Thank heavens for land
revenue grew a pedestrian 2.7% to
R16.2bn (2014: R15.7bn) largely due
to lower sugar sales in Swaziland
and SA. Operating profit crumbled
12% to R2.1bn (2014: R2.4bn) on
the back of price reductions in the
European Union, the knock-on
effect of lower world prices as well
as lower production levels.
The board, probably comforted by
the highest ever cash generated
from operations of R2.5bn (2014:
R2.1bn), increased the dividend
payout to 380c/share (2014: 360c).
Headline earnings fell 17% to 826c/
share (2014: 991c/share).
As world sugar prices continue to
sink, Tongaat’s sale of vast tracts
of land along the KwaZulu-Natal
coastline is coming to the rescue.
for its core sugar operations
remains constrained.
After racking in close to R2bn
(42% of group operating profits)
from land sales over the past two
years, management says it plans
to dispose of a further 3,801ha of
the identified 8,091 developable
hectares in prime locations in the
next five years.
Based on our discounted cash-flow
model and outlook, Tongaat has a
valuation of R132.50 per share (8%
higher than its current market price)
which places it in the hold region.
While the core sugar operations
will likely remain under pressure,
the real estate pipeline provides
a reassuring value underpin for
its shares.
This, alongside the smaller starch
operations which are gaining
momentum, will provide much-
During the year to end-March, land
conversion and developments
realised R1.1bn (2014: R1.5bn)
needed cover in the short to
medium term as the outlook
14
ISSUE 4 – JULY 2015
in revenue at an eye-watering
operating margin of 74%. Group
Despite having substantial nonsugar operations which now
contribute more than half of its
bottom line, the supply-demand
mechanics in the sugar industry
will continue weighing heavily on
Tongaat’s share price movement.
In the medium to long term, the
fundamentals support an increase
in the world sugar price. Current
prices limit new investments
into the industry and may also
push higher-cost producers out
of business. This, together with
gradually increasing consumption
and the emergence of alternative
uses for sugar, should see the world
market closing the gap, which will
be positive for the industry and
for Tongaat.
The long-term viability of the local
industry is also boosted by the
progress made towards finalising
the legislative framework which will
enable the use of sugar in ethanol
and electricity generation. If such
initiatives are implemented they
could take up most of the surplus
local sugar production , which is
currently exported at lower prices.
This will not only provide margin
enhancement but also add a new
operational dimension.
However, reforms in the EU will
end caps on how much its domestic
producers can sell, dampening
prospects of a long-term supply
demand balance. It’s estimated that
the EU will become a net exporter
once the reforms becomes fully
effective, which will be a sour pill
to swallow for local producers who
up to recently have been receiving
favorable prices from the EU.
On a forward PE of 13, Tongaat
looks like a good add for the longterm value investor. In the short to
medium term though the company
seems to have a number of hurdles