Too much icing on top
The truth has been sugarcoated for too long: Tongaat Hulett has managed to mess up all by itself
Tongaat Hulett is facing a showdown with shareholders over the fact that, according to new research, R8.2bn in value has been destroyed since 2012.
Last week, the 126-year-old sugar company made headlines when Investec Securities analyst Anthony Geard argued that based on an awful decade of falling returns, CEO Peter Staude should “step aside” — only for the bank to throw its analyst under the bus by apologising to Staude for the “embarrassment”.
But an analysis from David Holland, professor at the University of Cape Town Graduate School of Business and founder of consultancy Fractal Value Advisors, shows just how deep Tongaat’s value destruction runs. This shows how capital spending has vastly exceeded Tongaat’s after-tax operating profit by R8.2bn cumulatively since 2012.
“So this means R8.2bn in value has been destroyed over the past seven years. They have been sticking too much money into the sugar business every year. Yet their costof-capital vastly exceeds their return-on-capital,” says Holland.
Investors in the company who have spoken to the FM have pinpointed this as a major sticking point, along with over-generous remuneration for its top brass. “We are chatting to the board — [those] are exactly the issues,” said one of Tongaat’s major shareholders, who asked not to be named.
The problem is, all Tongaat’s metrics look awful. Its share price has tumbled 35% in a year, while the JSE has risen 12.9%.
Chris Logan, founder of Opportune Investments, has been tackling Tongaat for four years. His research shows that since 2010, Tongaat has made R7.7bn from selling land, and then ploughed R9.4bn in capital into the sugar business. “The land sales have papered over the cracks to some extent. If they’d had to borrow that R9.4bn and had to repay it now, Tongaat would be in serious trouble,” he says.
The problem is that despite this huge investment, Tongaat only produced 1.17 Mt of sugar last year (nearly the same level at which it was producing in 2012), the sugar price has tanked and there has been a deluge of imports.
“It’s the worst allocation of capital I’ve seen in a listed company. If the Guptas had spent billions on something and produced nothing, there would be hell to pay. But here, Tongaat’s management is still getting big bonuses,” Logan says.
He believes it’s a grand failing across the board. “While Staude was responsible for executing the strategy, the board also gave him the green light, and even its institutional shareholders voted every year at the AGM to support him,” he says.
However, the deeper problem for Tongaat is that it trades in a global market distorted by subsidies that have encouraged other countries to produce too much sugar. As a result, the International Sugar Organisation reveals, the sugar price has fallen from nearly Us$0.24/lb in October 2016 to just $0.13/lb today.
Local producers like Tongaat get $0.16/lb when they