SHARE VIEWS ON: TONGAAT HULETT NETCARE REMGRO SPAR
Tongaat Hulett is scheduled to release its financial year results at the end of May and the group has warned investors to brace for a lower operating profit, with sugar production having declined in all its markets.
the drought in KwaZuluNatal has hurt local sugar producers, with Tongaat Hulett warning in a trading statement on 20 May that its operating profit for the past financial year is expected to drop by some 13.5% to R1.8bn, driven largely by an 84.6% drop in operating profit from its sugar operations.
Tongaat Hulett produces sugar in South Africa, Zimbabwe, Mozambique and Swaziland. Its other key business operations include its starch and glucose operations, as well as land conversion and development, which has been a lucrative business for the group. In the financial year to end March, Tongaat sold 121 developable hectares in attractive areas such as Umhlanga on the north coast of KwaZulu-Natal, contributing more than R1.1bn to the group’s operating profit, it said in its trading statement. This compares with the sale of 108 developable hectares sold at a profit of R829m in the 2015 financial year.
Its sugar operations, traditionally the core of the business, have however been struggling. Sugar production declined in all its markets, but SA was hardest hit, with production dropping more than 40% to 323 000 tons in the past financial year. Zimbabwe was the biggest producer for the group, with output of 412 000 tons (2015: 445 000). Overall sugar production totalled 1.02m tons, down from 1.3m tons in 2015 and 1.4m in 2014. In addition to the lower production, export revenues were also impacted by lower international sugar prices.
Tongaat Hulett is the biggest private sector employer in both Zimbabwe and Mozambique, illustrating the importance of the sector for the regional economy. In SA, about 1m people are directly impacted by the local sugar industry, whose players include Illovo Sugar and Tsb Sugar, which is owned by RCL Foods.
After a long bearish streak – the share lost 46% of its value in 2015 – Tongaat Hulett is finally recovering, with a 22% increase in its share price since the start of the year. And despite the poor performance by the sugar operations in the past financial year, the group is forecasting substantial growth in output in the next three years. South African output is expected to grow to 715 000 tons by 2018/19 (2016: 323 000); Zimbabwe to 540 000 (2016: 412 000); Mozambique to 300 000 (2016: 232 000) and Swaziland to 58 000 (56 000). The group is also benefitting from increased market protection for sugar in SA.
Tongaat Hulett is scheduled to release its results for the year to end March on 30 May.
Possible scenario: In my previous technical analysis of Tongaat Hulett, published in the 11 June 2015 issue, I suggested a short below 13 615c/share, as the descending phase of a double-top pattern had potential to depreciate the share price to the 8 545c/ share level. Having fulfilled that objective and retaining support at 7 785c/share, Tongaat Hulett has breached the resistance trendline of its major bear trend, even confirming a positive breakout above 10 700c/share. Therefore, go long. Above 12 500c/share, Tongaat Hulett would return to its previous bull trend. A 100% retracement to 17 500c/share would be possible in the medium term on continued upside through 13 600c/share. Alternative scenario: The previous bear trend would be resumed below 9 540c/share. Support at 7 785c/share could soon be tested and even breached.
Peter Staude CEO of Tongaat Hulett