Drought dries up Illovo’s half-year profits

Cape Town – South Africa’s drought, pressure on export prices and reduced demand in Malawi resulted in Illovo Sugar [JSE:ILV] cutting its half-year profit by nearly 60% on Monday.

Revenue fell by 7% to R5.489bn and weighed on the operating margin, which fell from 23.5% to 16.1%. Operating profit decreased by 36.7% to R881m, while headline earnings per share (Heps) declined by 58.1% to 71.7 cents.

Illovo expects its Heps for the year ending March 31 2016 to be between 25% and 45% below the prior year. Due to the loss on the closure of the furfural-based nematicide business, earnings per share will reflect a decline of between 50% and 70% compared to the year ended March 31 2015.

“The business challenges of regional drought, sustained pressure on export sugar prices and reduced demand for sugar in Malawi continue to weigh on the business performance,” said Illovo managing director Gavin Dalgleish in a statement.

“Nonetheless the downstream business delivered a strong operational and financial performance, while the group continued to improve the sales mix away from the EU by growing regional sales volumes in key markets.

“Cost-reduction, efficiency improvement and the culture of doing more with less has become further embedded in the business.

Dalgleish added that forecasts suggest the global sugar balance will move towards a production deficit in the current year and this, added to speculation in the market, has contributed to world market prices recently recovering from seven-year lows.

“Initiatives to improve the sales mix and to develop regional markets will benefit the full year earnings, whilst structural cost reduction programmes will continue to build on the good results achieved to date,” he said.

In South Africa, the drought has reduced the total cane supply to the group’s factories by 20% on a comparable year-on-year basis. Flood damage suffered in Mozambique during January 2015 further decreased late season cane supply.

World sugar prices reached seven-year lows during August 2015, which in turn impacted regional prices. While the decline in EU market prices appeared to level off during the period under review, the weaker euro continued to impact on profitability, the company said.

While volatile currency fluctuations will continue to challenge sugar market conditions, the recent recovery in world market prices is encouraging, it said.

A recovery in sugar production during the 2016/17 season is expected, but will be limited by the continuation of the drought in South Africa and is dependent on a return to normal summer rainfall levels across the other southern African operations.

The consistent ongoing growth in world and African sugar consumption, the expectation of a global production deficit, a shift in sales mix away from the EU and operational efficiency improvements signal improved medium-term prospects, it explained.

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