Tongaat Hulett turns to property as drought cuts profits

Construction of the underpass linking Bridge City to Phoenix Industrial under the M25 (Supplied)
Construction of the underpass linking Bridge City to Phoenix Industrial under the M25 (Supplied)

Cape Town – A severe drought cut profit from Tongaat Hulett’s sugar operations by 85% to R124m in 2016, but land development and starch operations helped reduce its overall loss to 18%.

The company confirmed on Monday that its headline earnings per share had dropped 18% to R6.78, as per its May 20 cautionary note. The company generated R16.7bn revenue, resulting in a 13.5% fall in overall operating profit of R1.8bn in the year ended March 31 2016. Its share price was 1% down at R113.03 at 08:45 on Monday.

The company declared a final dividend of 60 cents, reducing the annual dividend 39.5% to 230 cents.

Starch operations increased Tongaat Hulett’s operating profit by 17% to R658m, while its successful land conversion and development strategy increased profit by 34% to R1.115bn.

The starch and development activities were “negated by the impact of the substantial reduction in Tongaat Hulett’s sugar production as a result of poor growing conditions”,  said Tongaat Hulett CEO Peter Staude on Monday.

“The nature of sugar milling and cane growing is such that there is a high proportion of fixed costs,” he said. The South African sugar operations - including agriculture, milling, refining and various downstream activities - dived 100% to R5m, which included a 40% reduction in production volumes.

The big burst in profit came from developing property. Tongaat Hulett has developed or sold 488 hectares in the last three years, resulting in R3bn profit.

“The momentum in Tongaat Hulett’s land conversion and development activities continues to increase, with good progress on numerous activities that increase demand, unlock supply of land and enhance value across the portfolio of 7 970 developable hectares in KZN earmarked for development,” Staude said.

“A major milestone in the past year was to increase the number of hectares with approval for release from agriculture for development …  by some 2 600 developable hectares to more than 3 000 hectares.”

The profit drop from sugar operations came as cane volumes were impacted by lower yields “due to the severe drought in KwaZulu-Natal and poor growing conditions with low rainfall and restricted irrigation levels in Mozambique and Zimbabwe as a result of low water and dam levels”, said Staude. “Electricity availability has, at times, also impacted on irrigation in Mozambique and Zimbabwe.”

The drought in KwaZulu-Natal is expected to continue impacting total sugar production in 2016/17, said Staude.

Weather and growing conditions are masking the progress being made with intensive agricultural improvement programmes, irrigation efficiency and power reliability, said Staude.

In addition, he said the “paradigms around costs that have traditionally been viewed as fixed are being challenged, to mitigate against future potential volume volatility”.

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