Sweet new export market for Africa
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.