Cosumar, the only sugar operator in Morocco, is a de facto monopoly operating seven sugar mills and one raw sugar refinery. The company has a total annual production capacity of 1.65 tonnes. To cope with local market cycles the group has developed a business model that enables it to produce sugar from sugar beets or from raw imported sugar. With this flexible industrial approach, Cosumar is able to satisfy local demand regardless of the agricultural output in Morocco, and as a semi-integrated operator controlling the complete value chain for sugar production, the group is continuously striving to develop agricultural output in Morocco to reduce the company’s exposure to global price volatility.
A Local Sweet Tooth
Per capita sugar consumption in Morocco is among the highest in the world, totalling 36.5 kg, compared to an average of 24.2 kg globally and 16.8 kg in Africa. In Morocco, sugar is traditionally consumed primarily with mint tea, and sugar is both an essential and a sensitive staple, as it is one of the most important sources of nutrients for Moroccan households. In order to protect consumer purchasing power, the government subsidises the price of sugar, keeping it affordable for the whole population. In 2013 Société Nationale d' Investissement reduced its stake to 9% in the sugar producer, selling 27.5% to Wilmar International, an Asian leading agribusiness group and 26.5% to a group of local institutional shareholders.
In 2014 the group’s turnover rose 1.2% and stood at Dh6.5bn (€657.8m), while operating profit stood at Dh1bn (€108m), yielding a stable EBIT margin of 16.6%. Its net income group share grew 1.8% to Dh639.90 (€69.62), with a net margin also constant at 10.6%. The group’s financial performance benefitted mainly from a satisfactory domestic agricultural output, which covered 40% of local demand.
In the midst of a favourable rain season, 2015 is expected to benefit from a good agricultural harvest. We anticipate sales to grow approximately 1.7% to Dh6.1bn (€668.4m). The group’s operating profit is to benefit as well from the continuous downward slopping curve in the price of fuel oil. Henceforth, based on our forecasts, the EBIT margin is to leap 4 points to stand at 20.6% for an operating profit of Dh1.26bn (€137.6m). Benefitting from the trend, the group’s net margin is expected to increase three points to 13.7%, while net income group share is to grow 31.5% to Dh841 (€91.50).
We recommend investors buy Cosumar and foresee it reaching a target price of Dh235 (€25.56). The stock presents investors with a potential upside of 30% when compared to its current share price of Dh181 (€19.69).
CFG Group’s positive opinion on the stock is supported by the following key considerations:
• the company's strong expected bottom-line growth, which is driven by the rising contribution of local sugar plants to total production as a result of the efforts made by Cosumar to support the development of domestic beet production;
• further margin growth, as a result of an additional drop in the price of fuel oil; and
• investment in the development of coal boilers that will replace the fuel oil boilers currently being used, an investment that should enable the company to further reduce its energy bill by almost 20%.
Input Costs Declining
During the latter half of 2014, Cosumar's share price remained almost stable, despite the rapid deterioration of the price of fuel oil, a key input in sugar production. As a result, the stock is currently trading at approximately 9x its 2015 expected earnings, which represents a significant discount compared to other stocks, and indicates that the market has not yet priced in the positive effect that the decline in oil prices is having on the group’s margins and profitability. With continued downward pressure on oil prices and steady demand for sugar products, we expect this positive boost to margins to be sustained for some time.
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