Drought and gluts a bitter reality for Illovo

ILLOVO sugar on Friday added a sweetener to an otherwise sour earnings update, making it easier for investors to digest.

Headline earnings per share for the six months ended September would probably be between 50% and 60% lower when the company releases results on November 30.

Earnings per share would decline as much as 85% due to a decision to write off accumulated costs related to the development and registration of a special kind of chemical pesticide.

Illovo, however, maintained its year-end guidance.

Headline earnings per share for the year-ended March 2016 would remain between 134.2c and 98.4c, the company said, just as it had stated in its preliminary report released in May.

Illovo did not reveal how it intended to ensure year-end profits would remain unscathed.

Usually, the first half of the year is Illovo’s strongest as the second part is when most of its mills are shut down for maintenance.

But this year’s depressed sugar prices, currency volatility and adverse weather conditions in SA meant this would not be the case.

The sugar producer’s share price has plunged more than 30% on the JSE since January as global sugar prices plummeted to six-year lows and SA experienced its worst drought since 1992, which has resulted in decreased sugarcane production.

Africa’s largest sugar producer, Tongaat, is down 32% so far this year, according to Bloomberg data.

World sugar prices have been pressured by a supply glut in the market as the weakening of the Brazilian real has made its exports more attractive. Brazil is the world’s largest producer and exporter of sugar.

Its currency has slumped 44% against the dollar this year, making it the world’s worst performing emerging market currency.

India has also increased its foot- print in the global sugar market after its government gave local cane millers sitting on stockpiles a subsidy to export the sugar they cannot sell at home.

These exports, together with those from Brazil, have flooded Illovo’s key African markets such as Mozambique and Malawi where, unlike in SA, there is no protection for local producers, said Sumil Seeraj, an equity research analyst at Standard Bank.

Mr Seeraj said that he did not expect a turnaround for global sugar prices in the near future and was bearish on Illovo’s outlook for the next 12 to 18 months.

He was more optimistic about Tongaat Hulett, given its exposure to property, which would negate the pressures from depressed sugar prices.