Once bit ten twice shy?

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.