Investor interest growing as business rescue nears end

The impending sale of Tongaat Hulett, a prominent sugar conglomerate, has garnered significant attention as the company continues to grapple with a debt burden of approximately R7 billion. Under business rescue since October last year, Tongaat Hulett is now on the cusp of determining its strategic equity partner. Among the leading contenders are Kagera, Terris, and Mozambican RGS Company. As the sale outcome eagerly awaits resolution, its ramifications extend beyond Tongaat Hulett's future, impacting Hippo Valley and the broader African sugar industry.

Initially, Kagera Sugar of Tanzania emerged as the favored bidder for Tongaat Hulett, with a deal potentially worth over R3 billion. However, recent developments have introduced RGS Group and the Terris Consortium, spearheaded by South African tycoon Robert Gumede, as new contenders for the partnership. These potential buyers signify a diverse range of alliances that could shape the future landscape of Tongaat Hulett.

RGS Group, known for its involvement in sugar, tea, maize, and flour production, has tabled a substantial R6 billion proposal to acquire Tongaat Hulett. Notably, RGS Group has expressed openness to collaborating with South African partners, indicating its desire to establish a mutually beneficial relationship. Conversely, the Terris Consortium, comprising Gumede's Guma operation, Remoggo, Almoiz, and Terris Sugar, has questioned their initial exclusion from the selection process, seeking clarification from the Industrial Development Corporation (IDC) and the business rescue practitioners.


Challenges and Opportunities in the African Sugar Industry:

The African sugar industry faces a myriad of challenges, hindering its full potential for growth. One notable obstacle is the persistent supply shortage in countries such as Congo, where the demand for sugar outstrips local production capabilities. Additionally, the arduous task of transporting sugar and its raw materials to the market remains a significant hurdle, impeding efficient distribution networks throughout the continent. In a recent interview with Equity Axis post Hippo Valley’s AGM CE Aiden Mhere highlighted this opportunity that arises for the industry as well as opportunities to satisfy the European quota on sugar supply from less developed nations.

However, amidst these challenges lie ample opportunities for the African sugar industry to capitalize on. The establishment of a new sugar milling plant in Zimbabwe's southeastern Lowveld region, which the government has invited bids for, presents a notable prospect. This initiative aims to foster competition, enhance productivity, and provide alternative milling options for farmers. It is anticipated that this endeavor will create a more vibrant and dynamic market environment, boosting the industry's overall competitiveness.

Furthermore, African countries possess vast tracts of arable land and favorable climatic conditions, rendering the continent conducive for sugar cultivation. Leveraging these advantages, coupled with strategic partnerships and investments, African sugar producers can tap into both domestic and international markets, driving economic growth and development.

With the imminent decision on Tongaat Hulett's strategic equity partner, the fate of Hippo Valley and the wider African sugar industry hangs in the balance. The involvement of multiple bidders, including Kagera, Terris, and Mozambican RGS Company, underscores the diverse possibilities that lie ahead for Tongaat Hulett. Simultaneously, the African sugar industry confronts challenges such as supply deficits and logistical complexities. Yet, within these challenges, opportunities abound, as evidenced by Zimbabwe's endeavor to establish a new sugar milling plant. By harnessing the continent's agricultural potential, forging strategic alliances, and addressing logistical bottlenecks, the African sugar industry can overcome obstacles and emerge as a formidable player in the global market, driving economic progress across the continent.

Is Tongaat a unique and priced asset?

Tongaat which has a total processing capacity across its sugar plants in the Southern Africa region of 1.5 million tonnes, presently produces 1.2 million tonnes of sugar making it the second largest sugar producing company in Sub Saharan Africa after Illovo. It is unlikely that its combined processing and production capacity together with any of its current bidders, will take it to first place, replacing Illovo.

 But Tongaat remains with the advantage of retaining operations in some of the best climate areas in Sub Saharan Africa. This allows for high quality production and relatively firmer yields, which help drive profitability. Combined with the advantage of low production costs, a terrain induced advantage, the relative profitability of the sugar producing operations is largely unmatched on the continent. It however, closely follows that of Illovo which is also highly concentrated in Southern Africa. Southern Africa is one of the world’s most cost-competitive producers of high-quality sugar. According to independent surveys of the costs of production of more than 100 global sugar industries, the Southern African sugar industry consistently ranks among the top 10. Its excellent export infrastructure, world-renowned agricultural and industrial research platforms, and efficient industry organisation are key drivers of excellence.

The Prime Land Bank

What Tongaat has also done right is to diversify its asset base by acquiring land which is suitable for prime housing development in KwaZulu Natal. Tongaat Hulett owns 16400 hectares of land 9600 hectares being prime developmental land in KwaZulu Natal. Tongaat Hulett’s portfolio of prime land near Durban and Ballito in KZN, South Africa, has an indicative fair value of R11 billion. This significant portfolio of developable hectares of prime land has the potential to be converted out of sugarcane into urban land as urban development expands and the demand arises. The indicative developed value of this portfolio is estimated at R35 billion. The land buffer can either be leveraged for diversification once the company is fully reconfigured on the right growth trajectory, or be used to unlock debt or be partially disposed of to finance operational reconfiguration.

Latest Released Results

For the 12 months period to March 2022, Tongaat Hulett recorded strong local sugar demand and good market share maintained across all geographies. Net finance costs of R1.2 billion were reduced by 25%, due to lower debt levels and favourable exchange rate movements. Dividends and management fees received from Zimbabwe decreased by 65% to R139 million. Cash flow from operations deteriorated by R1.8 billion. Recoveries were dampened by lower raw sugar production and the continued negative effects of hyperinflation and currency devaluation in Zimbabwe. Property transactions were constrained by COVID-19 pandemic conditions and social unrest.

Civil unrest negatively impacted profits of the South African sugar operation by R158 million. There were also restatements arising from a review of technical accounting matters following the transition to new auditors. Contributions from the disposal of starch, Namibia and Eswatini operations in the prior year were intergrated. The company also benefitted from lower borrowings following asset disposals offset by remaining operations continuing to utilise cash. Overall, the company reported a Basic loss per share of 790 cents. Revenue was unchanged at R15.5 billion while an operating profit of R584 million (FY21: Profit R1.4 billion restated) was achieved. Adjusted EBITDA* came down 67% to R591 million (FY21: R1.8 billion restated). Free cash outflow of R297 million (FY21: cash inflow of R1.5 billion restated) was also realised. No dividend was declared for the financial year.