Tongaat CEO Staude upbeat on future despite 16% HEPS fall

Sugar cubes - BizNews.comJOHANNESBURG, May 25 (Reuters) – South African sugar maker Tongaat Hulett posted a 16 percent drop in full-year earnings on Monday, weighed down by lower sugar output and prices.

Tongaat said diluted headline earnings per share for the year to the end of March totalled 826.1 cents compared with 979 cents a year earlier.

Headline earnings are the main profit gauge in South Africa and exclude certain one-off and non-trading items. – REUTERS

Tongaat operating profit

From Peter Staude (Tongaat CEO): 

The sustainability of farmers in the sugar industry throughout many parts of the world is under significant pressure at the low current world price and taking into account the substantial input cost increases over the past decade. This, together with possible variable weather conditions, is likely to exert downward pressure on global sugar production levels. Global sugar consumption is predicted to continue to grow at a rate of some 2% per annum, with most of this growth coming from low per capita consumption developing countries.

There are predictions for sugar demand growth in southern and eastern Africa of some 30% over the next six years. The current surplus global stock levels have also been putting pressure on local and regional prices, as well as the EU market, amplified by the EU market reforms.

Tongaat Hulett is steadily shifting export sales from the EU to regional deficit markets. Attention is focused on capturing and growing local market sales.

In South Africa, the reference price used to calculate import duty levels does not yet fully provide adequate and appropriate protection for this socio-economically important rural industry. In Mozambique, the imminent substantial increase in the reference price should provide such assistance.

Further Cost Reductions

The sustainable cost reductions achieved over the past two years, while having to absorb input price increases, provide a good base for the next steps in the concerted cost reduction process in the sugar operations. Unit costs of sugar production will benefit substantially from growth in volumes and better yields, as milling costs and many of the agricultural costs per hectare are mostly fixed. The marginal cost of additional sugar production from existing hectares under cane is typically 4 to 6 US cents per pound.

Growing Sugar Production

The crop size in the coming season in South Africa is uncertain and is likely to be at the lowest level for many years, while Zimbabwe and Mozambique are likely to show modest growth in sugar production.

Good progress continues to be made in growing the number of hectares under cane and it is expected that by 2018/19 an additional 22 800 hectares will be harvested, of which 9 074 hectares have already been planted. Agricultural improvement programs aimed at improving yields and sucrose content are proceeding well.

Tongaat Hulett has more than 2,1 million tons of sugar milling capacity. Sugar production is targeted to grow from the 1,314 million tons in 2014/15 to some 1,821 million tons in 2018/19, under normal weather conditions. Of this growth, 37% is expected to come from a return to normal weather conditions, 30% from additional hectares under cane and 33% from yield and sugar extraction improvements.

Creating Value For All Stakeholders

In KZN there are established collaborations with Provincial and Local authorities in the inextricably linked areas of sugar and cane activities, the development of urban areas (including Cornubia) and maximising the future benefit of renewable energy.

The planting of 28 687 hectares in the past four years has created some 7 175 direct jobs in rural areas and the 12 000 hectare project currently underway for cane development and job creation in rural KZN includes a Jobs Fund grant for R150 million allocated over some three years, with the first R50 million already received.

In Zimbabwe, Tongaat Hulett, the Government and Local communities are working together on socio-economic initiatives in the south-eastern Lowveld region of the country. One of the key focus areas remains the on-going orderly development of sustainable private sugar cane farmers and at the end of the 2014/15 season, some 857 active indigenous private farmers, farming some 15 880 hectares, employing more than 7 300 people, generated US$70 million in annual revenue.

Current initiatives should increase this, by the 2017/18 season, to some 1 023 private farmers supplying more than 1 900 000 tons of cane harvested from 19 270 farmed hectares, with further job creation in rural communities. In Mozambique, 415 000 tons of cane were delivered from 4 370 hectares in the 2014/15 season, supporting 2 018 indigenous private farmers.

Growing Starch and Glucose

The starch and glucose operation, which is the only wet-miller in Sub-Saharan Africa, is well positioned strategically, focused on growing its sales volume, with an enhanced product mix and customer growth prospects into Africa. This is underpinned by improving use of its available capacity and the efficiency of its operations. Dry weather conditions in the new season have resulted in maize prices trading above international levels and the starch operations current exposure to these higher prices comprises approximately 15% of the coming year’s maize requirements.

Momentum in Land Development

The momentum in unlocking value and cash flow from land conversion and development continues, with a portfolio of 8 091 developable hectares in KZN ultimately earmarked for development. The value achieved per hectare of land sold is increasingly reflecting the steadily improving land conversion platform and varies based on usage and location.

A progressively larger area is benefitting from planning activities and infrastructural investment at key points. Tongaat Hulett continues to work together with Government, related organisations and key stakeholders in the property industry to capture the synergy of each other’s unique capabilities and to maximise value for all stakeholders.

This has a positive impact on economic development, ranging from industrial and commercial to tourism and all levels of residential development and the affordable housing backlog, in the Durban/Northern KZN area and complements the simultaneous rural development taking place around new agricultural cane developments. Over the next 5 years, sales are expected to come primarily out of 3 801 developable hectares in key focus areas comprising the urban expansion north of Durban in the Umhlanga and Cornubia areas, coastal lifestyle areas of Zimbali and Sibaya, business and residential development around the airport, coastal development north of Ballito in Tinley Manor and in the Ntshongweni area west of Durban. Further detail on the land portfolio (including prospective usage, market momentum, development themes, possible timing and values) is available on the www.tongaat.com website.

Financial Prospects for the Year Ahead

The financial results for the year ahead will be influenced by a number of varying dynamics, the magnitude and impact of which are difficult to predict at this stage. It is likely that the sugar operations will remain under pressure, particularly in South Africa. Land development could have a record year. Starch volumes, mix, cost and exchange rate dynamics are likely to counter maize prices being closer to import parity.

The business is in a good position to benefit from multiple actions across all of its well-grounded strategic thrusts, with its footprint in six SADC countries, its ability to process both sugar cane and maize, electricity generation and ethanol opportunities and increased momentum in land conversion.

* Peter Staude is the CEO of Tongaat Hulett

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