Ton­gaat in shock de­cline

Shares plunge 12% as the com­pany’s cane drops in value and world mar­kets fall

Sunday Times - - Business Times - By MUDIWA GAVAZA and PENE­LOPE MASHEGO Gavazam@sun­day­ Mashe­gop@busi­

● 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.”

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