

No of shares 67.012 67.012 67.012

Gearing % 52.12 49.63 47.87

Financial Data

Source: Omnicane

66%

12%

12%

10%

Turnover Contribution

Thermal Energy Agriculture White Sugar Plant Refined Sugar

Source: Omnicane

28

MUR Millions 2008 2009 2010 2011 2012 2013 E 2014 E

Revenues 468 450 3 190 3 488 3 871 4 282 4 702

Y-o-Y % (90.8%) (3.7%) 608.5% 9.3% 11.0% 10.6% 9.8%

Gross Profit 468 450 3 190 3 488 3 871 4 282 4 702

Y-o-Y % (70.0%) (3.7%) 608.5% 9.3% 11.0% 10.6% 9.8%

EBITDA 77 108 1 107 1 081 1 200 1 285 1 411

Y-o-Y % (90.9%) 40.5% 920.6% (2.4%) 11.0% 7.1% 9.8%

EBIT/Operating Profit, exlc exceptionals 50 39 697 615 726 826 927

Y-o-Y % -88.2% (22.7%) 1700.3% (11.8%) 18.0% 13.8% 12.2%

Attributable Net Income/Profit After Tax 201 284 258 249 393 485 572

Y-o-Y % 288.9% 41.2% (9.0%) (3.7%) 57.8% 23.5% 17.9%

Per Share data

Attributable Diluted EPS 3.00 4.24 3.86 3.71 5.86 7.24 8.53

Y-o-Y % 553.6% 41.2% (9.0%) (3.7%) 57.8% 23.5% 17.9%

Dividend Per share (DPS) 2.50 2.00 2.00 2.50 2.75 3.40 4.01

Y-o-Y % NA (20.0%) 0.0% 25.0% 10.0% 23.7% 17.9%

NAV/Basic Share 89.59 98.47 97.53 93.47 124.02 139.41 157.50

Y-o-Y % 1947.5% 9.9% (1.0%) (4.2%) 32.7% 12.4% 13.0%

Margin Performance

2008 2009 2010 2011 2012 2013 E 2014 E

EBITDA margin % 16.5% 24.1% 34.7% 31.0% 31.0% 30.0% 30.0%

EBIT margin% 10.7% 8.6% 21.9% 17.6% 18.7% 19.3% 19.7%

Net Income Margin % 43.0% 63.1% 8.1% 7.1% 10.1% 11.3% 12.2%

Ratios

ROaA - 0.7% 9.7% 5.3% 4.3% 4.4% 4.6%

ROaE 5.4% 4.5% 3.9% 3.9% 5.4% 5.5% 5.7%

Earning yield on current price 3.6% 5.0% 4.6% 4.4% 6.9% 8.6% 10.1%

Dividend yield current price 3.0% 2.4% 2.4% 3.0% 3.3% 4.0% 4.7%

Financial Summary

29

ENL Land Ltd is an agribusiness sugar cane cultivation and property development company which came about through the merger of The Savannah Sugar Estates Ltd and Mon Désert Alma Limited. It has a property segment which currently constitutes 25% of its operations and has moved from being a pure sugar manufacturer over the past few years. The merged entity owns land in the southern and central parts of Mauritius consisting of 16,000 acres which is ear-marked for future developments.

Revenue stability threatened by EU quota removal…

A large part of ENL’s sugar is exported to the European Union. Revenues in 9M 13 recorded a 30.40% y-o-y increase to MUR 990m, driven mostly by the prevailing high EU sugar prices. In the 2011/12 season, Mauritius was granted an EU quota of 335,875 tonnes and ENL exported 28,700 tonnes, (8.54% of total Mauritius EU exports), under this quota to the EU. With quota’s being phased out in accordance with the WTO ruling, ENL will in future have to compete for sales in the EU market with global companies. This makes the medium term pricing and volume outlook for its EU exports uncertain and unpredictable.

Diversification well under way…

ENL’s property development segment is growing and currently consists of a portfolio of malls, shopping centres and other residential properties to the value of MUR 5.3bn, excluding MUR 3.1bn held by joint associates. Other areas of diversification include landscaping and animal farming. ENL is also strategically positioning itself to become a premier property developer as it owns some convertible land.

Valuation

We have used a SOTP valuation to value ENL as its land business currently constitutes 32% of its revenues, whilst sugar contributes approximately 67%. The company is trading on a P/E of 7.0x with a P/BV of 0.7x and our model gives us a fair value of MUR 41.58 which is 11.52% below the current market value of MUR 47. Given the company’s revenue outlook and weak prospects for its sugar business, we recommend investors REDUCE their current positions

pending clarity on the company’s prospects post EU quotas.

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S & P Africa Frontier index vs. ENL Land (Rebased)

S & P Africa Frontier Index ENL Land


Diversification provides stable revenues. Declining trend in cane and sugar production in

Ownes adequate land to convert. Mauritius.

Low operating margins.


urbanisation increase demand in commercial volatility in sugar prices

property Adverse weather conditions.

Recommendation REDUCE

Bloomberg Code SAVA:MP

Current Price (MUR) 47.00


Target Price (MUR) 41.58


Downside (%) (11.52)

Liquidity

Market Cap (MUR m) 10 833.50


Shares (m) 230.50

Free Float (%) 40.00


Price Performance


Change (%) 19.88


Change (%) 6.96

Financials (MUR m) 30 Jun Current 2014F 2015F

Turnover 1 293 1 404 1 504

EBIT/Operating Profit 117 125 136



EPS (MUR) 6.72 6.93 7.21

DPS (MUR) 1.22 1.18 1.15

NAV/Share (MUR) 70.23 74.86 70.63

Ratios

RoaA (%) 7.8 7.3 8.2

RoaE (%) 10.0 8.5 9.5

EBIT Margin (%) 9.1 8.9 9.1


Earnings Yield (%) 14.3 14.7 15.4


PE (x) 7.0 7.6 6.4

PBV (x) 0.7 0.6 0.6

Equity Research

Mauritius

October 2013

Sugar

30


Revenue for FY 13 increased by 31.17% y-o-y to MUR 1.2bn from MUR 985m in the previous year. Sugar sales accounted for 60.30% of total revenues, whilst the other 39.70% was from the property segment through rental income and residential unit sales. Additional income in the period was also derived from ENL subsidiaries which operate the landscaping and animal husbandry business units. Operating profit increased by 58.64% to MUR 117.4m y-o-y from MUR 74.0m in FY 12. Amortisation of deferred expenditure and intangibles fell by 81.76% to MUR 26.43m from MUR 144.9m for the period and the fair value gain on investment properties increased from MUR 281.9m to MUR 886.2m at FY 13. Finance costs increased y-o-y by 63.81% to MUR 123.0m due to a 7.9% increase in borrowings. PBT, as a result, rose by 62.15% y-o-y from MUR 862.2m at FY 12 to MUR 1.3bn at FY 13. Taxation for the year went from a credit of MUR 22.3m to a charge of MUR 15.3m resulting in a 32.3% rise in net profits from MUR 1.1bn to MUR 1.5bn. On the balance sheet, investment properties went up by 39.64% y-o-y due to fair value gains. Investment in associates and jointly controlled entities remained relatively flat with a marginal increase of 0.87% to MUR 3.4bn, leading to an increase in total non-current assets of 1.61% y-o-y to MUR 16.9bn. Current assets increased by 33.16% to MUR 1.6bn, and total assets came up to MUR 20.0bn from MUR 17.9bn. Included in the total assets was the recently completed 45,000m² mall and commercial and residential property valued at MUR 5.3bn which is expected to aid in diversifying the company’s revenues further away from sugar. Long-term borrowings increased by 25.0% y-o-y to MUR 2.09bn as the business invested funds into property investments. Net cash generated increased from a negative MUR 82.4m in FY 12 to a positive MUR 251.0m in FY 13, a threefold increase due to the rise in the company’s profitability. Net cash outflows from investing activities were lower at MUR 254.4m for FY 13 from MUR 883.7m in FY 12. Net financing activities resulted in cash inflows from financing of MUR 391.9m, down by 30.16% from the previous year’s inflow of MUR 561.0m. In total, cash and cash equivalents for the year improved to MUR 157.1m from a negative MUR 230.5m in the previous year.

25

26

27

28

29

30

31

300

310

320

330

340

350

360

370

380

390

2009 2010 2011 2012 2013

Cane harvested and sugar produced ('000 tonnes)

Cane Harvested (LHS) Sugar Produced (RHS)

-200

-150

-100

-50

0

50

100

150

0

200

400

600

800

1000

1200

1400

2009 2010 2011 2012 2013

Revenue and EBIT (MUR m)

Revenue (LHS) EBIT/Operating Profit (RHS)

75%

12%

6%7%

Land usage

Land under Cane Cultivation Other Agricultural Production

Property Development Others (Roads, Rivers, Buildings,etc)

31

Outlook The Mauritius sugar industry has been benefiting from protected fixed sugar prices of its exports to the European Union. However, the quota system is being phased out by the EU and Mauritius companies will need to compete with regional and global sugar companies for any revenues from the EU market. Below is a graph showing the amount of sugar ENL has managed to export to the EU over the last few years. Fig. 28: ENL exports to the EU have traditionally been executed through the Mauritius Sugar Syndicate and have generally been below 30,000 tonnes p.a. This is expected to leave ENL exposed to the prevailing low global prices and will affect revenues negatively should the company be unable to produce at lower costs than its competitors. Over the years, ENL has implemented various cost saving strategies. These for example, have seen ENL’s labour force in the agriculture segment reduced by almost half, with the company moving more towards mechanical production. This provides higher efficiency levels and some multi-use benefits of the machines, for example between agricultural production and property development, especially for de-rocking purposes. The area for cane cultivation is gradually shrinking and being replaced by commercial development, driven by the demand for such developments in the country. ENL has a strategic advantage since it owns large portions of land and can do its own developments allowing it to have long-term leases or out-right disposals.

We view ENL’s diversification strategy as being able to yield positive results over the long term. The investments ENL has entered into will help the company stabilise its cash flows in the medium term as

they start to yield consistent cash flows.

Valuation & Recommendation

ENL has a business model which relies on sugar exports for over 67% of its total revenues. The company is currently trading on a P/E of 7.0x with a P/BV of 0.7x and our model gives us a fair value of MUR 41.58 which is 11.52% below the current market value of MUR 47. Given the current turmoil in the global sugar market and the company’s weak revenue outlook for its sugar business, we recommend investors start to REDUCE their current positions pending clarity on the

company’s prospects post EU quotas.

50%

17%

33%

Shareholding structure

ENL Limited ENL Investment Limited Others

5269.42 5244.41

5105.73

4837.424800.00

4500

4600

4700

4800

4900

5000

5100

5200

5300

5400

2008 2009 2010 2011 2012

Area under cane cultivation (Ha)

Source: ENL Land

28,400

28,500

28,600

28,700

28,800

28,900

29,000

29,100

29,200

29,300

2010 2011 2012

Tonnes

ENL - Est. Sugar exports to EU

Source: USDA

32

MUR Millions 2008 2009 2010 2011 2012 2013 2014 E 2015 E

Revenues 914 848 485 729 916 1 293 1 404 1 504

Y-o-Y % (7.2%) (42.9%) 50.3% 25.7% 41.23% 8.6% 7.1%

EBITDA 148 127 (103) 54 106 144 190 195

Y-o-Y % (14.2%) (180.6%) (152.6%) 96.6% 35.4% 31.8% 3.1%

EBIT/Operating Profit, exlc exceptionals 71 59 (163) (30) 38 117 125 136

Y-o-Y % (16.9%) (376.8%) (81.8%) (227.4%) 210.7% 6.8% 8.7%

Attributable Net Income/Profit After Tax (151.74) 327 (40.81) 1 803 1 190 1 548 1 429 1 695

Y-o-Y % (315.8%) (112.5%) (4517.7%) (34.0%) 30.1% (7.7%) 18.7%

Per Share data

Attributable Diluted EPS (23.04) 49.71 (0.19) 8.56 5.40 6.72 6.93 7.21

Y-o-Y % (315.8%) (100.4%) (4517.2%) (37.0%) 24.4% 3.2% 4.1%

Dividend Per share (DPS) 15.00 9.33 10.00 0.62 0.88 1.22 1.18 1.15

Y-o-Y % (37.8%) 7.2% (93.8%) 41.9% 38.6% (3.4%) (2.0%)

NAV/Basic Share 630.04 1 374.88 44.74 62.46 66.86 70.23 74.86 70.63

Y-o-Y % 118.2% (96.7%) 39.6% 7.0% 5.0% 6.6% (5.7%)

Margin Performance

2008 2009 2010 2011 2012 2013 2014 E 2015 E

EBITDA margin % 16.3% 15.0% (21.2%) 7.4% 11.6% 11.1% 13.5% 13.0%

EBIT margin% 7.8% 7.0% (33.7%) (4.1%) 4.1% 9.1% 8.9% 9.1%

Net Income Margin % (16.6%) 38.6% (8.4%) 247.4% 130.0% 119.7% 101.7% 112.8%

Ratios

ROaA (2.3%) 2.7% (0.4%) 11.4% 6.6% 7.8% 7.3% 8.2%

ROaE (3.7%) 5.0% (0.4%) 16.0% 8.5% 10.0% 8.5% 9.5%

Earning yield on current price (49.0%) 105.8% (0.4%) 18.2% 11.5% 14.3% 14.7% 15.4%

Dividend yield current price 31.9% 19.9% 21.3% 1.3% 1.9% 2.6% 2.5% 2.5%

Financial Summary

33

Hippo Valley has historically been a low cost sugar producer with extensive irrigation facilities that help to insulate it against drought and increase the ability of the company to overcome climatic conditions and operate a 12 month production cycle for crops. Currently Hippo grows sugar cane on 12,300ha of arable land and has a 50% stake in the 442ha Mkwasine Sugar Estates. Hippo’s total cane production is normally in the region of 1.4m tonnes per annum at an average yield of 112t per hectare. Hippo also has a 33.3% stake in Sugar Industries Ltd in Botswana and a 49% stake in NCP Distillers, which converts molasses into alcohol. Other interests include a 50% stake in Zimbabwe Sugar Sales Ltd, a sugar broking entity and Chiredzi Township Ltd that develops and sells township stands.

Enhanced efficiencies Since the dollarisation of Zimbabwe’s economy, Hippo has undertaken several projects including mill refurbishment, to re-establish cane supply and sugar milling capacity utilisation. We expect this to significantly improve its total sugar output and yield per hectare beyond 300,000t and 110t/ha, respectively.

Recapitalisation of out-growers Hippo Valley has an out-grower system which is in part funded by the EU under the auspices of Zimbabwe’s National Sugar Adaptation Strategy (NSAS). This programme is meant to assist and guide out–growers by providing finance and technical assistance for farming sugar cane. As a result of this programme, we expect Hippo Valley’s out-grower scheme to increase its deliveries of sugar cane due to improved yields and quality of crop as a result of early application of chemicals and improved farming techniques.

Valuation In valuing Hippo we used a DCF and derived a target price of USD 1.16, implying 15.7% upside on the current price. However due to headwinds from issues such as EU quotas ending, questions around indigenisation and the low international price for Hippo’s primary product, we rate the counter a SPEC BUY.

Equity Research Zimbabwe October 2013

Sugar

STRENGTHS WEAKNESSES

EU support programmes for local sugar Weather patterns still affect produuction.

High sugar recovery rates Susceptible to commodity price movements

Historically a low cost producer Low quality sugar production

A return to pricing baased on fundamentals. Power disruptions


Successful relaunch or outgrower schemes will boost prodtn.The land reform remains contenttious

Improved quality of Sugar to fetch higher prices Slow economic growth

Increase in sugar production Low disposabel incomes

Increased production of by-products. lack of adequate liquidity in the market.

Recommendation SPEC BUY

Bloomberg Code HIPPO:ZW



Upside (%) 15.7

Liquidity

Market Cap (USD'000) 19 302

Shares (000) 193 021

Free Float (%) 24.0


Price Performance


Change (%) 0.0


Change (%) (13.0)

Financials (USD'000) 31 Dec Current 2014F 2015F

Turnover 174 239 181 209 187 551

EBITDA 21 787 39 866 43 512

Net Finance Income (6 794) (10 609) (16 138)


Financials (USD'000) 31 Dec Current 2014F 2015F

EPS (USD) 0.07 0.08 0.07

DPS (USD) NA 0.02 0.02

NAV/Share (USD) 1.09 1.15 1.20

Ratios

RoaA (%) 6.7 8.6 9.0

RoaE (%) 6.7 7.2 6.3

EBITDA Margin (%) 12.5 22.0 23.2


Earnings Yield (%) 6.9 8.1 7.4

Dividend Yield (%) - 2.4 2.2

PE (x) 14.5 12.3 13.6

PBV (x) 0.9 0.9 0.8

EV/EBITDA (x) 8.4 6.1 5.6

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

4-Sep-12

18-Sep-12

2-Oct-12

16-Oct-12

30-Oct-12

13-Nov-12

27-Nov-12

11-Dec-12

25-Dec-12

8-Jan-13

22-Jan-13

5-Feb-13

19-Feb-13

5-Mar-13

19-Mar-13

2-Apr-13

16-Apr-13

30-Apr-13

14-May-13

28-May-13

11-Jun-13

25-Jun-13

9-Jul-13

23-Jul-13

6-Aug-13

20-Aug-13

3-Sep-13

17-Sep-13

S & P Africa Frontier index vs. Hippo Valley (Rebased)

S & P Africa Frontier Index Hippo

34

Hippo reported a mixed set of FY 13 financials, posting solid top-line growth on improved production, but profitability declined due to pressure on margins. Sugar production increased 34% to 228,000t and sugar recoveries were 84.8% from 83.5% due to improved efficiencies. EBITDA margins eased 118bps to 18.1% from 19.3% due to pressure on the selling prices of sugar on the international market. The situation was exacerbated by the weaker Euro/US dollar exchange rate which negatively impacted export proceeds.

Cash flows remained solid, with operating cash flow up 25% to USD 31.9m implying an EBITDA/OCF of 99%. Working capital increased by USD 12.0m due to an increase in export sugar stocks and debtors. Debtors increased 74% to USD 24.9m with an average tenure of 51 days up from 36 days. Capex was USD 17.6m and net gearing deteriorated slightly to 18% from 17%. EBITDA/ interest cover was high at 4.7x, although net finance charges increased 13% as the company increased its debt levels. The company continues to provide inputs and extension services to third party cane growers so as to enhance cane production and deliveries to the mill. The drive to restore sugar production to the installed milling capacity of 300,000 tonnes is still on-going. However, there has been a slowdown on account of water availability. Irrigation has been reduced and cane expansion and root replanting for both private growers and company estates have been curtailed. For FY 13, sugar production is expected to decline slightly to 222,000t. The completion of the Tokwe Mukosi dam (expected in 2013) will result in increased production of sugarcane, raw and refined sugar, and the maximisation of beneficiation to by-products.

Outlook

Increased sugar production The short to medium term goal of the sugar industry in Zimbabwe is to increase its capacity utilisation and sugar production up to the installed capacity of around 640,000t per annum. The industry intends to achieve its objective of a complete turnaround by the 2016/17 season. This is despite several challenges such as reduced water availability. The four year recovery plan is anchored on an “accelerated plough out and replanting program” for private farmers. Hippo expects to produce 222,000t this season and this is in line with the current year’s production of 228,000t and with our estimates of circa 225,000t. It aims to restore production levels to the installed capacity of 300,000t by the 2016/17 season. Early estimates of the industry’s sugar production in the 2013/14 season indicate potential production of 460,000t tonnes, 28% below the installed industry capacity of 640,000t.


Due to low dam levels irrigation has been reduced and cane expansion and root replanting for both private growers and company estates have been curtailed until the completion of the Tokwe Mukosi dam. Fig 29: Hippo Valley, sugar production is currently rising at a 5 year

CAGR of 13.4%...

0

50 000

100 000

150 000

200 000

250 000

2008 2009 2010 2011 2012 2013 est

Hippo production

Source: Company annual reports

Weak International Sugar Prices & the phasing out of EU Quotas World sugar prices have been at their lowest level due to current over-supply of raw sugar from countries such as Brazil and Thailand. Out-of-quota beet and cane sugar from other developing countries have also managed to find their way into the lucrative EU market at reduced levies and import duties. This has placed a lot of pressure on sugar prices in general, dimming the prospects for Hippo Valley’s exports. Fig 30: Hippo EU Exports…

Despite the current white sugar prices in the EU remaining well above world market prices, Hippo Valley’s exports to the EU remain at risk from the planned phasing out of the EU quota and tariff structure from which it has been benefitting. Over 45% of Hippo Valley’s export sales for 2012 were to the USA and EU with the EU market being the most dominant.

Hippo Valley currently exports a significant portion of its sales

annually to the EU (~ 35%), with a smaller percentage being sold to

the USA…

-

50,000

100,000

150,000

200,000

250,000

300,000

2009 2010 2011 2012

Hippo Valley Sales distribution

Domestic EU + USA

Source: Hippo Valley Annual Report, USDA

35

Below is a table illustrating the current shareholding

structure for Hippo Valley.

Fig.31: Current Hippo Valley shareholding… from the

table it can be deduced that foreign shareholders currently

account for c 60% of the total shares in issue…

Shareholder # of Shares % of Total

1. Triangle Sugar Corporation Limited97 124 027 50%

2. Old Mutual Life Assurance Co. 25 522 495 13%

3. Tate & Lyle Holland BV 19 314 480 10%

4. NSSA - NPS 5 014 301 3%

5. Stanbic Nominees (Pvt)Ltd 3 918 968 2%

6. National Social Security Authority 3 573 683 2%

7. Standard Chartered nominees 2 842 752 1%

8. Mining Industry Pension Fund 2 778 057 1%

9. Old Mutual Zimbabwe Ltd 2 604 694 1%

10. NSSA - WCIF 2 446 872 1%

11. Standard Chartered Nominees 1 498 831 1%

12. Datvest Nominees 1 310 198 1%

13. Fed Nominees 1 185 313 1%

Hippo H1 13 Shareholding - 28/06/12

Valuation & Recommendation. Mill refurbishments are expected to add to profitability over time and with its strong balance sheet, high cash generative abilities and sound management, we believe that the group remains a solid investment. There are however, several headwinds which are currently affecting the counter such as the EU quotas coming to an end, the resolution of the indigenisation issue and the low international price for Hippo’s main product. Using a DCF valuation method we obtain a target price of USD 1.16 which implies 15.7% upside to the current price of USD 1.00. Due however, to the unresolved issues mentioned above we assign a SPEC BUY recommendation to the counter.

As part of its strategy to counteract the expected decline in prices, Hippo has been participating in Zimbabwe’s NSAS in order to try and increase the output of its out-growers. This is expected to assist in driving volumes of sugar cane processed higher and thus help to maintain revenues at high levels. Regionally, the depressed global prices continue to impact negatively on sales revenues for regional exports. The sustained pressure on selling prices due to global over-supply is expected to keep regional sugar prices low. Firm domestic demand

Although margins shrunk in the first half we still believe Hippo is in line to achieve our forecast numbers as local demand will carry the company. Per capita consumption is estimated at 24.6kg, with the consumption pattern influenced by availability rather than price.

Indigenisation issues remain under discussion...

On the empowerment front, Hippo Valley management has

indicated that discussions remain sensitive and confidential

and as a result they were unable to comment on the

potential outcome. Dialogue is being maintained though,

with all the key stakeholders including the appropriate

authorities at the highest levels.

According to information at hand, Hippo's parent company

Tongaat Hullet has managed to implement a successful

development programme for 670 indigenous private

farmers who are currently projected to produce up to

772,000t of sugar cane. Tongaat Hullet is proposing a

similar broad based empowerment scheme for both Hippo

Valley and Triangle combined, for a further 600 farmers on

12,700ha that could potentially supply an additional 1.4m

tonnes of sugar cane per annum.

Our view is that the indigenisation issue will drag on for

a while but will eventually will be resolved like other

similar cases…

We do not believe there will be any significant

interruptions to the operations of Hippo based on

precedence set with other indigenous cases locally. Our

expectations are for Hippo to eventually come up with an

employee share ownership scheme and cede stakes in the

company to community ownership schemes. With land

remaining a sensitive issue in the country, however,

nothing can be assumed with any certainty.

36

Financial Summary

US$ Thousands 2010 2011 2012 2013 2014 E 2015 E

Revenues 100 108 101 532 144 078 174 239 181 209 187 551

Y-o-Y % NA 1.4% 41.9% 20.9% 4.0% 3.5%

Gross Profit 32 252 41 268 59 774 78 571 85 168 90 400

Y-o-Y % NA 28.0% 44.8% 31.4% 8.4% 6.1%

EBITDA 18 411 13 130 31 563 21 787 39 866 43 512

Y-o-Y % NA (28.7%) 140.4% (31.0%) 83.0% 9.1%

EBIT/Operating Profit, exlc exceptionals 18 397 12 175 32 388 23 370 32 147 35 628

Y-o-Y % NA (33.8%) 166.0% (27.8%) 37.6% 10.8%

Attributable Net Income/Profit After Tax 23 646 8 794 20 946 13 647 15 632 14 199

Y-o-Y % NA (62.8%) 138.2% (34.8%) 14.5% -9.2%

Per Share data

Attributable Diluted EPS 0.14 0.05 0.11 0.07 0.08 0.07

Y-o-Y % NA (62.8%) 113.2% (36.6%) 17.7% (9.2%)

Dividend Per share (DPS) NA NA NA NA 0.02 0.02

Y-o-Y % NA NA NA NA NA (9.2%)

NAV/Basic Share 0.97 1.02 1.02 1.09 1.15 1.20

Y-o-Y % NA 5.4% 0.0% 6.7% 5.2% 4.5%

Margin Performance

2010 2011 2012 2013 2014 E 2015 E

Gross Margin 32.2% 40.6% 41.5% 45.1% 47.0% 48.2%

EBITDA margin % 18.4% 12.9% 21.9% 12.5% 22.0% 23.2%

EBIT margin% 18.4% 12.0% 22.5% 13.4% 17.7% 19.0%

Net Income Margin % 23.6% 8.7% 14.5% 7.8% 8.6% 7.6%

Ratios

ROaA 13.4% 4.2% 10.0% 6.7% 8.6% 9.0%

ROaE 28.2% 5.1% 11.2% 6.7% 7.2% 6.3%

Earning yield on current price 13.7% 5.1% 10.9% 6.9% 8.1% 7.4%

Dividend yield current price NA NA NA NA 2.4% 2.2%

37

Zambia Sugar Plc. is a subsidiary of Illovo Sugar of South Africa and is a leading, low-cost African sugar producer with the milling capacity to produce over 400,000t of sugar per annum. The core business of the company is growing sugar cane and its conversion to table and industrial sugar for the local and export markets.

Still monopolising the sugar industry. Zambia Sugar (ZSUG) is the largest sugar producer in Zambia and sells 40% of its products to the domestic market, with the balance being exported to the EU and African regional markets. After expanding its production plant in 2013, ZSUG was able to process a record 3.25 million tonnes of cane resulting in a record output of 400,000t of sugar. The increased production impacted positively on its FY revenues (+3.65%) with operating expenses also rising slightly.

A sunset clause on EU/CAP quota. The phasing out of the preferential import quota in the EU market is expected to result in heightened competition for African sugar exporters as they compete with South America and Asian producers. In FY 2013, ZSUG exported around 121,000mt of sugar at quota prices into the EU market. Such exports will be at risk from competition and sugar price volatility as the market becomes more open and deregulated.

Debt remains an issue. The company remains highly levered, despite consistent operational profit growth in FY 12 and FY 13. The significant debt affected net profits of the company negatively in FY 13. ZSUG’s debt-to equity ratio has improved somewhat from 143% in FY 12 to 114% in FY 13, whilst cash flows remained under strain due to debt financing obligations.

Valuation. The positive economic performance has resulted in increased local demand for sugar, and we are optimistic about the company’s long-term prospects. At a price of ZMW 7.00 the counter is trading on a P/E of 16.2x, P/BV of 2.4x with a div. yield of 3.1%. We believe however, that the counter is at present fully valued as it is trading above our current target price of ZMW 6.89 and we thus recommend investors HOLD.

Equity Research Zambia October 2013

Sugar

Recommendation HOLD

Bloomberg code ZMSG ZL

Current Price (ZMW) 7.00


Target Price (ZMW) 6.89


Upside (%) (1.5)

Liquidity

Market Cap (ZMW m) 2 215.6


Shares (m) 316.5

Free Float (%) 42.7


Price Performance


Change (%) 39.1


Change (%) 35.0

Financials (ZMW m) 31 Dec Current 2014F 2015F

Turnover 1 535 1 592 1 652

EBITDA 370 376 387


Attributable Earnings 137 150 153

EPS (ZMW) 0.43 0.47 0.48

DPS (ZMW) 0.22 0.24 0.24

NAV/Share (ZMW) 2.86 4.22 5.66

Ratios

RoaA (%) 14.3 14.3 13.8

RoaE (%) 15.8 13.3 9.8

EBITDA Margin (%) 24.1 23.7 23.4


Earnings Yield (%) 6.2 6.8 6.9


PE (x) 16.2 14.8 14.4

PBV (x) 2.4 1.7 1.2

EV/EBITDA (x) 8.5 8.4 8.1

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

7-Sep-12

28-Sep-12

19-Oct-12

9-Nov-12

30-Nov-12

21-Dec-12

11-Jan-13

1-Feb-13

22-Feb-13

15-Mar-13

5-Apr-13

26-Apr-13

17-May-13

7-Jun-13

28-Jun-13

19-Jul-13

9-Aug-13

30-Aug-13

S & P Africa Frontier index vs. Zam Sugar (Rebased)

S & P Africa Frontier Index Zam Sugar

STRENGTHS WEAKNESSES

Largest domestic sugar producer Reliance on exports double-edged sword

Group support Cane supply susceptible to weather conditions

Access to export markets Exports susceptible to the strength of the ZMK

Scale economies


Bio-energy / Bio-fuel industry Lower demand from Europe

Cashflow improvement from debt restructureKwacha appreciation

Domestic and regional growth High interest rate climate

Adverse weather conditions

Demand for higher wages versus cost-control

38

The 2012/2013 season saw the Nakambala Factory reach its production capacity, processing a record 3.5m tonnes of cane. The increased sugar production, higher sales volumes and improved factory productivity resulted in a 3.65% y-o-y increase in revenues despite a record high of 400,000t of sugar produced from 3.25m/t of sugar cane. Operating profits also rose slightly y-o-y by a modest 3.25%, with the operating profit margin remaining flat at 20.60%. A 21.2% y-o-y rise in administration expenses, (mainly wages/salaries) was largely responsible for the flat growth in operating margins. For FY 13, financial costs amounted to ZMW 141m, 8.88% lower than FY 12 due to principal repayments, leaving PBT at ZMW 174.5m, up 15.56% from the previous year. Net income for FY 13 was ZMW 141m, up 9.30% y-o-y from ZMW 129.8m in FY 12 with taxation rising to ZMW 33.4m from ZMW 21.3m the previous year. Earnings per share improved by 10.34% y-o-y to ZMW 0.43 at FY 13 from ZMW 0.39 at FY 12 (restated). Surprisingly given the company’s high debt to equity ratio of 103%, management opted to increase annual dividend payments to investors by 9.09% to ZMW 0.22 at FY 13 from ZMW 0.39 in the prior year Net operating cash flows tumbled 80.0% to ZMW 37.98m, brought down by falling working capital as inventories rose y-o-y by almost 100x, a 294.0% y-o-y increase in trade receivables and an 11.13% increase in factory overhead costs incurred as a result of the increased sugar production and through put. In FY 13 no new debt was taken up, not surprising given the existing gearing levels.. The company’s cash and cash equivalents for the year were reduced by 79.8% to ZMW 49.1m.

Outlook We maintain our positive long term outlook for ZSUG as it remains the main producer of sugar in Zambia, making up over 90% of the total annual sugar produced in the country. It also has a strategic position in sugar exports in the region and the EU, although we expect its exports to the EU to decline from the current 121,000t as the EU quota system is phased out. Already in the past year, domestic sugar sales increased by 10% to 159,000t and constituted 41% of total sales whilst export sales to the EU markets declined. Sugar cane production is still expected to rise due to an expanded area under cultivation by out-growers, depending on whether or not good climate conditions prevail. The record high 400,000t of sugar produced in FY 13 was a milestone for ZSUG whilst ethanol production and electricity generation are expected to result in excess power being sold back into the national power grid.


0%

5%

10%

15%

20%

25%

30%

0

500

1 000

1 500

2 000

2009 2010 2011 2012 2013 2014 E 2015 E

ZM

W B

illi

on

s

Total Revenue EBITDA EBITDA Margin (%)

Source: Company results

340

360

380

400

420

440

460

0

200

400

600

800

1 000

1 200

1 400

2011 2012 2013 2014 E 2015 E

'00

0 T

on

ne

s

ZM

W B

illi

on

s

Sugar Revenue Cane Revenue Sugar Sales Volume



39

The increased sugar output which ZSUG is currently producing could become a double edged sword due to the current global sugar glut, caused by high supply from South America and Asia. As a result, ZSUG has been trying to increase regional sales to countries such as Kenya which have a sugar deficit. ZSUG’s cane production seems sustainable into the future, secured by independent out-growers who produced 1.6m/t of sugar cane. Agriculture remains the highest employer in the region of Mazabuka where ZSUG’s factories are located, and in the country at large. Energy production using bagasse is also picking up speed in Zambia and Africa at large and it provides an incentive for the expected increase in cane volumes, as alternative power sources are needed to add on the national grids. The population growth rates in Zambia are still high leaving potential for increased demand due to development and rising urbanisation.

Valuation & Recommendation Zambia Sugar continues to face challenges with regards to its restructuring of debt. The loan facility was refinanced through a five year syndicated loan in May 2011, and repayment commenced in April 2012, attracting interest at the ruling Bank of Zambia policy rate, adjusted by means of a liquidity premium to the 182 day T-bill rate plus a 3.25% margin. At the current price of ZMW 7.00, it is trading on a P/E of 16.2x, P/BV of 2.4x and dividend yield of 3.1%. Applying a DCF valuation, the price target we obtain for ZSUG is ZMW 6.89, representing downside of 1.5% from the current price. As such we currently regard the counter as trading above its full valuation levels and prefer to investors to HOLD pending clarity on how management will tackle its high debt levels and future export strategies.

Source: Zambia Sugar Annual report

Fig 32: In FY 13 the EU market accounted for a significant 32% of

ZSUG’s sales making future exports to the EU critical for the company’s success.

Domestic41%

EU32%

Region27%

FY 13 Sales by destination

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

340

360

380

400

420

440

460

2011 2012 2013 2014 E 2015 E

ZMW

Mill

ion

s

To

nn

es

Sugar Sales Volume Average Sale Price


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2011 2012 2013 2014 E 2015 E

ROaA ROaE


0%

10%

20%

30%

40%

50%

60%

2011 2012 2013 2014 E 2015 E

Gross Margin EBIT margin% Net Income Margin %


40

Financial Summary

ZMW Millions 2009 2010 2011 2012 2013 2014 E 2015 E

Revenues 532 908 1 232 1 480 1 535 1 592 1 652

Y-o-Y % NA 70.5% 35.7% 20.1% 3.7% 3.7% 3.8%

Gross Profit 269 444 544 760 789 814 841

Y-o-Y % NA 64.7% 22.6% 39.7% 3.8% 3.2% 3.3%

EBITDA 102 222 227 359 370 376 387

Y-o-Y % NA 117.0% 2.3% 58.2% 3.1% 1.7% 2.7%

EBIT/Operating Profit 78 159 174 308 316 324 324

Y-o-Y % NA 103.7% 9.4% 77.0% 2.6% 2.4% 0%

Attributable Net Income 137 96 28 125 137 150 153

Y-o-Y % NA (29.9%) (71.0%) 349.1% 9.2% 9.4% 2.5%

Per Share data

Attributable Diluted EPS 0.44 0.30 0.09 0.39 0.43 0.47 0.48

Y-o-Y % NA (31.0%) (70.4%) 341.2% 10.3% 9.2% 2.5%

Dividend Per share (DPS) 0.25 0.15 0.07 0.20 0.22 0.24 0.24

Y-o-Y % NA (40.5%) (52.7%) 178.9% 9.1% 9.2% 2.5%

NAV/Basic Share 1.37 2.31 2.32 2.62 2.86 4.22 5.66

Y-o-Y % NA 68.7% 0.3% 12.7% 9.5% 47.4% 34.1%

Margin Performance

Gross Margin 50.6% 48.8% 44.1% 51.3% 51.4% 51.2% 50.9%

EBITDA margin % 19.2% 24.4% 18.4% 24.3% 24.1% 23.7% 23.4%

EBIT margin% 14.7% 17.5% 14.1% 20.8% 20.6% 20.3% 19.6%

Net Income Margin % 25.8% 10.6% 2.3% 8.5% 8.9% 9.4% 9.3%

Ratios

ROaA 5.8% 8.3% 8.3% 14.3% 14.3% 14.3% 13.8%

ROaE 34.2% 16.5% 3.8% 16.0% 15.8% 13.3% 9.8%

Earning yield on current price 6.2% 4.3% 1.3% 5.6% 6.2% 6.8% 6.9%

Dividend yield current price 3.6% 2.1% 1.0% 2.8% 3.1% 3.4% 3.5%

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