Grow­ing cav­ity

Finweek English Edition - - KILLER TRADE - BY MOXIMA GAMA

Af­ter a year-long top-side con­sol­i­da­tion, Ton­gaat Hulett has com­menced the de­scend­ing phase of a top­ping-out pat­tern, which could ini­ti­ate a break­out out of its ma­jor bull trend.

Ton­gaat Hulett is an agri­cul­ture and agro-pro­cess­ing busi­ness, fo­cus­ing on sugar cane and maize – and as a re­sult has a sub­stan­tial land port­fo­lio.

Although Ton­gaat man­aged to main­tain its long-term up­trend over the years, trou­ble loomed when it reached the ceil­ing at 17 500c/share in Novem­ber last year.

Trou­ble started early this year with its Zim­babwe unit. Ton­gaat Hulett con­trols just over 50% of the Zim­babwe Stock Ex­change-listed Hippo Val­ley and has a ma­jor­ity in­ter­est in Tri­an­gle Sugar. The two units sup­ply sugar to Zim­babwe and ex­port mar­kets, largely in the EU.

But the se­cu­rity of land own­er­ship in Zim­babwe was thrown into un­cer­tainty when es­tates owned by Hippo Val­ley and Tri­an­gle were il­le­gally oc­cu­pied by about 600 peo­ple claim­ing to have land of­fer let­ters from the gov­ern­ment. Many in­vestors then put the brakes on Ton­gaat,

18 000

16 000

14 000

12 000

10 000 which saw the share price dwin­dle un­til it re­cently plum­meted through a key sup­port level.

Things could get even rock­ier for the com­pany. Ecobank said in a re­cent re­port it be­lieves African pro­duc­ers are show­ing grow­ing dis­com­fort over the lib­er­al­i­sa­tion of EU sugar reg­u­la­tions. They are con­cerned that the trans­for­ma­tion of Europe’s sugar regime will be a dou­ble whammy for African sugar pro­duc­ers, be­liev­ing it will re­duce the need for im­ports and open up com­pe­ti­tion.

Brussels im­posed pro­duc­tion quo­tas on sugar beet in 2006, which trans­formed Europe from the world’s sec­ond-largest sugar ex­porter to a net sugar im­porter. Th­ese pro­duc­tion caps will be lifted in 2017, which is ex­pected to re­sult in a sig­nif­i­cant in­crease in Euro­pean sugar pro­duc­tion. This will not only re­duce the de­mand for sugar im­ports, but may also re­sult in the EU be­com­ing a net ex­porter again.

The EU cur­rently al­lows a duty-free im­port quota of 3.5m tons from the so-called ACP coun­tries that in­clude most of Sub-Sa­ha­ran Africa, the Caribbean and Pa­cific is­land na­tions such as Ja­maica. Some an­a­lysts feel Illovo and Ton­gaat Hulett “could ben­e­fit” from the quota by lever­ag­ing pro­duc­tion at their op­er­a­tions in other African coun­tries that ben­e­fit from the ACP quota.

In its re­sults for the year ended March, Ton­gaat re­ported a 2.8% in­crease in rev­enue to R16.2bn, while op­er­at­ing profit fell 12% to R2.1bn. Thanks to stronger cash f lows from op­er­a­tions, the div­i­dend was in­creased by 5.6% to 380c/ share.

Ton­gaat said land con­ver­sion and devel­op­ment ac­tiv­i­ties will con­tinue to un­lock sub­stan­tial value, de­spite op­er­at­ing profit be­ing be­low that re­ported last year. Over the next five years, Ton­gaat is ex­pected to con­tinue its prop­erty sales, with about 3 800 de­vel­opable hectares ear­marked in KwaZulu-Natal, in­clud­ing around Umh­langa and Cor­nu­bia.

Breaching the 13 615c/share key sup­port level has now placed Ton­gaat in the de­scend­ing phase of a top­ping-out pat­tern. It’s still trad­ing within its ma­jor bull trend, and the sup­port trend­line (black bold trend­line) could curb a sell-off. How­ever, if the rel­a­tive strength in­dex (RSI) re­mains bear­ish and the trend­line on the price chart is breached be­low 11 800c/share, down­side to the 9 730c/share tar­geted mark could en­sue. The 8 545c/share sup­port level could even be tested.

A false break­through past the 13 615c/share key level would be deemed false above 14 500c/share. How­ever, Ton­gaat would only re­deem it­self above 17 500c/share.

POS­SI­BLE SCE­NARIO:

AL­TER­NA­TIVE SCE­NARIO:

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