Once bit ten twice shy?

Financial Mail - Investors Monthly - - Front Page - Stafford Thomas

Ton­gaat Hulett’s year to March should have been suc­cess­ful, with the group emerg­ing from the worst drought to hit the re­gion in more than three decades. But while its sugar pro­duc­tion rose 11% across its op­er­a­tions in SA, Zim­babwe and Mozam­bique, its head­line EPS dived 37.2% to 534.8c and its div­i­dend from 300c to 160c.

The most se­vere dam­age was done in SA: de­spite a 160,000 t (45%) in­crease in sugar pro­duc­tion to 513,000 t, op­er­at­ing profit slumped 78%, from R390m to R86m.

“Our SA sugar op­er­a­tion came as a big shock,” says long-serv­ing CEO Peter Staude.

Ton­gaat Hulett was hit by a num­ber of fac­tors be­yond its con­trol in SA — not least of which was a com­plete drop­ping of im­port du­ties over a lengthy pe­riod. This was the re­sult of a so-called ad­min­is­tra­tive er­ror by the re­spon­si­ble govern­ment de­part­ment.

It meant that 520,000 t of im­ported sugar poured into SA, send­ing SA pro­duc­ers’ sales in the coun­try div­ing from 1.64Mt in 2016 to 1.18Mt in 2017.

The sugar dis­placed by im­ports was ex­ported in the lat­ter part of 2017 — when the in­ter­na­tional price was low and the rand was strength­en­ing against the US dol­lar.

Last year’s fi­asco has united in­dus­try play­ers. “The in­dus­try is now a lot more in touch with govern­ment,” says Staude.

In par­tic­u­lar, the in­dus­try is press­ing for a sig­nif­i­cant in­crease in tar­iff pro­tec­tion. It is on a strong foot­ing, given that it pro­vides di­rect em­ploy­ment to 79,000 peo­ple and buys sugar cane from more than 21,000 small black grow­ers.

In its past year, Ton­gaat Hulett took strain in Mozam­bique, where pro­duc­tion lifted 10% to 218,000 t but op­er­at­ing profit al­most halved to R159m. It was hit by lower ex­port re­al­i­sa­tions caused by the met­i­cal strength­en­ing against the US dol­lar.

The di­vi­sion is look­ing to a 90,000 t re­fin­ery — due to start com­mis­sion­ing in Septem­ber — to re­place im­ported white sugar and gen­er­ate higher ex­port prices.

Ton­gaat Hulett’s Zim­babwe

Ton­gaat Hulett notes sales over the next five years are ex­pected to av­er­age 120 ha to 220 ha/year

op­er­a­tion saved the sugar di­vi­sion from a profit wipe out. De­spite a 13% fall in pro­duc­tion to 392,000 t, it upped op­er­at­ing profit 12% to R563m through im­proved re­fin­ery ef­fi­cien­cies.

The Zim­babwe out­look is good: an im­proved cane crop is ex­pected and the re­cently com­pleted Tokwe Muko­rsi Dam will boost ir­ri­ga­tion wa­ter se­cu­rity.

Over­all, Ton­gaat Hulett ex­pects its three op­er­a­tions to pro­duce 1.31Mt-1.45 Mt of sugar in the cur­rent year — up 12%24% — push­ing this to 1.6Mt in the near term.

Ris­ing pro­duc­tion holds the prom­ise of in­creased prof­itabil­ity, given the low mar­ginal cost of ad­di­tional pro­duc­tion.

Though Staude says he would be “very happy” with 1.6 Mt, he would be even hap­pier if Ton­gaat Hulett’s full 2Mt ca­pac­ity could be utilised.

“The re­place­ment cost of our spare ca­pac­ity is R20bn,” he says. The so­lu­tion, he be­lieves, lies in in­creas­ing ex­ports to South­ern African coun­tries with sugar deficits.

For Ton­gaat Hulett’s maize­based glu­cose and starch divi- sion, the past year was a tale of two halves. In the first half, op­er­at­ing profit was down 21% at R240m, with the maize price in de­cline.

How­ever, the di­vi­sion’s for­tunes lag maize prices. “We ben­e­fit when the maize price is at ex­port par­ity and are im­pacted when it is at im­port par­ity as it was for much of the first half,” says Staude.

Prices at ex­port par­ity in the sec­ond half did the trick, bring­ing op­er­at­ing profit for the full year up 12% to R572m.

With SA ex­pected to re­main a net ex­porter of maize in 2018/2019, Staude is bullish on the out­look for the di­vi­sion.

As an in­vest­ment, Ton­gaat Hulett’s big­gest at­trac­tion is its 7,612 ha of de­vel­opable land near Dur­ban, 1,485 ha of which has re­ceived en­vi­ron­men­tal ap­proval for de­vel­op­ment.

With Dur­ban’s pop­u­la­tion ex­pected to rise by 500,000 to 4.1m by 2021, there is no short­age of po­ten­tial de­mand.

In its past year Ton­gaat Hulett sold 96 ha of land to gen­er­ate a R20m rise in op­er­at­ing profit to R661m. But its prof­its, which de­pend on the tim­ing of land sales, are prone to volatil­ity. Re­flect­ing this, in the year to March 2016 the di­vi­sion’s op­er­at­ing profit was R1.11bn from the sale of 121 ha.

The di­vi­sion’s out­look looks solid, with Ton­gaat Hulett not­ing that sales over the next five years are ex­pected to av­er­age 120 ha-220 ha/year.

In the cur­rent year, sugar prof­its should re­cover, glu­cose and starch op­er­a­tions per­form solidly and prop­erty re­sults re­main buoy­ant. The re­cov­ery prospects make Ton­gaat Hulett, now trad­ing at a nine-year low, a share worth con­sid­er­ing. But given its volatil­ity, it is not for the faint-hearted.

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