How diversifying is working for the sugar industry
The sugar-producing business is cyclical by nature, as illustrated by the impact of a drought on the recent results from Tongaat Hulett and Illovo Sugar, the giants of the local industry.
Both companies have worked hard in recent years to diversify their businesses, including into downstream operations such as ethanol and furfural production, electricity co-generation and, in the case of Tongaat, starch operations and property development.
They have also diversified geographically. Tongaat, with a market capitalisation of R17.5bn, has operations in Swaziland, Mozambique and Zimbabwe. Its smaller rival Illovo, with a market capitalisation of R8.1bn, has operations in Malawi, Zambia, South Africa, Tanzania, Swaziland and Mozambique.
Illovo sees itself as “more than just a sugar company” and downstream operations contributed 16% to prof it in 2015, says Dirk van Vlaanderen, investment analyst at Kagiso Asset Management. “They have a target to increase this to 20% medium term, having successfully commissioned an ethanol distillery in Tanzania in 2014, and have plans for a similar project in Zambia and a furfural plant in Swaziland. We believe this will add a bit more stability to the earnings profile of the group once completed.”
Tongaat’s land development projects and starch operation already contribute the bulk of its profits (63% of operating profit in the year to end March). Overall, the group reported a 14.6% decrease in headline earnings to R945m in the latest financial year, in part due to the impact of the drought. Illovo saw its headline earnings per share decline by 7.7%.
DIFFERING COMPETITIVE ADVANTAGES