Commentary by Peter Staude, CEO of Tongaat Hulett:
The first half of 2009 was characterised by the restoration of key macroeconomic fundamentals for the sugar business in Zimbabwe and limited opportunity for agricultural land conversion as a result of testing market conditions for property developers in South Africa. Headline earnings increased to R440 million compared to R252 million in the first half of 2008.
Operating profit from agricultural land conversion and development amounted to R64 million (2008: R115 million) with a further R2 million in capital profits (2008: R15 million) being realised. During the first half of the year, 95 developable hectares (183 gross hectares) were sold, of which, 93 hectares were for affordable housing in the eThekwini growth corridor. Market conditions for property development in the prime residential, resorts and commercial sectors continued to be depressed, while the demand for land for affordable housing and industrial property in the Durban area remained positive. There is a shortage of established industrial logistics, support and service locations north of Durban, which continues to be the focus of attention, particularly with the new international airport under construction for 2010. Good progress has been made in areas such as Sibaya, Cornubia and Canelands in the planning and acquisition of development rights, with the conversion from agricultural land to take place at the appropriate time.
The South African agriculture, sugar milling and refining operations contributed R77 million to profit (2008: R37 million). In the first half of 2009, raw export volumes from South Africaincreased to 93 000 tons (2008: 66 000 tons) and were sold at an effective world sugar price of 12,9 US c/lb (2008: 10,8 US c/lb) at an average exchange rate of R8,34/US$ (2008: R7,50/US$). South African domestic sales were 240 000 tons (2008: 230 000 tons). In 2009, sugar production is estimated to be 638 000 tons compared to the 644 000 tons produced in 2008.
The downstream sugar value added activities contributed R94 million to profit (2008: R75 million). The South African refined exports, domestic marketing, sales and distribution activities benefited from increased realisations and delivered another good performance, as did Voermol and the Botswana and Namibian sugar packing and distribution operations.
In Swaziland, Tambankulu Estates is expected to produce a raw sugar equivalent of 53 000 tons (2008: 56 000 tons) and has benefited from higher realisations within the Swazilandsugar industry. Operating profit grew to R34 million (2008: R29 million).
The Mozambique profit from operations increased to R134 million (2008: R77 million), with the growth in the agricultural activities contributing significantly. The expanded mill at Xinavane commenced limited crushing in June and will be in a ramp-up phase until the end of August. Production at Xinavane this year is expected to be above 150 000 tons (2008: 63 000 tons) in an extended season, weather permitting. Mafambisse’s sugar production is expected to be 83 000 tons (2008: 45 000 tons), following the expansion completed in 2008.
The Zimbabwe sugar operations are now consolidated in Tongaat Hulett’s financial results. This consolidation follows the macroeconomic changes that essentially occurred when Zimbabwe moved to a US dollar and Rand based economy and, in so doing, restored relevant key fundamentals to the economy. The accounting treatment, in terms of International Financial Reporting Standards, on the commencement of consolidation of these operations gives rise to a balance sheet take-on gain of R1,969 billion, which is recognised in the income statement. This gain is excluded from the profit from operations and excluded from headline earnings. The profit from operations in the first half of 2009 in Zimbabwe was R305 million (compared to the dividend received of R35 million in 2008). Sales to the domestic market were undertaken in US dollars at levels in line with regional pricing and export shipments to the European Union were fulfilled. The milling campaign got underway in the second quarter, with sugar production in Zimbabwein 2009 expected to be similar to the 298 000 tons produced in 2008.
Profit from the starch and glucose operations was R112 million (2008: R103 million). A second successive season of favourable agricultural conditions in South Africa resulted in local maize prices trading close to world prices for a large part of the period. The positive effects of improved margins were offset by reduced demand. Sales volumes in the local market declined by 4,3% with growth in confectionary and coffee creamer sectors being offset by declines in the paper and alcoholic beverage sector. Sales to the industrial sector are expected to remain below last year, while sales to the alcoholic beverage sector are expected to recover in the second half of the year with the commissioning of a new brewery in Gauteng that will replace current imported beer sales. Approximately 90% of customer sales contracts for the current year have been concluded with maize procured close to world price levels.
The centrally accounted and consolidation items include an R82 million gain on the recognition of an unconditional entitlement in the first half of 2009 to an employer surplus account allocation in the Tongaat Hulett pension fund.
Cash inflow from operations was R253 million (2008: R180 million). Tongaat Hulett’s net debt has increased to R3,064 billion from R2,356 billion at the end of 2008 with significant capital expenditure, mainly on the Mozambique expansion and the cash absorption in sugar cane growing crops. Finance costs increased to R151 million, commensurate with the borrowings in the business.
The Board has declared an interim dividend of 100 cents per share (2008: 160 cents per share).
Profit from operations in the second half of the year is expected to be below that achieved in the first six months. Agricultural land conversion opportunities are limited in current market conditions. A stronger Rand would affect export realisations from South Africa and the profit in Rands reported by the operations outside South Africa. Profit from operations inZimbabwe in the second half is likely to be well below the first half of the year, which included the benefit of the recovery of pricing and its impact on sugar stocks and the value of cane. The seasonal nature of cane growing leads to operating profit in the first six months which includes the increased value from the growth in the cane crop. Following the anticipated cash absorption in the Mozambique expansion, significant cash inflow is expected to commence in the latter part of 2009 and early 2010.
In Zimbabwe, management attention is focused on improving cane yields and the re-establishment of outgrower cane lands, so as to restore sugar production to the existing installed capacity of 600 000 tons per annum from the current production level of some 298 000 tons. Similarly, the attention in Mozambique is on moving from the 105 000 tons produced in 2008 to the newly installed milling capacity of 300 000 tons per annum. BothZimbabwe and Mozambique benefit from preferential access to the attractive European Union markets.
The current dynamics of a higher world sugar price are encouraging for the South African sugar industry. Improved returns from sugar cane farming will encourage an improvement in farming practices and increased hectarage under cane, leading to improved milling capacity utilisation.
The structural changes that are taking place in international agricultural commodity markets are resulting in improved competitiveness of South African maize and the starch operations, which have additional capacity for local and export growth. Southern Africa has the opportunity to become a sustainable net exporter of maize in the medium term.
Land and property development activity is currently focused on the growth corridor north ofDurban that commences inland of Umhlanga/Umdloti, extends around the new international airport at La Mercy and includes the greater Tongaat region. Tongaat Hulett owns 5 906 gross hectares in this corridor. Given the housing backlog and Government’s commitment to infrastructure spend, there is both opportunity and socio-economic urgency to establish communities with affordable housing in this area and to accelerate land conversion for airport services and support logistics, niche industrial, health care, education and social facilities. In the present economic conditions, few hectares are likely to be converted to development in the high value, prime locations on the coastline (Tongaat Hulett’s 6 006 hectares) and to the west of eThekwini (2 050 hectares) and the focus is on securing infrastructure and development rights, for conversion at the appropriate time.
Tongaat Hulett, with its established agricultural and agri-processing operations in Southern Africa, remains well positioned for the emerging global food, agricultural products and renewable energy demands.
Chief Executive Officer
About Tongaat Hulett
Tongaat Hulett is an agri-processing business which includes integrated components of land management, property development and agriculture. Through its sugar and starch operations in Southern Africa, Tongaat Hulett produces a range of refined carbohydrate products from sugar cane and maize. It has considerable expertise in downstream agricultural products, biofuel production and electricity cogeneration. Competition for water and alternative land usages is an ongoing dynamic. Tongaat Hulett balances the operational requirement for cane supplies to its sugar cane processing operations with the transition of agricultural land to other uses at the appropriate times. It is well positioned to benefit from the changing world of agriculture and agri-processing.
3 August 2009