Shares of sugar giant Tongaat Hulett booked their biggest one-day drop in six months on Wednesday, crashing by almost a fifth as investors digested a weak operational performance and news that it may ask shareholders for an additional R1bn in cash to shore up its balance sheet.
Tongaat said in a trading update shortly before markets closed on Tuesday that production had fallen by 9% to 463,000 tonnes in its year to end-March, while the floods in its home province of KwaZulu-Natal forced it to close sugar mills for the past 10 days.
Production is set to resume only when farmers are able to access waterlogged fields to harvest cane, it said, adding that its SA business’s cash flow performance in the quarter to end-March was “considerably worse” than was forecast when a debt refinance was concluded in December.
As a result, Tongaat, which is now valued at less than R400m on the JSE, said it would have to increase the size of a shareholder-approved R4bn rights offer by R1bn to fix its lopsided capital structure.
Tongaat’s shares ended little changed on Tuesday because the news came 10 minutes before the market close. But they plummeted when trade resumed on Wednesday, crashing 22.28% in afternoon deals before trimming losses to close 18.75% lower at R2.99.
That level was last seen two years ago at the height of the pandemic-induced stock market rout and it was the worst one-day performance since November 2021, when Tongaat first signalled a desire to tap shareholders for cash injections.
Tongaat has mapped out a survival plan under CEO Gavin Hudson to recover from an accounting scandal that exposed holes in its balance sheet. The plan includes selling assets such as its starch business, which was offloaded to Barloworld in 2020, and some of its property assets as well as tapping shareholders for cash.
But the plan to undertake equity capital raising has annoyed some investors, with some saying Tongaat should rather pursue lawsuit claims to raise the money. Others have voiced concerns about Magister Investments, the little-known Mauritius-based agricultural investor that has agreed to underwrite half of what was then a R4bn fundraising.
Chris Logan, chief investment officer at Opportune Investments and a long-time analyst of Tongaat, raised questions about whether major shareholders would be supportive of a company that did not have access to other revenue streams after selling the starch business. “There is a question mark over whether SA sugar is even viable,” Logan said.
“Some industry players say that it is not, and that these mills should close,” he said.
This may leave banks swapping debt for equity as their best option, he said.
The company, which produces about 43% of SA’s sugar and is one of the biggest employers in KwaZulu-Natal, has seen its shares lose 97% of their value over the past five years, partly due to investors tiring of subpar performances under then long-term CEO Peter Staude.
In 2019, an investigation found that managers had overstated profits and the value of assets in what turned out to be SA’s second-biggest corporate scandal, surpassed only by the fraud discovered at Steinhoff two years earlier.
Update: April 20 2022
This article has been updated with additional information.
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