PURPOSE OF THE OFFER: Recommendation: BUY. INVESTMENT FLASH POINTS & RISK ANALYSIS Trends in World Sugar Market:

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1 PURPOSE OF THE OFFER: Dangote Sugar Refinery Plc Initial Public Offer (IPO) By Way of Offer for Sale of 3billion Ordinary Share of 50k each OFFER PRICE: NGN18.00 Offer Opens/Closes: Nov. 15 Dec. 22, To give investing public an opportunity to become part owners of Dangote Sugar, the market leader in the Nigerian Sugar Industry and To meet the requirements for a listing on The NSE. INVESTMENT FLASH POINTS & RISK ANALYSIS Trends in World Sugar Market: Recommendation: BUY Recent trends and developments in the world sugar point to a widening supply-demand gap that will greatly favour producers of refined sugar. India and China consume almost a quarter of global sugar output, with demand in these countries growing at 4.5 percent faster than global demand. It is expected that over the next few years, domestic demand in these countries will surpass the maximum domestic production thresholds of these nations, resulting in a move towards import dependence. In the same vein, changes in EU s sugar policy will result in gradual reductions in subsidies to EU producers and selected importers. Cuts in subsidy will result in EU sugar industry becoming less competitive. Thus EU sugar production is expected to decline significantly over the next two years. Sugar Industry Nigeria: Nigeria s sugar consumption is increasing steadily in step with growth in population and in industries utilizing sugar as raw material. The bulk of Nigeria s sugar requirement is imported raw and refined locally. Refined sugar imports are forecast at 300,000 tons (raw equivalent), down from 350,000 tons in 2005/2006 due to increasing refining capacity. The

2 bulk of Nigeria s sugar imports, both raw and refined, come from Brazil, the EU and Guatemala. Informal trans-border sugar exports to the land-locked countries of Niger and Chad are projected at 100,000 tons annually. Nigeria s domestic sugar production in MY2006/2007 is forecast at 80,000tons, up from 40,000 tons this year. After taking over the affairs of Savannah Sugar Company from the Federal Government through privatization in 2002, Dangote Group have completely rehabilitated the cane fields and the mills. Currently, the company has 3,000 hectares of cane fields at varying stages of maturity. At present, Savannah (now Dangote) Sugar Company has a total of 32,000 hectares of land available with excellent irrigation facility and plans to expand very quickly to use all the land. Other estates in Bacita and Sunti are at varying stages of rehabilitation under new management and could resume milling operations in 2006/07. Dangote Sugar Refinery Plc: Dangote Sugar commenced business in March 2000 as the sugar division of Dangote Industries Limited (DIL).DIL had initially entered the sugar business in 1978 through the importation and trading of white sugar. The sugar division was a spun-off as Dangote Sugar Refinery Plc via a scheme of Arrangement in January 2006 which transferred the assets, liabilities and undertakings attributable to the sugar division of DIL to Dangote Sugar. The company was formerly incorporated on January 2005 and has its factory located at Apapa Wharf, Lagos Nigeria. Dangote Sugar is in the business of sugar refinery with a long term strategic focus of expanding local sugar production by refinery raw sugar for direct consumption and industrial needs thereby reducing the country s dependence on refined sugar importation. The company imports sugar from Brazil, refines it into Vitamin A fortified white sugar in compliance with NAFDAC policy. Dangote Sugar Refinery Plc is one of the very few sugar refineries in the world that produce Vitamin A fortified white sugar. The company s factory was built by the largest sugar refiner in Europe, Tate & Lyle s with an initial installed capacity of 600,000 metric tonnes of raw sugar per annum. The factory

3 has undergone two expansions that have increased installed capacity to about 1.44 million metric tonnes per annum. The company is said to be the largest sugar refinery in sub- Sahara Africa and one of the largest in the world with over 75% capacity utilization. The company s operations comprise two key business areas, viz: Refinery Process & Marketing and Distribution. The refined white sugar is sold in 50kg bags to a variety of customers which can be categorized into Large Industrial Users, which are blue chip companies in Nigeria such as Cadbury Nigeria Plc, 7Up Bottling Company and Nigeria Bottling Company (NBC) which accounts for 18% of the company s turnover WHILE the second group-distributor: buys white sugar wholesale from Dangote Sugar for retail to households and small industrial users. This group accounts for 82% of the company s turnover. The company s major market is Nigeria though with an informal crossborder trading to neighbouring countries in West Africa. Strengths/Opportunities: Stable and well experienced management team with sound technical expertise in sugar industry in key emerging markets. Estimated local demand of creating a supply gap of.% Favourable government policies and regulatory framework The ONLY refiner of sugar in the West African sub-sahara Africa with Large domestic market and continually growing demands. Possesses potentials to explore ECOWAS market with 250 million consumers. Threats/Risks: Going concern status of the company is heavily premised on the success of political transition process in the country as well as continuity of economic reform programmes of the current administration. Exposure to changes in regulatory environment in terms of quality assurance, tariff protection and other government policies. Heavily dependent on imported raw sugar as its principal input, making it susceptible to fluctuations in exchange rates. Risk of dearth of raw material inputs from international market as the company currently secured a 3-year supply agreement with Sucden, France and Cargill.

4 Vulnerable to shocks in the Nigerian economy particularly consumer demand and changes in income levels as its turnover is largely driven by growth in the Nigerian sugar market. The company is also exposed to threat of potential new entrants as well as competition from importers. High dependency ratio on government and policies. Risk Mitigants: The institutional framework of the current administration has been applauded and adjudged to be sustainable (in some quarters) beyond current administration. The company s white sugar is effectively priced in US$ as a hedge against forex fluctuation Similarly, with current proactive and more effective management of the country s external reserves by the CBN, the currency risk seems mitigated. The Federal Government import substitution strategy makes it a poison pill and economically prohibitive for massive potential new entrants. Lack of presence of refiners of significant size in the ECOWAS sub-region or any developed plantation in ECOWAS nations constitutes a sizeable potential market for Dangote Sugar Refinery Plc at competitive international market prices. Recommendation: We maintain a BUY recommendation for the offer at N18.00 given the historical performance and growth prospects highlighted above.

5 DANGOTE SUGAR REFINERY PLC: TRENDS IN PERFORMANCE INDICES (2001-Q2:2006) 25.00% 20.00% N' % 10.00% 5.00% 0.00% Six Mth June Operating Profit Profit on Ordinary Activities Before Tax Other Income Retained Profit for the year DA NGO TE SU GA R REF INERY PLC: F ORECAST STA TISTICS Kobo Forecast EBITDA/ share(kobo)* Forecast EPS* Forecast DPS* * Calculated based on issued & fully paid-up capital of 10 billion Ordinary Shares 0f 50k to be in issue at Dec Meristem Securities Limited research report and its attendant recommendations are prepared based on publicly available information and are meant for general informative purposes. Meristem Securities Limited can neither guarantee the accuracy or completeness of the information as they are an expression of our analysts views and opinions. Meristem Securities Limited cannot be held responsible for any loss suffered by relying on the said information as this information as earlier stated is based on estimates and opinions and is meant for general information purposes and not as solicitation to buy securities and financial instrument. Meristem Securities Limited.Website: info@meristemng.com