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Tongaat starts seeing green shoots as business restructuring progresses

10th December 2019

By: Marleny Arnoldi

Deputy Editor Online

     

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Sugar producer Tongaat Hulett managed to contain headline losses at R923-million for the financial year ended March 31.

This is slightly lower than the headline loss of R947-million reported for the year ended March 31, 2018.

Operating profit, meanwhile, increased by 850% year-on-year to R1.2-billion, compared with R142-million in the 2018 financial year.

The company’s financial statements for the prior corresponding year had to be restated, with the total restatement amounting to R11.8-billion, Tongaat pointed out on Tuesday.

The company originally expected a restatement of between R3-billion and R4-billion – the difference between this range and the R11-billion was mainly owing to impairments and the derecognition of expropriated land in Zimbabwe of R4-billion and about R3-billion of deferred tax assets that had not been recognised.

“The R11-billion restatement was attributable to a revenue recognition of R2.7-billion, R3-billion in cane assets, R3.8-billion in cost capitalisation and R4-billion for assets recoverability,” Tongaat pointed out.

“Despite these restatements, it is encouraging to note that core business remains strong, with positive cash flows from operating activities and strong margins at an operational profit level. Our investment case is supported by our lenders, with whom we have signed debt refinancing agreements,” CFO Rob Aitken said.

He pointed out that the company had been able to determine the true financial position of the group in the year under review, which enabled the company to improve financial discipline and processes, as well as strengthen its balance sheet.

Tongaat had agreed with the South African lenders that it would execute a plan to reduce the level of debt by at least R8.1-billion by March 31, 2021, which the company planned to achieve in four phases.

The company will reduce its debt by R500 000 by June 2020; by another R3.5-billion by September 2020, a further R2-billion by December 2020 and, lastly, by R2.1-billion by March 2021.

Tongaat had gone through significant change since early in the 2019 calendar year, which had culminated in the appointment of a new board and executive management team, strengthened governance and financial structures, with a new vision and strategy.

The company had initiated a forensic investigation and implemented a range of corrective actions accordingly.

CEO Gavin Hudson said the company was embracing a new strategy called “It is a new dawn, it is a new day, it is the Tongaat Hulett way”.

The company was in talks with the JSE to lift the suspension in the trading of its shares, especially since the company was planning to undertake a R4-billion capital raise by March next year. The proceeds will be used to reduce its debt.

OPERATIONAL PERFORMANCE

Hudson highlighted that the company experienced an operational performance decline in the year under review, mainly owing to the overhang of surplus sugar arising from excessive sugar imports in South Africa and Mozambique, a significant reduction in the demand for sugar in South Africa as a result of the new sugar tax and low sugar prices worldwide.

He added that the company was reducing its cost to produce refined sugar for export to such an extent that it would generate increased profit from exports next year.

The company reported steady local sugar demand in Zimbabwe, despite significant price increases, with underlying shifts towards export sales to generate foreign currency.

Tongaat had planted 2 800 ha of new sugar cane fields in Zimbabwe during the reporting year.

The company’s starch business benefited from new market development initiatives, offset by weaker local consumer demand and customer production constraints in coffee creamers.

OUTLOOK

It is expected that 2020 will continue to be a challenging year for the company. Tongaat has a substantial task ahead to turn the business around and firmly re-establish itself on a sustainable growth path.

The starch and glucose operation was well positioned to grow sales volumes and enhance its product mix, underpinned by available production capacity, ongoing improvements in operating efficiencies and continued market development.

Tongaat’s sugar operations were actively focusing on marketing, packaging and route-to-market to streamline the business. Efforts continue to contain costs and grow market penetration in beneficiated deficit markets where direct consumption sugar still attracts a premium.

The export orientation – with a view to access preferential markets – remains a key strategic driver for Tongaat.

The company stated that local markets would continue to be reshaped through advocacy, diversification of the product range and a shift away from the company being a sugar producer to a cane processor that produces fit-for-purpose products and thereby enhances earnings potential.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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