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Illovo Sugar: In a sticky situation

The combination of drought effects, low raw sugar prices, and currency ructions knock profitability.

While food producers have faced a tough season, mainly being battered by harsh drought conditions across SA and throughout the continent, sugar producers have also not been spared.

Illovo Sugar could attest to this, as there have not been sweet times in recent months for Africa’s largest sugar producer. 

The company’s profitability continues to be hammered by low export sugar prices, currency volatility, declining demand for sugar and the severe drought which has hit large parts of SA’s agricultural land, with the exception of the Western and Eastern Cape.

The tough market has resulted in Illovo’s group revenue reducing marginally 0.7% to R13 billion, translating to a decline of 14.8% in its operating profit to R1.4 billion for the year to March 31 2016. Illovo’s operating margin fell to 10.7% from the previous years’ 12.5% and headline earnings per share declined by 36.5% to 113.6 cents.

Perhaps where drought effects are more felt is in its sugar production, which fell by 14% to 1.5 million tons from last years’ 1.7 million tons. The persistent dry weather conditions across the region and poor summer rainfall are expected to delay the sugar production recovery during the 2016/17 harvest season.

Exacerbating the blow is that the international price of raw sugar has been steadily declining since August, where it reached seven-year lows of US$ 11 cents/pound, putting sugar exporters under pressure. 

But despite the problems Illovo faces, MD Gavin Dalgleish is optimistic on the outlook. “The recent recovery in world sugar market prices is encouraging,” said Dalgleish, “with prices recovering from seven-year lows breaking the US$ 15 cents/pound resistance level in March.”

The recovery was largely driven by an expected world sugar production deficit in 2016 and strengthening of the Brazilian real. Brazil is considered to be the biggest producer of sugar in the world, and the weakness of the Brazilian real against the dollar makes sales of dollar-denominated sugar more valuable in real currency terms.

“Whilst this price recovery bodes well for the year ahead, the August 2015 low had the effect of depressing regional export prices,” said Dalgleish.

Exports business

Illovo’s downstream business, where its sugar production is sold into high-value and niche markets on the continent and internationally, continues to act as a buffer to its profit decline. Its downstream business contributed 24% to operating profit, compared with 16% in the previous year.

In recent years, SA’s sugar producers have been shifting their focus to export markets in a bid to diversify their earnings in rand hedge markets.

Illovo has been steadily shifting export sales from the European Union to regional African markets, where there is an insatiable demand for sugar. Also, a weaker euro, which has impacted the company’s profitability over several years, has prompted it to look for new growth avenues.

Individual countries in the continent are increasingly becoming important in contributing to Illovo’s operating profit.  There is first Zambia at 35%, then Malawi making up 32% (the previous year it was top of the list at 38%), Tanzania (16%), Swaziland (10%), SA (8%) and Mozambique (-1%).

There is also some upside for Illovo’s investments beyond SA– as the increase in import tariffs in Mozambique and weakening of the Malawian kwacha is expected to benefit earnings in the year ahead.

Turing fortunes around

Illovo’s fortunes might be turned around by UK-based diversified food and retail group Associated British Foods (ABF), which is buying out the company. ABF, which operates clothing retailer Primark and is a sugar producer in the UK, Spain and China, already owns a 51% stake in Illovo and is looking to buy the remaining shareholding held by minorities.  

The R5.6 billion cash-funded deal will ultimately lead to the delisting of Illovo from the JSE.

ABF finance director John Bason has repeatedly said that the company has the capabilities to help Illovo through its troubles as it already has an extensive sugar production pedigree.

No dividend was declared to shareholders.

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