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.

Finweek English Edition - - FRONT PAGE - By Mox­ima Gama ed­i­to­rial@fin­week.co.za Mox­ima Gama has been rated as one of the top 5 tech­ni­cal an­a­lysts in South Africa. She has been a tech­ni­cal an­a­lyst for 10 years, work­ing for BJM, Noah Fi­nan­cial In­no­va­tion and for Stan­dard Bank as part of the Re­sea

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.

What next?

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

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