Tongaat Hulett stock tanks on debt reprieve talks, sugar production loss

Tongaat Hulett’s shares fell as much as 27% on Thursday, 29 April, after it said it was negotiating another reprieve on its debt repayment targets and warned of production losses at its SA sugar operations.

CEO Gavin Hudson, who took over in early 2019, has given the sugar producer and land owner a major overhaul after financial mismanagement under its previous management had a devastating impact across its business. 

Last July, the JSE hit the company with the maximum fine possible after it breached listing requirements by publishing incorrect, false and misleading financial information to the detriment of investors.

Under Hudson, Tongaat has been disposing of non-core assets to help it pay down debt as part of a financing arrangement agreed with funders in December 2019. Late last year it sold its starch business to a subsidiary of Barloworld, using the R4.54-billion it received to reduce its gearing.

While it met a 31 March deadline to repay at least R6-billion of its SA debt, it failed to meet a revised milestone to sign cumulative debt reduction agreements amounting to R8.1-billion. 

In order to prevent a default, its lenders amended the milestone measurement date to 30 April as it had only signed agreements totalling R6.56-billion by the end of March. It said it was now in advanced negotiations to lower the targeted amount from R8.1-billion to R6.4-billion. 

However, it still has to reach the R8.1-billion target by the end of June.

“As certain of the facilities mature on 30 September 2021, negotiations with the South African lenders have commenced to implement a debt refinance and a further announcement will be made once this has been agreed,” Tongaat said.

Meanwhile, the company said a large sugar production loss would have a material, but not as yet fully quantified impact on the full-year financial performance of its SA sugar operations.

To honour its commitments to supply an increase in demand for refined sugar, the company said it became necessary to keep its refinery running. That meant delaying the planned annual maintenance shutdown for the 2021 financial year to the off-season period. Consequently, actual production of refined sugar for the 2021 financial year increased by 40% to more than 450,000 tons, against a previously planned production level of 304,000 tons.

Unfortunately, the extra pressure of the production ramp-up on the refinery led to increased production costs and process inefficiencies and resulted in a 25,000 ton sugar production loss.

“Significant steps have been taken during the recent maintenance shutdown to rectify and enhance the refinery processes and controls in order to prevent a reoccurrence,” the company said.

Tongaat advised shareholders to exercise caution when dealing in its shares until the amount of the full impact of the loss had been quantified. 

One market-watcher said there were many things Tongaat couldn’t control, including international sugar prices, cyclones, weather, the rand and the local economy.

“The one thing they control is the refinery process, which they obviously messed up,” he said.

“In Tongaat management’s defence, they’ve made big improvements thus far. This is their first major misstep. Recoveries from major downturns are seldom smooth.” DM/BM