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The Investment Week

Mentioned in this Article

JSE-listed companies: FM Edition:

Rising prices and soaring production make for the kind of combination that commodity producers dream of. It’s this situation that is unfolding for SA’s largest listed sugar producer, Tongaat Hulett.

The first sign of a big profit kicker came in Tongaat Hulett’s six months to September. Off a depressed base, operating profit of its SA, Mozambique and Zimbabwe sugar operations jumped 73% to R825m, R19m more than in its full year to March.

A number of factors were at work, not least this year’s 29% rise in the SA sugar price. The first hike of 12.5% was in February and the second, of 15%, came in July.

On the export front, a 60% rise in world sugar prices this year provided another kicker, taking export prices to almost the same level as SA’s normally far higher regulated reference price.

A world sugar supply shortage is at work, and that is unlikely to change soon.

"There are emerging concerns [about] the ability of global supply to match demand at prevailing price levels," says Tongaat Hulett.

In the latest six months, Tongaat Hulett’s SA sugar operating profit almost trebled to R306m. Also providing a big boost was Mozambique, where operating profit leapt R125m to R219m.

"Mozambique was the highlight of our past six months," says CEO Peter Staude.

Another profit kicker is yet to make itself felt: rising production from levels hit by the worst regional drought on record.

The drought resulted in Tongaat Hulett’s sugar production falling to 1.02Mt in its year to March, from 1.42Mt the previous year. SA was hardest hit, with production concentrated in KwaZulu Natal (KZN) halving to 323,000t — a third of milling capacity.

The year to March 2017 will again reflect the drought’s impact. "Production is heading for 1Mt again," says Staude.

But prospects for the next two financial years are good. "KZN has had good rains and though Zimbabwe and Mozambique have had no rain yet, forecasts are positive," says Staude.

In its forecasts, Tongaat Hulett is looking to produce 1.2Mt-1.3Mt in its year to March 2018, and 1.5Mt-1.6Mt the following year. Rising production will bring big economy of scale benefits and the potential of soaring profits.

For investors wanting sugar exposure, the field has become limited since the acquisition of SA’s biggest player, Illovo Sugar, by Associated British Foods in May.

An alternative is sugar cane grower Crookes Brothers, which comes with the lack of marketability of a very small-cap share.

Another alternative is RCL Foods, SA’s third-largest sugar grower and miller. But investing in RCL means going with a diversified food group that includes beleaguered Rainbow Chicken.

This leaves Tongaat Hulett as the prime choice. However, the group is facing the risk of a proposed tax on sugar-sweetened beverages, which could damage demand.

Noncommittal on the tax, Staude says: "We may just have to export more sugar."

Sugar is not the group’s only profit generator. Its line-up includes its R600m annual operating profit, maize-based glucose and starch operation, which Old Mutual Mid and Small Cap Fund manager Warren Jervis terms "a very strong business".

Another attraction for investors is 3,149ha of sugar fields in the Durban area, earmarked for urban development over the next five years. The target is 7,951ha over 10 years.

Land sales in the latest six months fell to 19ha, from 65ha in the first half of the previous year, slicing operating profit from R576m to R269m.

"Sales are subject to negotiations and do not go in a straight line," says Staude.

This was the key factor limiting Tongaat Hulett’s headline EPS growth to 4% in its latest half-year. But prospects are excellent. Negotiations are under way for the sale of 227ha that holds the potential of a R1.8bn profit, says Staude.

This is why four of five analysts who cover it rate it a "buy", with a target price of R141.05. This is 7.5% above current levels.