Former Tongaat investor blames old school strategy

Listed agriculture and agro-processing firm Tongaat Hulett appears to be losing appeal with investors and, according to one former investor, the bad run is an indictment on the company’s leadership.

Tongaat’s shares on the JSE have been on a losing streak, trailing the JSE all share index and the food producers index. Over the past five years, Tongaat is down 56.89%, while the all share index is up 16.57%.

In the same period, the food producers index, which includes the likes of Clover Industries, Rhodes Food Group, Tiger Brands and Pioneer Foods, is up 1.13%. Tongaat’s shares were up 3.98% to R53.03 on Friday.

Chris Logan of Opportune Investments, a former investor at Tongaat, is critical of the company’s “backward-looking” strategy, whereby the company has invested a total of R11bn in the past 10 years while selling prime land. “Sugar is an industry of the past,” says Logan.

Outgoing CEO Peter Staude says the company plans to sell between 600ha and 1,100ha of land over the next five years. The company owns 7,612ha of developable hectares of prime land in KwaZulu-Natal, near Durban and Ballito.

But Logan says the company has its priorities wrong, and Tongaat should retain and develop the valuable portfolio. “Once you sell the land, it is gone, for good. They have sold prime land and put that money in sugar. They could have used that land to develop an IT park. It could have been a cash cow for them. This is an indictment on the board,” he said. In the year ended March, Tongaat’s sugar business took strain as a result of the influx of sugar imports and low international prices, says Staude. According to the company, the sugar imports negated the positive impact of an increase in sugar production in the past financial year, from 353,000 tons to 513,000 tons.

As the long-serving Staude departs at the end of October, there is a lot that is not going Tongaat’s way. Earlier this month, the company told shareholders that earnings per share and headline earnings per share for the six months ended September 30 would be down by at least 60%. The company attributed the expected fall in earnings to its inability to conclude any of the major land sale transactions in the six months. The company also pointed to the unfavourable market conditions affecting sugar. “In SA, the negative impact of imported sugar on local market volumes and pricing experienced during the second half of 2017-2018 continued into the first half of 2018-2019. On the other hand, a stronger metical and lower world sugar prices affected local and export revenues in Mozambique,” the group warned.

The expected poor earnings are in contrast to Staude’s assertion at the end of the last financial year that the company’s 2018-2019 financial year earnings and cash flows would exceed those of 2017-2018.

Then there is the company’s increasing reliance on shortterm and long-term borrowings as a source of capital. The borrowings have been rising consistently for at least five years, increasing from R5.4bn in 2014 to R9.1bn. On the other hand, the company’s debt to equity ratio, which measures the percentage of debt the company is using to finance relative to the value of shareholders’ equity, has increased from 44.2% to 76%.

In August, the company was on the receiving end of its shareholders’ discontent at its annual general meeting. In an unprecedented move, the shareholders resoundingly rejected its remuneration policy, with only 40.64% endorsing the policy.

In terms of King 4, if a remuneration policy or implementation plan is not approved by at least 75% of shareholders, the remuneration committee must consult shareholders and disclose the nature and outcomes of such consultations. The company has said it would reach out to the shareholders who voted against the policy.

The shareholders who voted against the remuneration policy or abstained had until August 30 to provide their details to the company “in order for the board to arrange engagement with the respective shareholders to ascertain the reasons for their votes”. Tongaat did not respond to requests for comment.