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Cane valuations, land negotiations dent Tongaat Hulett’s H1 headline earnings

12th November 2018

By: Marleny Arnoldi

Deputy Editor Online

     

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JSE-listed agriculture and agroprocessing group Tongaat Hulett suffered a 64% year-on-year decrease in operating profit for the six months ended September 30 to R530-million, compared with the R1.4-billion profit reported for the six months ended September 30, 2017.

Tongaat said on Monday that major transactions in the company’s land conversion and development activities were still being negotiated and were not concluded by period-end, while difficult local market conditions experienced by the sugar operations in South Africa and Mozambique during the second half of the 2017/18 financial year continued into the first half of the 2018/19 financial year, with a resultant negative impact on both revenue and cane valuations.

Land conversion and development activities recorded an operating loss of R30-million, compared with a R441-million operating profit in the comparative period. The company stated that substantial commercial engagements were continuing with a number of prospects.

The company reported a headline loss of R87-million, compared with headline earnings of R661-million in the comparative period, which is a 113% decrease.

The company did not declare an interim dividend.

Tongaat’s sugar operations recorded a combined operating profit of R1.1-billion, compared with R1.3-billion in the prior year, before cane valuations. Sugar production for the period picked up to 954 000 t, compared with 848 000 t in the comparative period, which is a 13% production increase.

However, revenue from higher production was offset by the lower world market raw sugar price, which was, on average, 22% below that of the comparative period.

The charge against operating profit of R796-million, compared with R473-million in the comparative period, in respect of cane valuations was R323-million higher than the comparative period, to which Mozambique and South Africa contributed R172-million and R130-million, respectively.

In South Africa, the movement in cane valuations arose from lower domestic prices and a lower cane age profile, as the harvest programme was further advanced than in the comparative period. South African sugar operations recorded an operating profit of R205-million, compared with R273-million in the comparative period, before cane valuations.

Improvements in cane yields, quality and milling performance lifted sugar production in South Africa to 431 000 t, compared with 380 000 t in the comparable period.

In response to competition from imported sugar, local prices were reduced both in July 2017 and March 2018 by a cumulative 22%, resulting in lower margins relative to the comparative period.

After extensive engagement with the International Trade Administration Commission and the South African government, the dollar-based reference price, which is used in the calculation of import duty, was increased in August from $566/t to $680/t.

This intervention has resulted in a decline in the volume of imported sugar entering the local market over the past six months to 112 000 t, compared with 301 000 t in the comparative period. South Africa recorded an operating profit of R13-million after cane valuations, compared with R211-million in the comparative period.

After adjusting for the impact of cane valuations in South Africa and Mozambique, the sugar operating profit amounted to R342-million, compared with R835-million in the comparative period.

OTHER SUGAR OPERATIONS

In Mozambique, the movement in cane valuations was attributable to lower domestic prices and a reduction in the company’s cane area, owing to the expiry of some lease arrangements with private farmers.

The Mozambique sugar operations recorded an operating profit of R341-million, compared with R394-million in the comparative period, before cane valuations. Sugar production increased to 176 000 t, compared with 153 000 t in the comparative period.

The stronger metical resulted in a higher local price of sugar in Mozambique than in neighbouring markets in dollar terms, creating price arbitrage opportunities. Local market sales volumes, however, were below that of the comparative period.

Realisations from export sales, which represented more than 50% of the industry’s production in Mozambique, were impacted on by low international prices and the stronger currency.

Additionally, construction of the 90 000 t sugar refinery at the Xinavane sugar mill was completed within budget during the reporting period.

After adjusting for cane valuations, operating profit was R7-million, compared with R232-million in the comparative period.

Meanwhile, the Zimbabwe sugar operations generated an operating profit of R537-million, compared with R580-million in the comparative period, before cane valuations.

Increased water availability and the accelerated sugarcane root replanting programme have improved cane yields, resulting in sugar production of 306 000 t, compared with 280 000 t in the comparative period.

Tongaat said liquidity constraints in the local market had resulted in considerable cost-push inflationary pressure. After adjusting for cane valuations, Zimbabwe’s sugar operations reported an operating profit of R319-million, compared with R358-million in the comparative period.

CASH MATTERS

Tongaat’s operating cash flow after working capital improved by R236-million to R183-million, compared with a R53-million outflow in the comparative period.

Proceeds from previous land sales totalling R112-million were collected by the end of September, with a further R630-million received in October.

The company’s working capital requirements reduced by R705-million, with the South African sugar operations benefitting from the sizable “buy-in” ahead of the September price increase.

Overall, the reporting period reflected a net cash outflow after dividends of R1.6-billion, which is similar to the comparative period’s R1.68-billion.

Tongaat’s existing sugarcane footprint has the potential to produce 1.6-million tonnes of sugar. Total sugar production in 2018/19 is estimated to be between 1.31-million tonnes and 1.35-million tonnes, compared with the 1.1-million tonnes produced in 2017/18.

Sugar production in 2019/20 is expected to exceed 1.4-million tonnes, underpinned by the prospect of normal summer rainfall and improvements in cane yields.

Tongaat expects that South Africa will, in 2019/20, have normalised local sugar sales levels of 1.6-million tonnes.

The company expects improved cash flow performance in the second half of the financial year and anticipates earnings growth beyond 2018/19.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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