Sweet new ex­port mar­ket for Africa

Finweek English Edition - - Companies & Markets - SHAUN HAR­RIS shaunh@fin­week.co.za

AFRICA’S LARGEST su­gar pro­ducer – Illovo Su­gar – will al­most cer­tainly tap share­hold­ers for funds through a rights is­sue in the sec­ond half of this year. It’s likely to be a large cap­i­tal-rais­ing is­sue. Vig­or­ous ex­pan­sion through­out Africa has seen debt spi­ral from R1,17bn to R2,41bn, push­ing gear­ing up to 70% (pre­vi­ously 39,9%).

It’s a po­si­tion new MD Gra­ham Clark doesn’t seem too comfortable with. Clark suc­ceeded Don MacLeod at the beginning of April. MacLeod had been MD of Illovo since 1992, steer­ing it through much of its ex­pan­sion into Africa.

Says Clark: “We want to send a di­rect sig­nal to the mar­ket that we plan to pro­ceed with the rights is­sue. In the cur­rent en­vi­ron­ment a heav­ily geared sit­u­a­tion isn’t ideal. We’ll prob­a­bly release a Sens an­nounce­ment next month with de­tails of the rights is­sue and then seek share­holder ap­proval.”

Clark couldn’t in­di­cate how much cap­i­tal Illovo would seek to raise un­til de­tails are fi­nalised. But the group is looking at a cap­i­tal ex­pen­di­ture bill of more than R4bn. Much of that is aimed at rais­ing pro­duc­tion in Africa’s least de­vel­oped coun­tries and mem­bers of the African, Caribbean and Pa­cific trade group. With op­er­a­tions in Malawi, Zam­bia, Swazi­land, Tan­za­nia and Mozam­bique, Illovo’s African ex­ports to the Euro­pean Union qual­ify for most if not all of one of those cat­e­gories.

Re­form of the su­gar regime in the EU – largely through a re­duc­tion in EU ex­port sub­si­dies and lower do­mes­tic sup­port for Euro­pean su­gar-beet farm­ers – has taken nearly 6m t of su­gar out of the EU mar­ket. From 1 Oc­to­ber, when the African coun­tries listed above have un­re­stricted ex­port ac­cess to the EU, much of that deficit will be made up by ex­ports from Africa.

A large de­cline in su­gar pro­duc­tion in In­dia and con­straints in the su­gar in­dus­try in Brazil have also tipped global pro­duc­tion into deficit, which is sup­port­ing an in­creas­ing, if volatile, world su­gar spot price that should play into Illovo’s hands in its cur­rent fi­nan­cial year.

“But what’s re­ally wor­ry­ing is the strength of the rand. It will af­fect ex­port earn­ings. To­gether with higher fi­nance costs and an in­creased tax rate (due to the end of tax ben­e­fits in Zam­bia) it will be a tough year,” Clark says.

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