In the face of marginally lower domestic sales volumes, narrowed margins and increased export volumes at lower prices, JSE-listed Illovo Sugar has lifted its operating profit for the six months ended September 30 by 9.4% to R1.6-billion, largely on the back of an equivalent increase in sugar production.

While the bulk of operating profit was attributed to higher sugar production, which swelled 9.4% to 1.4-million tons, the group’s cane-growing business and cogeneration divisions were responsible for 44% and 4% of operating profit respectively.

By country, Malawi contributed 33%, Zambia 30%, Swaziland 17%, South Africa 10%, Mozambique 9% and Tanzania 1%.

A 23% increase in group revenue was attributed to an 11.6% increase in sugar sales volumes, as well as the impact of the weaker rand on South African downstream sales and European Union (EU) export realisations in Swaziland.

This came as the sugar producer acknowledged that, while cost control measures were a feature of the operating environment, overall, margins had declined in comparison with the comparable prior year’s period.

At R152.9-million, net financing costs were similar to that of the previous year, while the effective tax rate declined from 28.2% to 25.5%.

Illovo’s after-tax profit rose to R1.2-billion from R962.8-million, resulting in an improvement of 14% in headline earnings.

The sugar producer reported on Thursday that, in general, operating conditions had been favourable during the first six months of the year, allowing for the crushing of 11.7-million tons of cane, reflecting a 7.5% increase compared with the first six months of the previous financial year.

“On average, sucrose levels have been slightly better, while cane supply and cane quality have been good. In addition, the group’s sugar factories have performed reasonably well,” the company stated in its interim report.

The four South African factories had operated at “high” levels of efficiency, while the expanded factories in Zambia, Swaziland and Mozambique achieved throughput levels in line with their expanded design capacities.

Total cane harvested at the group’s own estates during this period amounted to 4.7-million tons compared with last year’s 4.9-million tons, while group cane production for the full season was anticipated to be around 250 000 t less than last year, owing to lower yields in Malawi, Zambia, Swaziland and Mozambique.

Meanwhile, the group noted that the production of downstream products in South Africa had progressed well and expectations were for furfural and alcohol volumes to exceed the prior year’s levels for the full season.

This would be augmented by the new potable alcohol distillery in Tanzania, which was commissioned in August and was operating at design capacity, producing high-quality product from startup.

“The cogeneration of electricity at the Ubombo mill, in Swaziland, meanwhile, continues to perform well, with increasing exports of surplus power into the national grid,” the company said.

IMPORT CONSTRAINTS

Commenting on the state of the domestic sugar sector, Illovo reported that the South African commercial environment was “difficult”, as sugar imports impacted negatively on domestic sales and prices in South Africa and Tanzania.

As a result, the South African sugar industry had made an application to the International Trade Administration Commission of South Africa for an increase in the import tariff of sugar, which it hoped would reduce the level of duty-free imports.

In addition, the continued world sugar surplus had put pressure on the group’s export markets.

“The world sugar price is currently trading at around $0.18/lb and, although it has rallied recently, it still remains below the cost of production for most sugar producers.

“Domestic markets are the bedrock of the group’s sugar sales, but are expected to be slightly lower compared with last year, owing to increased levels of imported sugar in South Africa and Tanzania,” Illovo stated.

However, total group sales for the year were forecast to be higher than last year, supplemented by higher sugar production, which had been sold into global and regional markets.

Exports to all traditional markets were on schedule and pricing had, in general, been in line with expectations, although at lower levels than the prior year.

The new sugar warehouse and distribution center, in South Africa, was operating successfully and had been of “major benefit” to the company in balancing supply and demand in a challenging environment.

Alcohol pricing and sales, meanwhile, remained in line with expectations, while those of furfural and furfuryl alcohol increased from their low base in March, which was not in line with previous historical price cycle rates.

Currency exchange rates, in general, were of benefit to export proceeds.

TIGHT OUTLOOK

Group sugar production for the full year was anticipated to increase by around 5%, with the higher output expected to originate chiefly from South Africa and, to a lesser extent, Swaziland, while production at the other operations was forecast to remain at similar levels to that of last year.

In contrast, sugar market conditions across the group were expected to remain difficult, with imports into South Africa and Tanzania impacting negatively on domestic market sales and prices in those countries.

“While regional prices have held up well over the period, sugar sales and prices into the region are starting to be affected by the world sugar surplus. Prices in the EU, at the commencement of the new season, are declining and will impact on the group’s remaining sugar sales into that market in the current year,” commented MD Gavin Dalgleish.

On the upside, currency weaknesses were expected to assist export earnings for the full year, with good growth in downstream earnings anticipated.

While cost control would remain a priority, the group’s operating margin was anticipated to be lower than the prior year, owing to the present market conditions.

Net financing costs were forecast to be similar to last year, while the effective tax rate should be slightly lower.

Cash generation remained strong and gearing was anticipated to remain low.

“Although we continue to prioritise cost control and efficiencies, we expect that challenging market conditions will continue to put pressure on our operating margins,” cautioned Dalgleish.

In lieu of a dividend, Illovo declared an interim capital distribution by way of a reduction of contributed tax capital of 37c a share for the six months.