why CFG Bank recommends keeping the title?

Cosumar unveiled its achievements for the year 2021. Indeed, the group benefited from the recovery of domestic sales. However, operating margins and profitability are down due to the following factors:

Prices for raw and white sugar are set according to the laws of supply and demand on international markets. While the prices of the two raw materials increased in 2021, the price of raw sugar increased at a higher rate (+15% according to CFG Bank) than that of white sugar (+6%), hence the drop observed .

Indeed, according to CFG Bank, the white spread on exports fell by 42% from 660 DH/T in 2020 to 380 DH/T in 2021 on average. “It should be noted that the group’s consolidated operating margins have not fallen as much as expected thanks to the available stock of 2020 which was purchased at a lower price”, recall the analysts.

Indeed, Cosumar stores stocks (raw sugar) for security reasons and given that the value of sugar increased in 2021 compared to 2020, Cosumar therefore benefited from much cheaper input prices thanks to its storage policy. . This has helped to mitigate the decline in the white spread in 2021. Analysts say it will be necessary to wait for the publication of the company’s full financial statements to support this hypothesis.

Sugar production remained at a very low level, satisfying only 32% of domestic sugar consumption (against 46% on average since 2015). It should be noted that the production of sugar from sugar plants harvested in the country generates higher margins than production from the refining of imported raw sugar.

The launch of the new refinery in Durrah in Saudi Arabia, which had not yet reached equilibrium. “We will emphasize that Durrah is consolidated using the equity method, so the impact is only on the group’s net income as ‘equity accounted gains/losses’,” the analysts say.

All in all, while the contraction in the white spread and the drop in beet production have impacted the group’s operating margins and net income, the launch of the new refinery only impacts the group’s net income. This partly explains why adjusted NIGS (restated for the 100 MDH donation paid to the special COVID fund in 2020 and other non-recurring costs) fell by 20% year on year in 2021 while EBITDA remained stable.

Other factors that may have triggered this decline are higher interest charges and other non-recurring items. However, it will be necessary to wait for the publication of the complete financial statements to understand this drop.

In 2021, turnover increased by 5.6% thanks to the recovery of domestic sales after the confinement. However, while sales jumped 5.6%, EBITDA remained nearly stable, resulting in a 1 point decline in EBITDA margin to 20.3% from 21.3% in 2020. The dilution of the margin rate is due to the factors mentioned above.

In addition, the group plans to distribute a dividend per share of 6 DH, which implies a DY of 2.5% based on the current share price.

“The group has not yet communicated the complete financial statements and therefore we do not yet have details on the extent of the loss of the investment in the subsidiary Durrah”, explain the analysts. He added: “We will come back with a corporate update once we have access to full financials and once we can thoroughly and reliably quantify the impact of the drought and inflationary pressures from this year on the group’s profitability”.

They are convinced that their old levels of operating margins and 2022E profitability must be readjusted downwards to take into account the expected drop in sugar mill production due to the lack of rainfall in Morocco in 2022, and a possible additional contraction. of white.

For the time being, the price target is maintained unchanged at 269 DH/share because they believe that while the results and profitability for the 2022E financial year could be lower than previous forecasts, they believe that profitability levels will recover. from 2023E and beyond if the following conditions materialize:

  • A good level of rainfall in Morocco, which will bring the level of self-sufficiency of sugar production to 45% on average and beyond;
  • A stronger white spread thanks to the resumption of raw sugar production in Brazil and India, which will have a positive impact on the group’s operating margin;
  • The surge of Durrah which, in fact, has already reached full production capacity by the end of December 2021. This will help restore and strengthen NIGS.

The target price implies a potential upside of 11% based on the current share price of MAD 243/share, CFG Bank therefore recommends keeping the share. Overall, they are supported in their opinion of holding the stock by the following elements:

  • The group’s ongoing efforts to seek new growth opportunities;
  • The defensive feature that characterizes the sugar industry in Morocco. Indeed, sugar consumption in Morocco is relatively predictable and resilient. Consumed mainly in mint tea, sugar is both an essential and sensitive staple in Morocco;
  • The positive impact of the Durrah Sugar Refinery on Cosumar’s equity value and profitability over the next few years;
  • The strength of the group’s balance sheet, allowing Cosumar to seize potential opportunities for organic growth in Morocco and/or Africa;
  • The group’s know-how and experience in the sugar industry. This could encourage the group to become a major regional player through the development of other sugar refineries.

Also read: Cosumar: despite the economic situation, consolidated turnover increased by 5.6% in 2021

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