Tongaat in trouble

SOUTH Africa’s Tongaat Hulett (Tongaat) is in a precarious position as it faces a negative cash flow in the current trading period due to its inability to recieve dividends from its Zimbabwean and Mozambique operations, an equity analyst has said.
This comes as the company also faces various funding constraints due to various factors.
The Hippo Valley Estates parent’s operating profits of R530 million for the half year ended September 30, 2018 barely covered its net finance costs of R430 million during the same period.
Still, this balance was assuming that the group can successfully extract cash from its Zimbabwean and Mozambique operations which, at this point seems unlikely in the short-term.
“The likelihood of the group’s H2:19 period generating positive free cash flow is low and the draws on funding make the group’s balance sheet particularly risky right now,” Keith McLachlan, a South African equity analyst said in a research note last week.
The group’s half year results indicated that it can utilise borrowing facilities of a further R1,8 billion and that it may be able to sell some of its land at discounts for quick cash.
McLachlan, however, says the plausibility of these fund raising avenues is limited because of various factors that have made the company’s balance sheet significantly risky.
“The sugar price was circling the drain, making the dominant sugar operations in Tongaat break-even, at best, and loss-making at worst.
“The group’s capital expenditure bill has been rachetting upwards from both replanting of recent drought-devastated cane fields and a R550 million sugar refinery in Mozambique,” McLachlan said.
“The Expropriation Without Compensation risk in South Africa has also collapsed the land segment’s sales,” he added.
He said the bound cash flows were likely to start “to become ring-fenced and worthless to the group’s South African head office”.
“Likewise, you can start to exclude these from profit contributions from the group’s gearing ratios,” McLachlan said.
He said whatever funding that remains available to the group could disappear very quickly irrespective of profitability, with R500 million going into Mozambique “and possibly never coming out”, while Zimbabwe’s operations continue to fail to expatriate cash flows as the sugar operations continue to report losses and requiring capital expenditure for root-planting.
“Suddenly, Tongaat could find itself flying too close to the sun and may even need a rights issue or some other capital raising mechanism to buy itself time.
“I see a material risk in this company at this point in the cycle,” McLachlan said.
The group’s shares closed trading on Friday at R50,02 on the Johannesburg Stock Exchange.
At a market capitalisation of R6,8 billion, the group is currently trading at a fraction of its sugar and starch operations’ replacement cost which is estimated at between R10 billion to R20 billion.
The group is even trading at below its land portfolio’s value which is estimated at R10 b