INTERIM RESULTS FOR THE HALF-YEAR ENDED 30 SEPTEMBER 2010
Commentary by Peter Staude, CEO of Tongaat Hulett:
The past six months have been characterised by counteractive factors. Tongaat Hulett is starting to benefit from the targeted sugar production growth in Mozambique and Zimbabwe. Sugar production in South Africa has been affected by the severe drought in the current season. Sugar realisations in this period have not yet reflected the benefits of the recent surge in world sugar prices brought about by supply and demand dynamics. Exchange rates have been less favourable than in the corresponding six months in 2009. In the current economic climate, the sale of development land remained depressed. Tongaat Hulett’s headline earnings increased by 12% to R507 million for the half-year ended 30 September 2010, compared to the R452 million earned in the six months to 30 September 2009. The profit from operations for the half-year grew by 10% to R963 million from the R873 million earned in the same period in 2009.
Profit from the starch operations for the six months was R125 million, compared to R117 million in the same period last year. A third consecutive year of favourable agricultural conditions in South Africa yielded a large maize crop in 2009/10 of 13 million tons (2008/9: 12 million tons) and resulted in local maize prices trading close to world prices. The margin benefit of lower maize costs was partially offset by lower co-product prices and the effect of a firmer Rand. Starch and glucose sales volumes in the local market were similar to the corresponding prior period. Volumes in the alcoholic beverage, coffee creamer and confectionary sectors started recovering while the canning and prepared food sectors reflected lower volumes.
The profit from sugar operations in Zimbabwe was R303 million (US$ 41 million) in the first half of the financial year, compared to R326 million (US$ 40 million) in the same period last year. Sales volumes in the first half of the year were 3% higher than the same period last year. Sugar production commenced later than normal at the Hippo Valley mill following the extensive rehabilitation work undertaken during the off-season. The crush rate has since increased closer to capacity as the refurbished second extraction line was brought into production.
In Mozambique, profit from the sugar operations for the six months to September 2010 increased to R163 million (Metical 739 million) from R79 million (Metical 263 million) in the same period last year, benefiting from substantially higher volumes. The rapid depreciation of the Metical has resulted in a situation where domestic sugar prices need to increase by more than 50% to be in line with regional pricing.
The South African sugar milling, refining and agriculture operations contributed R47 million to profit for the six months ended September 2010 (2009: R77 million). The drought conditions in KwaZulu-Natal have led to a reduction in the current sugar crop and higher costs per ton of sugar produced. Sales volumes in the first half of the year grew by 7% together with higher local and export sales realisations. Almost all of Tongaat Hulett’s sugar production is effectively sold in the local market under the Huletts brand. In terms of the South African sugar industry legislated regulations, 79% of the sales in the current season are deemed to be local and 21% are recognised and valued as exports. Raw sugar export volumes from South Africa were sold at an effective world sugar price of 19,0 US c/lb (prior season: 16,5 US c/lb) at an average exchange rate of R7,67/US$ (prior season: R8,16/US$).
The downstream sugar value added activities contributed R136 million to profit (2009: R127 million). This includes Voermol animal feeds, South African refined exports, regional marketing, sales, packing and distribution activities.
In Swaziland, the Tambankulu sugar estate generated operating profit of R19 million for the half-year (2009: R29 million). The exchange rate of the Rand against the Euro has negatively impacted export earnings. Production for the full year is expected to be similar to the previous season.
Tongaat Hulett’s land and property development activity is currently focused on value creation for all stakeholders in the growth corridor north of Durban, including the new international air platform at King Shaka, targeting land conversion at the appropriate time and value. In the current economic climate, with the sale of development land across most sectors being depressed, few hectares are being converted to development in the higher value prime locations on the coastline and to the west of Durban. Tongaat Hulett owns 13 807 gross hectares for development in South Africa. Operating profit from land conversion and development for the six months to September 2010 amounted to R97 million (2009: R72 million) with a further R4 million in capital profits (2009: R2 million) being realised. During this period, 39 developable hectares (56 gross hectares) were sold in the area north of Durban. Revenue was generated mainly from sales in the Umhlanga Ridgeside and Izinga areas, together with a benefit and associated land sale for the golf course at Zimbali Lakes, which is currently being constructed by Tongaat Hulett’s joint venture partner. In the current economic climate there has been increased attention on controlling development expenditure, with cost savings being brought to account.
The centrally accounted and consolidation items included a gain of R130 million (2009: R82 million) on the recognition of an unconditional entitlement to an employer surplus account allocation in the Tongaat Hulett pension fund.
The tax charge in the income statement includes the attractive Mozambique tax rate for agricultural operations and a lower tax rate in Zimbabwe compared to the first half of the previous financial year.
Finance costs for the first half of the 2010/11 year increased to R231 million from R142 million in the first half of the 2009/10 year. The capitalisation of interest on the Mozambique expansion project ended in the 2009/10 year, with the commissioning having been completed.
Cash inflow from operations, before working capital, was R929 million for the six months to September 2010 (2009: R867 million). Cash flow was adversely impacted by full production of sugar commencing later than expected due to unseasonal rain in Mozambique and the extensive rehabilitation work in Zimbabwe. The September half-year coincides with a peak working capital absorption point in the year. Tongaat Hulett’s net debt at the end of September 2010 was R3,741 billion. This compares to R3,245 billion at September 2009. The last two years have seen significant capital expenditure on the Mozambique expansion and cash being absorbed in the establishment of the expanded cane crops, the replanting of sugar cane and mill refurbishment in Zimbabwe.
The Board has declared an interim dividend of 110 cents per share (2009: 100 cents per share).
Regional sugar prices are now starting to rise in response to the higher world prices. The demand for raw sugar into the European Union is intensifying. Sugar available for export from the current season’s production is limited. The drought experienced in South Africa has brought forward the closure of the sugar mills for the 2010/11 season. The mills in Zimbabwe and Mozambique are likely to close in December for start-up in April and May for the 2011/12 season.
Tongaat Hulett expects to make further progress in growing sugar production towards the target of doubling the 2009/10 production, utilising the available milling capacity, with a simultaneous reduction in unit costs.
Zimbabwe sugar production in the 2010/11 season is expected to be between 330 000 and 350 000 tons (2009/10: 259 000 tons). In the 2011/12 season, production is expected to increase to between 380 000 and 400 000 tons of sugar, with better cane age and yields on a similar number of hectares being harvested, as well as improved sugar extraction in the mills.
In Mozambique, sugar production in the 2010/11 season is expected to be between 185 000 and 205 000 tons (2009/10: 134 000 tons). In order to improve the ongoing profile and age of the crop, some sugar cane originally targeted for milling in the 2010/11 season will now be milled early in the 2011/12 season. Production in the 2011/12 season is projected to be between 270 000 and 290 000 tons of sugar, with an increase in hectares harvested, higher cane yields and improved sugar extraction in the mills.
The drought in KwaZulu-Natal has resulted in the current season’s South African sugar production being more than 100 000 tons below the 564 000 tons produced in the 2009/10 season, notwithstanding the additional 2 000 hectares under cane supplying Tongaat Hulett’s mills. An additional 6 000 hectares of new cane land is currently being planted.
The South African Department of Energy’s Integrated Resource Plan for Electricity now includes bagasse as one of the preferred options for electricity generation. Tongaat Hulett has the potential to generate 189 megawatts, excluding tops and trash, in South Africa.
Agricultural land conversion and development activity is currently focused on development and bulk sale opportunities in the growth corridor north of Durban, including industrial and business park land adjacent to the new international airport and at Cornubia. Industrial land in Durban/eThekwini remains in short supply.
The large South African maize harvest in 2010 and the high maize stock levels from the previous two seasons should maintain local maize prices close to world prices and contribute to the competitiveness of the starch operation. Higher international starch prices are countering the impact of the exchange rate.
Tongaat Hulett’s financial results remain sensitive to movements in the Rand, US dollar, Euro and Mozambique Metical. These impact on the revenue streams, costs incurred and the conversion of profits into Rands.
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 generation. Competition for water and alternative land usages is an ongoing dynamic. Tongaat Hulett optimises land conversion and development at the appropriate times. New dimensions for agriculture are emerging with the continued increase in demand for food products together with a world having to contend with climate change. Agricultural trade regimes are changing, with Africa and the European Union (EU) moving closer as a trade bloc. Opportunities for expansion and growth in Africa are thus emerging. Tongaat Hulett has the established business platform and size to capitalise on these opportunities.