Illovo upbeat on sugar price and Zambia output increases

ILLOVO is betting on a recovery in sugar prices and cost-saving initiatives and increased production from its most profitable market, Zambia, to offset drought-related pressures in the year ahead.

The company, which is the largest producer of sugar in Africa, said on Friday the Zambian sugar-alignment and refinery project, which it completed in May at a cost of 526-million Zambian kwacha ($50m), was expected to double sugar output from that region in the year ahead.

Sugar production from Zambia stands at 380,000 tonnes per annum, about a quarter of Illovo’s total sugar production of 1.512-million tonnes in the year to March.

The region, however, contributed more than a third to Illovo’s operating profit of R1.41bn, benefiting from a 22% increase in revenue. Illovo said it had launched structural cost reduction projects and efficiency improvements, as persistent dry weather conditions in its sugar growing markets — SA, Malawi, Mozambique and Tanzania — would further delay the anticipated recovery in sugar output.

Overall sugar production in the 2017 financial year was expected to remain at a similar level to that recorded in the year under review.

"The culture of doing more with less has become further embedded in the business, and should bring meaningful benefits to the group in the short to medium term," Illovo said.

Depressed export revenues that stemmed from the plunge in world sugar prices to seven-year lows in 2015 are not expected to pose a risk for sugar exporters, such as Illovo and Tongaat, in the year ahead.

Economists have forecast a deficit in the global sugar market as Brazil, the world’s largest exporter, faces wet weather patterns that could disrupt yield and shipments of sugar.

Asian producers also expect lower output due to drought, which should sweeten sugar prices and result in increased revenues.

"The recent recovery in world sugar market prices is encouraging ... this price recovery bodes well for the year ahead," Illovo said.

The company also expressed its optimism about the growth of its downstream business, where it produces value-added sugar products used in alcoholic beverages, cough syrups, methylated spirits, solvents as well as thinners.

Operating profit from downstream activities grew from 16% to 24% at the end of March 2015, as its output at two alcohol production units in SA and one in Tanzania improved, and as output at the distillery and lactulose plant at Merebank climbed to new records

"It’s part of Illovo’s strategic intent to optimise the return on every stick of cane," the company said.

Illovo’s largest shareholder, Associated British Foods (ABF), has made a takeover offer for the group. Approval of this deal, which is subject to conditions, will see the local sugar producer delisted from the JSE.

UK-based ABF, a diversified retailer with sugar operations in the UK, Spain and China, has held a 51% stake in Illovo for the past 10 years.

It plans to buy the shares in Illovo it does not own at R25 per share.

On May 25, Illovo said shareholders had approved the deal at its annual meeting. As a consequence of the takeover process, shareholders will not receive a dividend this year.

The group said the buyout included a deal not to pay out any profits.