Tongaat Hulett reports R1.9bn FY18 operating profit

28th May 2018 By: Simone Liedtke - Writer

Tongaat Hulett reports R1.9bn FY18 operating profit

Photo by: Creamer Media

Agriculture and agroprocessing business Tongaat Hulett’s operating profit for the year ended March 31 reached just over R1.9-billion, with the company’s sugar operations recording an operating profit of R837-million, despite being adversely affected by several factors.

Among these were imports into the South African market, low international sugar prices and the impact of a stronger local currency on export realisations, while a partial recovery from the drought conditions of the previous two seasons had a positive impact on the company’s operations for the period.

Total sugar production in the period increased to 1.17-million tonnes, while the price of raw sugar in the world market remained under pressure during the year.

The South African sugar operations, including downstream activities, recorded an operating profit of R86-million, with improved rainfall in the coastal areas of KwaZulu-Natal having seen a production increase to 513 000 t.

The recovery in production was negated by high volumes of imported sugar into the local market when, over several months, upward revisions to the import duty were not implemented timeously.

This, the company explained on Monday, was followed by a period during which zero duty was erroneously applied.

Imports into the South African market increased to 520 000 t in the 12 months to December 31, 2017, dropping the industry’s sales into the local market to about 1.18-million tonnes, compared with 1.64-million tonnes in the previous year.

The impact was prolonged by the storage of large quantities of sugar that were imported during the period, the company said.

In addition to the displaced locally-produced sugar having been exported in the latter part of the year and impacted on by a low world price and a stronger rand, Tongaat averred that the South African sugar industry has taken measures to regain its local market share by ensuring local prices are more responsive to international markets by applying for an increase in the dollar-based reference price used in the calculation of the duties.

An increased involvement in the process to implement duty revisions timeously, will also be implemented.

Moving into the rest of Africa, Tongaat Hulett’s Zimbabwe sugar operations generated an operating profit of R563-million.

This, the company added, is owing to continued growth of local market sales, which were assisted by the refinery optimisation project that increased the availability of refined sugar for the industrial market.

Low dam levels during peak growing periods limited irrigation, however, which affected cane yields, resulting in reduced sugar production of 392 000 t.

The Mozambique sugar operations recorded a reduced operating profit of R159-million, while sugar production increased to 218 000 t.

Good progress was made with export sales into deficit regional markets, the company said.

Additionally, the construction of the 90 000 t sugar refinery at the Xinavane sugar mill is progressing well, with commissioning targeted for September.

The refined sugar production will replace imported white sugar and satisfy the country’s growing industrial demand, while realising a meaningful price premium in export markets, the company noted.

Tongaat Hulett’s starch and glucose operation, meanwhile, recorded an operating profit of R572-million, while land conversion and development activities delivered an operating profit of R661-million from the sale of 96 ha of developable land.

Operating cash flow, after working capital, was just over R2.2-billion.

Improved operating cash flows generated by the starch and glucose operation provided some mitigation for the cash impact of lower profits from the sugar operations, the company said, while land conversion and development activities’ cash outflows exceeded cash inflows by R68-million.

Capital expenditure totalled R2.1-billion with the start of the refinery project in Mozambique and the considerable investment in sugarcane root replanting after the drought.

Finance costs of R878-million were commensurate with borrowing levels.

Overall, the year reflected a net cash outflow after dividends of R1.3-billion, with Tongaat Hulett’s net debt at March 31 at just over R6.4-billion, compared with R4.7-billion in the prior financial year.

Taking the above into account, headline earnings for the year decreased by 37% to R617-million, the company said.

Tongaat Hulett further declared a final dividend of 60c a share, thereby bringing the yearly dividend to 160c a share.

OUTLOOK

Looking forward, Tongaat Hulett, through proactive cane development and irrigation initiatives, aims to grow sugar production through using its available milling capacity of two-million tonnes a year, which will benefit from evolving preferential regional trade access and growth in sugar consumption.

Total sugar production in 2018/19 is estimated to be between 1.3-million and 1.4-million tonnes, which is underpinned by improved water availability at all operations, and cane yields that reflect the benefit of agricultural improvement plans and the replanting of sugarcane roots after the drought.

In Zimbabwe and Mozambique, the effectiveness of various protection measures has become meaningful, the company said, while in South Africa, the South African Sugar Association has applied for an increase in the US dollar-based reference price, used in the calculation of the duties, from $566/t to $856/t.

A decision is expected in 2018.

The starch and glucose operations are focussed on growing sales volumes and margins by continuing to replace imports with local production, by enhancing its product mix through new business development and by targeting selected export markets.

Following the previous year’s record maize crop of 16.8-million tons, a crop of 12.8-million tons is anticipated for this year.

With carry-over stock of more than four-million tons, total maize supply is expected to be sufficient and maize prices should remain competitive, close to export parity levels, sustaining the improved margins, the company said.

Sales volume growth is expected to moderate from the prior year, with the impact of muted domestic consumer demand being offset by ongoing benefits from the import replacement project and from new business volumes being in place for the full year. The ongoing focus on operating efficiencies and cost reduction will continue to contribute to profit.

Further, Tongaat Hulett has invested R979-million into land earmarked for future sales, to create a sound planning and infrastructure platform.

Available shovel-ready land currently totals 185 developable hectares, exceeding the 171 ha sold over the past two years. In the socially and economically important Cornubia area alone, investments of R489-million have been made.

Land development activities involve considerable cash inflows and outflows that occur over an extended period and may not coincide within a financial year, Tongaat Hulett noted.

Strong cash inflows are anticipated, however, mainly in the second half of the next financial year, when a considerable number of property transfers are registered.

As several infrastructure projects in the region are completed or nearing completion, cash outflows will be below those of the previous two years.