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,
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.