SA’s biggest sugar producer, Tongaat Hulett, which is scrambling to keep its turnaround on track following the fallout of an accounting scandal two years ago, has negotiated a new deal with lenders to avoid a default.
The embattled group, valued at R1bn on the JSE, needed to reduce debt by R8.1bn by the end of March, but it has asked lenders to push back the deadline by six months. It cited production difficulties in SA, hyperinflation in Zimbabwe and problems in getting asset sales over the line during a pandemic.
Tongaat, however, said it was encouraged by support from its lenders, while robust demand for sugar in SA and Mozambique were providing reasons for optimism for a group that was still able to slash net debt by 42% to R6.57bn in its year to end-March.
Management’s focus remained squarely on reducing debt, CEO Gavin Hudson told Business Day on Tuesday, which remains Tongaat’s “achilles heel”. All options for this remained on the table, including further asset sales, an equity injection, or tapping shareholders, he said, with the group’s turnaround still on track.
The company, once one of SA’s most recognisable blue-chip stocks, has seen its share price battered by allegations of irregular accounting practices. It has implemented a turnaround strategy that involves cutting debt through selling assets, including the R5.26bn sale of its starch business to Barloworld.
Hudson has been trying to steady the ship since taking over from Peter Staude in February 2019. Staude and other former executives are accused of being complicit in the mismanagement of the company, after a PwC report sought to uncover the root causes of problems besetting the company.
Hudson said Tongaat had now done all it could in terms of co-operating with regulatory authorities and investigators, adding the group’s understanding is that matters were “well advanced”. The group had co-operated as much as possible, he said, but it was now up to regulators, the law and courts.
Debt woes
Tongaat had been struggling with a hefty debt pile even before Covid-19 struck, and borrowing had more than doubled over six years to R11.4bn at the end of March 2019. Total borrowing stood at R7.2bn at end-March, and Tongaat had reached 75% of lenders’ initial debt reduction target.
Asset sales during the year to end-March included the sale to Barloworld as well as its packaging business in Namibia and its agricultural operations in eSwatini.
Covid-19 hampered property sales, but Tongaat remains one of SA’s largest landowners, with holdings of R8.3bn at the end of March.
Hudson said the group had looked at how to package its land to make it more commercially attractive, and had been seeing high levels of demand, at least until recent violent protests in Gauteng and KwaZulu-Natal, which has also shuttered operations and mills in the latter for two days.
Revenue from continuing operations, or excluding the starch operation, decreased 3% to R14.92bn to end-March, but the group’s headline loss worsened to R1.11bn, from R285m previously.
Two-thirds of the effect on headline earnings, a widely used profit measure in SA, was due to hyperinflation in Zimbabwe, which, for example, weighs on the value of assets there, such as sugar cane. Annual inflation in Zimbabwe peaked at 838% in July 2020 and has since fallen to 241% in March 2021, after the introduction of foreign currency reforms, the group said.
SA sugar operations were marred by problems at its Durban refinery as a production ramp-up led to a decrease in efficiency. Hudson said after two weeks of maintenance the issues had been resolved and processes improved.
Sugar demand
Tongaat generates 42% of its revenue in SA, 41% in Zimbabwe, and 12% in Mozambique, and had ramped up output at its Durban refinery in the wake of increased local demand.
Local market sales were up 22%, which the group said could be a combination of increased demand from staying at home, as well as the government’s encouragement — via the sugar master plan — to buy local. Tongaat had also been pursuing a strategy of selling directly to retailers, rather than going through wholesalers.
In Zimbabwe demand was steady, while in Mozambique revenue grew 10% year on year and operating profit almost doubled as Tongaat benefited from the highest demand it has seen in a decade.
Tongaat’s shares were trading 2.93% lower at R7.28 on Tuesday.
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