Tongaat records increase in operating profit for interim period

2nd December 2020 By: Tasneem Bulbulia - Senior Contributing Editor Online

Sugar and glucose producer Tongaat Hulett’s share price on the JSE rose by nearly 17% on Wednesday morning following the release of an operational update for the six months ended September 30.

The company said it expected to report a 70% year-on-year increase in operating profit for the six-month period, as a result of the “excellent performance” from all the sugar operations and good overall business momentum, which it said reflected continued progress with the business turnaround strategy.

Tongaat noted that the impact of hyperinflation in Zimbabwe continued to have a significant bearing on the company’s growth.

However, it highlighted the turnaround in the South African operations and continued solid performance from the Zimbabwean and Mozambican sugar operations, positing that this demonstrated the improvements that had been made in recent times.

The starch and glucose operation performed well despite challenges faced from the government ban on the production and sale of alcoholic beverages during the Covid-19 lockdown, Tongaat stated.

Higher finance costs, together with a net monetary loss arising from hyperinflation accounting in Zimbabwe, countered some of the improvements in the operating profit of the group.

Tongaat said there was a reasonable degree of certainty that its headline earnings for the period would show a substantial improvement compared with the headline loss of R315-million reported for the six months ended September 30, 2019.

Consequently, earnings a share and headline earnings a share were expected to be within the ranges of 151c to 174c and 117c to 140c, respectively.

The Mozambican sugar operations performed well, with increased sugar production across both operations and production at the Xinavane refinery almost doubling.

The business also benefited from an improved local market sales mix and better export pricing.

Ongoing cost containment initiatives contributed further to this positive result.

The South African sugar operations generated a significantly enhanced financial performance.

Improvements in production and productivity were further supported by notably stronger local market sales, while export sales benefitted from the weaker exchange rate and improved pricing, particularly in refined sugar markets.

Together with a variety of successful cost saving initiatives, this culminated in a “convincing profit” for the six months under review, relative to a loss in the prior period.

Operating profit in the Zimbabwean operations increased by more than 60%, benefitting from ongoing improvements to operations, as well as the effects of hyperinflation.

Sugar production was stable and local sales volumes and pricing were managed carefully to prevent sales arbitrage to surrounding markets, particularly during the period in which a price freeze was recommended by the government, said Tongaat.

Ethanol production and sales grew by double digits and the focus on generating foreign currency gained further impetus with the relative contribution from exports increasing from 21% to 30%.

Dividends from surplus export proceeds of R192-million were repatriated to South Africa during the six-month period, with a further R63-million received post period-end, bringing the total dividend received to date to R255-million.

Tongaat said lockdown restrictions had had a notable effect on starch and glucose sales to the alcoholic beverage sector and sales to non-essential services such as confectionary and papermaking were similarly impacted.

Coffee creamer sales volumes, however, grew by more than 30%.

The higher maize price placed margins under pressure, which was partially offset by higher co-product realisations. This, combined with cost reduction initiatives and the accounting requirement to not depreciate assets classified as held-for-sale, resulted in a modest reduction in operating profit in the starch and glucose operation.

The property operation sustained an operating loss in the period. While two large land sales were concluded, township property sales experienced delays in transfers owing to the deeds office being closed, as well as some cancellations.

Cash flow generated from operating activities increased almost threefold, despite September being the yearly peak of the working capital cycle for the sugar businesses.

Prudent investment continued, with capital expenditure having increased to about R230-million, compared with R120-million in the prior period.

The group’s total net borrowings (excluding the trade finance facilities of the starch and glucose operation) reduced from R11.8-billion in the prior comparable period to R10.9-billion in the period under review.

Tongaat said it had made “pleasing” progress in recent times to elevate governance and accountability within the business and to shift the culture.

It noted that the group had also strengthened financial discipline, oversight and assurance with the appointment of key positions such as a chief audit executive, chief risk officer, chief information officer, human resource executive and group legal counsel.

Tongaat will publish its interim results on or about December 11.