Commentary by Peter Staude, CEO of Tongaat Hulett:
Tongaat Hulett’s total sugar production for the 2011/12 year is expected to increase by some 14% to 1,150 million tons. More than 80% of the season’s cane had been milled by the end of October 2011. Sugar production for the year in Mozambique is expected to be approximately 45% above last year, production in Zimbabwe should rise by 10% and in South Africa it should increase by some 8% over that of last year. Good progress is being made in these countries related to increasing cane supply, with the area under cane increasing and the positioning of the crop improving. In the present economic conditions few hectares are generally being sold for land and property development. The starch business has benefitted from improved co-product recoveries and world competitive maize costs.
Revenue for the six months to 30 September 2011 of R6,027 billion was 27,6% above the R4,724 billion for the corresponding period in 2010. Profit from operations grew to R1,047 billion (2010: R963 million). Excluding the R130 million gain in the prior period in respect of the pension fund employer surplus account allocation, the increase in profit from operations is 25,7%.
Profit from the Mozambique sugar operations grew to R267 million for the half-year (2010: R163 million), with substantially increased sugar production and sales at higher domestic and export prices. The cane and its increased value reported at the end of the 2010/11 year is now being converted to sugar and sold, with the operating cash flow having increased by R427 million over the previous half-year. Crop positioning for optimal harvesting is improving, with increasing yields and sucrose content. Sugar production in Mozambique for the year is expected to increase to approximately 240 000 tons, an increase of some 45% over last year.
The Zimbabwe sugar operations generated profit of R364 million (US$52 million) compared to the previous half-year of R303 million (US$41 million). Sugar production and sales, particularly in the export market, increased in the first half of the year. The positioning of the crop is improving. Given the extent of the harvesting and production to date, there is less of a standing cane value than last year and there has been an improvement in operating cash flow of R224 million. Totalsugar production in Zimbabwe for the year is expected to be approximately 365 000 tons, an increase of 10% over last year, with the increase coming from Hippo Valley.
Operating profit in the South African agriculture, sugar milling and refining operations for the half-year was R54 million (2010: R47 million). The gap between the hectares under cane and the hectares milled is unusually large as a result of the substantial cane root planting following last year’s drought and the approximate 15 months required to first harvest. The lower tonnage being available for export from the industry has meant that revenue was driven mainly from the local market where price increases were in line with cost increases. Tongaat Hulett’s share of industry production this year is expected to increase from 23% to approximately 26%. Annual raw sugar production is projected to increase by about 8% to approximately 490 000 tons in the current season.
The various downstream sugar value added activities recorded profit of R142 million (2010: R136 million). The Voermol animal feeds operation experienced lower sales volumes and pressure on margins as a result of raw material availability constraints, high winter rainfall leading to a reduced requirement by farmers for feed and reduced on-farm feeding with higher maize prices.
In Swaziland, the Tambankulu sugar estate produced operating profit of R30 million (2010: R19 million), with improved pricing and higher cane yields being achieved.
In the land conversion and development activities, the appropriate sales strategies (bulk sale, partnership or own development) are constantly reviewed for each land holding and implemented as appropriate. Opportunistic offers for some semi-bulk land sales were received and turned down as they did not meet Tongaat Hulett’s value criteria. Revenue for the six months to September 2011 was generated mainly from 13 developable hectares (15 gross hectares) that were sold in the Umhlanga Ridge Town Centre, Zimbali and Izinga areas. Operating profit amounted to R62 million (2010: R97 million) with a further R3 million in capital profits (2010: R4 million) being realised.
Profit from the starch operations increased to R167 million, compared to R125 million in the same period last year. Improved co-product recoveries and local maize costs that were contracted below Chicago (CBOT) prices resulted in an improvement in starch and glucose processing margins. Sales volumes in the local market were 0,5% above last year.
Finance costs increased to R249 million from R231 million in the first half of the 2010/11 year and are commensurate with the level of borrowings.
Operating cash flow, before working capital, improved by R626 million to R1,555 billion for the half-year, mainly as a result of the higher sugar production and sales in the half-year to September 2011. This follows the previous absorption of cash in the various expansion and sugar cane establishment programs. The September half-year coincides with a high working capital absorption point in the year, particularly in the South African sugar industry, with large cane payments having been made and sugar stock levels having increased. There was a net cash outflow for the period, after dividends, of R253 million. Tongaat Hulett’s net debt at the end of September 2011 was R4,278 billion. A process to replace a portion of the short-term debt with long-term debt is close to being concluded.
Total net profit was R597 million (2010: R552 million). Headline earnings were R501 million for the half-year ended 30 September 2011, compared to the R507 million earned in the six months to 30 September 2010, after taking into account the minority shareholders’ interests in respect of increased profits at the sugar milling operations in Mozambique and at Hippo Valley in Zimbabwe.
The Board has declared an interim dividend of 120 cents per share (2010: 110 cents per share).
One of Tongaat Hulett’s key objectives is to facilitate increased cane supply (including hectares under cane, yields and cane quality) to its mills so as to fully utilise its existing installed milling capacity of some 2 million tons of sugar with a simultaneous reduction in unit costs. This would lead to a 75% increase in sugar production over the 1,150 million tons expected in the 2011/12 season.
Sugar production in Mozambique is expected to grow by a further 30% over the next three years to above 310 000 tons per annum together with a reduction in unit costs.
In Zimbabwe, co-operation between Government, the eastern lowveld communities and Tongaat Hulett is focused on the “Successful Rural Sugar Cane Farming Community” project. Some 15 900 hectares have been allocated to approximately 870 indigenous farmers. In this season, these farmers are expected to deliver approximately 488 000 tons of cane (equivalent to 61 000 tons of sugar) from some 9 100 hectares. The target is to uplift this to over 1,4 million tons of cane (equivalent to 180 000 tons of sugar) from the available hectares. The pace of planting new roots is targeted at some 4 000 hectares per annum, with 3 176 hectares having been planted by the end of October 2011. This, together with Tongaat Hulett’s improvement of its own agricultural yields, is key to achieving the target of increasing sugar production in Zimbabwe to full milling capacity of 600 000 tons per annum.
The strategy to increase cane supply in South Africa is focused on commercial farmers, small scale farmers and increasing Tongaat Hulett’s influence in cane development through leasing additional land and collaborating with Government to rehabilitate cane supply on its land and land reform farms that have gone out of cane. It is expected that the hectares available for milling in 2012/13 will increase by some 12 000 hectares as a result of the 9 696 hectares planted over the previous two years and a reduction in the gap between hectares under cane and hectares milled. An additional 8 000 hectares are targeted for planting this season in the catchment areas of Tongaat Hulett’s South African mills. Simultaneously, accelerated root replanting is underway and is expected to span some three years, with its seed cane requirement and the new cane not being harvested for an initial season. This will improve root age and generate better yields. The gap between hectares under cane and hectares milled will remain a feature of this period, albeit reducing.
The future revenue stream would benefit significantly from electricity and ethanol developments. Tongaat Hulett continues to interface with Government towards establishing an appropriate regulatory framework for both electricity generation and ethanol production from sugar cane.
Tongaat Hulett owns a total of some 8 600 developable hectares (13 639 gross hectares) for development in South Africa. A net cash inflow in excess of some R2,2 billion is expected to come in due course from the 348 developable hectares available for sale from eight active land developments, from which some 360 hectares have previously been sold. There are on-going processes on all of the developable land to enhance its usage and value to stakeholders. Industrial land in Durban/eThekwini remains in short supply and competition is intense for the industrial, retail and business park land that will become available in the Cornubia South development. Tongaat Hulett continues to explore a number of significant bulk land sale opportunities within its land holdings.
The outlook for the 2011/12 year remains in line with that previously communicated. Tongaat Hulett’s financial results remain sensitive to movements in exchange rates, which impact particularly on export realisations and the conversion of profits from Zimbabwe and Mozambiqueinto Rands. Both regional sugar prices and export prices into the European Union have remained firm despite the recent reduction in the world sugar price. It has become evident, with all the planting of new roots and in order to improve cane positioning for the future, that more hectares than originally anticipated will not be harvested this season in South Africa. The exact timing of land sales, including bulk sales, remains variable in the current economic climate. Local sales volumes of starch and glucose are expected to reflect little growth over the prior year. The R288 million defined benefit pension fund asset that was recognised in the second half of last year, with its impact on headline earnings, will not arise again this year. The minorities’ share of profits is expected to remain considerably above that of last year.
Chief Executive Officer
Tongaat Hulett is an independent agricultural and agri-processing business which includes integrated components of land management and property development. Through its sugar and starch operations, Tongaat Hulett produces a range of refined carbohydrate products from sugar cane and maize. The business has considerable expertise in downstream agricultural products, biofuel production and electricity generation. 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. The energy-food-water nexus is an evolving dynamic, presenting opportunities. Tongaat Hulett is well placed to capitalise on emerging opportunities for expansion and growth in Africa, with unconstrained access to sugar markets, its independent position, established business platform and size.
14 November 2011