Tongaat in shock decline
Shares plunge 12% as the company’s cane drops in value and world markets fall
● Sugar producer Tongaat Hulett saw its shares fall as much as 12% on Friday, after reporting a whopping 64% fall in operating profit because of poor sugar cane valuations and incomplete land transactions.
White sugar prices on the world market have fallen almost 22% in the past two years.
The local sugar industry has also been affected by the proliferation of cheaper sugar imports from regions such as South America, which have led local demand to wane.
Tongaat’s operations in SA and Mozambique were the biggest contributors to the company’s operating profit decline.
Deputy chairman of Sasfin Wealth David Shapiro said the results had taken the market by surprise.
He said that the losses were likely to be normal write-downs on the valuation of the company’s cane but that the market had not expected such large write-downs.
For a company like Tongaat, the sugar cane grown in its fields is an asset as in any other business operation.
These are said to be biological assets and a value needs to be assigned and accounted for based on how much cane is in the field, the quality of sugar it is likely to produce when harvested and the forecast revenues from that cane given the prevailing local and international sugar prices. There are a number of factors that contribute to this valuation. It is a complex process.
Given the International Financial Reporting Standards (IFRS), it can be said that Tongaat has incurred a fair value loss on its sugar cane that has acutely taken down profitability in the Mozambique and SA operations.
Casparus Treurnicht, portfolio manager and research analyst from Gryphon Asset Management, said: “The cane revaluations are real but they are also very volatile. It is standard accounting practice to account for the changes in asset valuations.”
Tongaat said that in SA, indications were that imported sugar has started to work itself out of the market although the extent of the “buy-in” at the lower price may slow sales volumes in the second half of the year.
The KwaZulu-Natal-based company reported a first-half loss of R110m.
Tongaat has had a tough run of its business in the past year, with its share price free-falling to a 45.65% low for the year and a 65% dip since its peak of R174 in September 2014.
Earlier this year, it faced tough questions from its shareholders around the performance and pay of its executives, following the sugar producer’s failure to meet its targets, resulting in the executives not receiving their bonuses for the year.
Former Hulett CEO Peter Staude vacated his position at Tongaat at the end of October, months earlier than his expected retirement date of April 2019.
An Investec Securities report earlier in the year played a central role in Staude’s exit as it called for him to step down after the sugar producer’s poor performance over a 10-year period.
Investec, a sponsor of Tongaat’s JSE listing, later apologised for embarrassing Staude and distanced itself from the report.
Staude has since been replaced by interim CEO Sydney Mtsambiwa, who took over from the embattled former leader at the start of November.
Mtsambiwa is no stranger to the sugar producer’s business, having previously overseen Tongaat’s Zimbabwe operations at Triangle Limited and Hippo Valley but he has his work cut out for him, coming in at a crucial time until a permanent successor to Staude can be found.
It remains to be seen what will happen with the value of Tongaat’s cane and potential revenues.
The price of sugar is a more immediate concern that could move the industry as a whole forward or backward.
According to Treurnicht: “There is a global oversupply of sugar in place and demand seems to decrease. There is a drive against sugar intake globally and record crops have all affectedthe supply/demand variables.”