Sugar business not on the block as Tongaat Hulett flogs assets

● Embattled Tongaat Hulett is flogging assets to make its mountain of debt more manageable, but the company is not about to pitch a For Sale sign at any of its sugar mills, says CEO Gavin Hudson.

Coffee-to-go drinkers will know Tongaat for its Hulett-branded sugar sachets, often sporting a pearl of wisdom by a famous author or a Chinese proverb.

But the company’s journey of a thousand miles, which started in February with a management overhaul and a forensic investigation by PwC, this week led to an R11.9bn restatement of its accounts. The company said two weeks ago that it intends to pursue claims against individuals who appear to have been responsible for the misstated accounts.

Asked about the action the company was taking against 10 former company managers, Hudson declined to comment.

He is now rejigging the business to tackle debt of R11.4bn. The company forked out more than R1bn in finance costs last year.

“Our priority is paying down debt,” Hudson told Business Times this week. But sugar is not on the block as it is Tongaat’s “absolute core business”.

The company has sugar-producing operations in SA, Zimbabwe and Mozambique.

Tongaat also has a starch business and a substantial property portfolio in KwaZuluNatal.

“There is upside value in the company in the medium term,” Hudson said, adding that the sugar business has the biggest growth potential.

But recent experience has been bitter as the feeble economy weighed on demand and a global supply glut depressed prices. The relatively new tax on sugary drinks in SA also prompted beverage manufacturers to use substitutes for cane sugar to lessen the impact on their bottom line.

The tax, known as the health promotion levy, came into effect in March last year and is aimed at the sugar content of beverages. The fiscus pocketed R1.7bn from it last year and this year hopes to take in nearly R2bn.

The result has been weaker demand for sugar in the local market, leaving producers to export sugar raw at much lower margins.

Lulama Qongqo, a consumer analyst at Mergence Investment Managers, has very little hope that Tongaat’s revenue or profit will improve unless there is a meaningful rise in the global sugar price.

The company’s revenue declined 2% to R17.1bn in the 12 months until end-March.

According to Qongqo, Tongaat is losing relevance in the souring sugar industry.

“SA is not an exception when it comes to things like sugar tax and awareness of the importance of curbing obesity and sugar diabetes. Globally, people are looking to consume less sugar,” she said.

In SA, food manufacturer Tiger Brands reduced sugar use by 11% or 12,000t, in the past five years.

Qongqo said sugar manufacturers need to be innovative and try to find other means to use their cane resources to generate more cash. She pointed to Brazil’s ethanol industry as an example.

But Hudson said Tongaat’s core business remains strong with positive cash flows from operating activities and strong margins at an operational profit level. This, he said, is underscored by lenders that have been willing to sign debt refinancing agreements.

Debt, however, needs to be reduced to more sustainable levels.

And selling core assets, especially those that generate a decent cash flow, would not be Hudson’s choice.

Instead, management hopes to tap shareholders for as much as R4bn in a rights issue. So far, none of the shareholders that management has engaged with have balked at the idea.

The current suspension of Tongaat’s shares on the JSE is expected to be lifted only after the company reports its delayed halfyear results at the end of January.

In the meantime, property disposals could be a low-hanging fruit.

Some of the property the company has sits squarely in KwaZulu-Natal’s growth engine, near the airport north of Durban.

But, said Hudson, the company is not about to embark on a fire sale.