Tongaat - trading update and trading statement
Gavin Hudson commenced his duties on 1 February 2019 as the new Chief Executive Officer of Tongaat Hulett with a mandate to expedite an immediate and comprehensive strategic and financial review with the view to stabilising the business, address the debt levels and set the path towards acceptable returns for shareholders. To this end, a permanent Chief Financial Officer has been appointed and the review has commenced. Priority areas for intervention have been identified and include streamlining operations, rationalising where appropriate, and improving business performance and accountability.
During the course of the strategic and financial review, it has become clear that that the business is facing more challenges and operational performance has continued to decline. As a result, Tongaat Hulett considers it important to provide both a trading update and trading statement to the market.
Further details of the company's strategic review and its turnaround strategy will be presented to shareholders in full, with the release of the final results. These matters are receiving the Board's urgent attention.
While sugar production for the season increased, local market sales across the industry remain under considerable pressure due to the overhang of excess sugar bought in prior to the price increase, and a greater than expected impact of the sugar tax on local demand, in particular with the reformulation of products in the beverage industry. Cane valuations have thus been rebased for the lower local market realisations.
Local market sales have been impacted by high volumes of imported sugar in the local market. This has resulted in additional sales of sugar into export markets at low world prices which has affected margins. Cane valuations have therefore been rebased for the lower local market realisations. The performance of Mafambisse mill was disappointing and impacted profits, while commissioning delays will see the full onstreaming of the refinery in the new financial year.
The company has kept its pricing in line with inflationary increases in the economy and demand for local market sugar remains strong. The operation earns sufficient export proceeds to cover its foreign input costs, and sugar as a commodity is able to maintain its value in US$ terms. The Zimbabwe operation can thus be ring-fenced with no requirement to draw funds from elsewhere in the group. The anticipated negative impact of translation at a weaker exchange rate (following the announcement of a free float of the currency) has been offset by a corresponding uplift in cane valuations. No further dividends have been received since the interim reporting period.
Land Conversion and Development
While negotiations continue, no further land sales have been concluded since 30 September 2018. In addition, land sales where debtors have not performed have been terminated, allowing the company to pursue alternative customers and replacement sales. A thorough review of the land portfolio is underway.
Starch and glucose business The starch and glucose business is expected to deliver growth in operating earnings over the prior financial period, supported by some recovery in volumes during the second half of the year, and with margins benefitting from competitive maize prices and improved co- product realisations.
Shareholders are advised that a reasonable degree of certainty exists that Tongaat Hulett's headline earnings are expected to reflect a decrease of at least 250% compared to the R617 million earned in the twelve months ended 31 March 2018 ("the comparative period"). Consequently, headline earnings per share ("HEPS") and earnings per share ("EPS") are both expected to reflect a loss in excess of 803 cents and 927 cents respectively, and a reduction of at least 250% when compared to HEPS of 535 cents and EPS of 618 cents for the comparative period.
With Tongaat Hulett's high debt levels and interest cost, any reduction in operating profit has a larger impact on earnings. The company has appointed advisors and will enter into discussions with lenders this coming week.
As the company prepares for the end of its financial year, management is assessing various assets including cane assets and project costs for impairment risk, reviewing the accounting implications of the currency dynamics in Zimbabwe, and finalising the impact of IFRS 15 Revenue from Contracts with Customers on its financial statements.
Further information to this effect will be released as and when appropriate, before the release of the audited results for the year ending 31 March 2019 scheduled for May 2019. This trading statement is issued in accordance with paragraph 3.4(b) of the JSE Limited Listings Requirements.
Shareholders are further advised that Tongaat Hulett is aware of discussions between its B-BBEE shareholders, their advisors and their preference share funders and that a formal unwind of the 2007 B-BBEE transaction funding structure is likely. The funding is non- recourse to Tongaat Hulett.