Tongaat-Hulett group: Highlights, Salient Features and Results
19 February 2007
HIGHLIGHTS, SALIENT FEATURES AND RESULTS FOR THE YEAR ENDED 31 DECEMBER 2006;
- Headline earnings increased by 51% to R703 million (2005: R466 million)
- Operating profit increased by 40% to R1,02 billion (2005: R730 million)
- Annual dividend up 38% to 550 cents per share (2005: 400 cents per share)
- Unbundling and listing of Hulett Aluminium
- BEE equity participation in Tongaat-Hulett and Hulett Aluminium
Tongaat-Hulett Group CEO Peter Staude said “I am pleased to report another successful year, with an increase of 51% in headline earnings. The fundamental profit drivers for our operations remain soundly in place. We are pleased with the progress made in the unbundling and listing of Hulett Aluminium (Hulamin) and the introduction of broad based Black Economic Empowerment partners in both Tongaat-Hulett and Hulamin.”
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Fundamentals in place
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Staude says that the Tongaat-Hulett Group continues to follow a focused investment approach that has resulted in the implementation of projects that have provided attractive returns and generated earnings growth. The Group, as demonstrated in the rolled products expansion at Hulett Aluminium, has developed the competence and expertise to implement projects of a critical scale. The past investments in its operations have established a solid asset and business base, ensuring it is well placed to take advantage of an improving global environment.
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Tongaat-Hulett is well positioned to take advantage of being a low cost sugar producer with preferential market access and to benefit from the global drive to renewable energy through bio-fuels and electricity cogeneration. The imminent R1,3 billion expansion of the Mozambique operations and the recent completion of the Muda dam near Mafambisse are indicative of Tongaat-Hulett being poised to capitalise on growth opportunities. The recent acquisition of 50,35% of Hippo Valley Estates increases the ability to capitalise on the synergies with Triangle Sugar, particularly when the socio-economic environment in Zimbabwe improves.
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As an agri-processor in Southern Africa, the significance to Tongaat-Hulett of agriculture and land is increasing rapidly. Land management strategies have been implemented to ensure that land values and the synergies between sugar and maize processing operations and property development are optimised. Tongaat-Hulett has the expertise and competence to manage the dynamics of optimising cane supplies, while conditions favour sugar production, and to unlock substantial value from its land holdings when circumstances support property development. In line with a global escalation in coastal land values and the continued growth of the economy in the Durban to Richards Bay development corridor, there is ongoing demand and development pressure on Tongaat-Hulett’s land. The prime quality, location and value of Tongaat-Hulett’s land are widely acknowledged and Moreland has continued to capitalise on the strength of the property market and its development expertise in unlocking this value at an escalating pace.
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Alan Fourie, MD of Hulett Aluminium said “Hulamin continues to experience strong demand, particularly in the high value niche markets that it is targeting. It expects to continue growing its volumes which, coupled with further improvements in its product mix and operating costs, will enable it to continue the growth momentum in operating earnings.”
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Outlook – Creating shareholder value and introducing broad based Black Economic Empowerment
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Peter Staude explained that the Group, like many South African entities, was a diversified industrial business with interests in aluminium, building materials, consumer foods, cotton, edible oils, industrial and commercial catering, mushrooms, sugar and agricultural land development, starch and glucose, textiles and transport. Since the early nineties the Group has systematically divested from a number of these businesses and refocused its operations, leveraging the synergies that exist between its agri-processing operations and prime agricultural land holdings. Capitalising on the investments in its operations and a solid platform of earnings growth, a strategic review of the Group’s operations saw the announcement in 2006 of the proposed unbundling and listing of Hulett Aluminium to create two separately listed, focused entities.
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A detailed cautionary announcement was made on 14 December 2006, which provided the proposed transaction framework to further enhance shareholder value, leading towards the creation in 2007 of two separately listed, focused companies:
- Tongaat-Hulett, an agri-processing business which includes integrated components of land management, property development and agriculture; and
- Hulett Aluminium (Hulamin), an independent niche producer of aluminium rolled, extruded and other semi-fabricated and finished products.
This will be achieved by the listing of Hulamin on the JSE followed immediately by the unbundling of Hulamin by Tongaat-Hulett to its shareholders. It will be accompanied by the simultaneous introduction of broad based Black Economic Empowerment (BEE) equity participation in both Tongaat-Hulett and Hulamin. The capital structures of both businesses will be optimised, including facilitating the BEE equity participation, a R500 million share buy-back and retaining the balance sheet capacity to take advantage of growth opportunities.
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The unbundling and listing of Hulett Aluminium has created the opportunity for the introduction into Tongaat-Hulett of BEE equity partners representing disadvantaged communities surrounding its property developments and the small scale cane grower communities supplying the four South African sugar mills. Similarly, the BEE partners in Hulamin include broad based groupings, mainly representing the communities in Pietermaritzburg.
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These transactions will have a considerable impact on the headline earnings to be reported in 2007. Once the requisite agreements have been signed, the financial effects have been finalised and the date of unbundling and listing Hulamin established, a final announcement will be made and the circular and pre-listing documents posted to shareholders, which is anticipated to be in May 2007.
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The fundamental profit drivers remain in place in both Tongaat-Hulett and Hulamin. Profit from operations of both these entities is expected to grow in the year ahead.
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COMMENTARY ON 2006 ANNUAL RESULTS
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Headline earnings increased by 51% to R703 million in 2006, compared to R466 million in 2005. This increase was due to a 40% growth in operating profit to R1,02 billion (2005: R730 million), a reduction in finance costs and an improvement in the result from the Xinavane mill, in Mozambique, which is equity accounted as an associate.
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Sugar
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Tongaat-Hulett Sugar’s operating profit increased by 42% to R356 million (2005: R251 million), including dividends from Triangle Sugar in Zimbabwe. An increase in domestic and export realisations more than offset lower sales volumes. In South Africa, domestic sales were 469 264 tons (2005: 474 387 tons) with raw sugar export volumes at 316 104 tons (2005: 386 876 tons) as a consequence of lower production. The 2006 South African crop was the second lowest in 10 years, mainly due to adverse growing conditions impacting on cane yields and quality. This resulted in utilisation of only 72% of installed cane crushing capacity. The 2006 results include an effective world sugar price for exports of 12,8 US cents per pound at an average R6,56/US dollar (2005: 9,0 US cents per pound at R6,58/US dollar). The drive to reduce manufacturing and overhead costs is ongoing, as are additional cane procurement initiatives. Dividends of R61 million (2005: R19 million) were received from Triangle Sugar in Zimbabwe.
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Total sugar production in 2006 was 1,067 million tons, which was 8% below the 1,160 million tons produced in 2005. Production in South Africa was 666 000 tons (2005: 753 000 tons). In Swaziland, Tambankulu Estates produced the raw sugar equivalent of 55 000 tons (2005: 56 000 tons). Triangle’s sugar production increased 1,7% to 240 000 tons despite the difficulties of operating in Zimbabwe. In Mozambique sugar production at Xinavane increased to 65 000 tons (2005: 61 000 tons) while Mafambisse decreased to 41 000 tons (2005: 54 000 tons) due to extreme drought conditions placing pressure on irrigation.
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Property
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Moreland achieved operating profit of R325 million (2005: R231 million) which was an increase of 41%. Tongaat-Hulett’s prime land, the well-established property development platform and continuing solid market demand are being capitalised upon. Significant contributions were achieved from the commercial, industrial and resorts portfolios, including RiverHorse Valley Business Estate, Umhlanga Ridge Town Centre, the Marriott International 5-star Hotel site in the Umhlanga Triangle and Zimbali Coastal Resort. Development approvals have been secured for Izinga and Kindlewood residential developments. Other new phases and developments likely to be launched in 2007 include Zimbali Lakes, Sibaya at Umdloti, Umhlanga Triangle Ridgeside commercial precincts, Umhlanga Ridge Town Centre residential precincts, Bridge City, Kindlewood at Mt Edgecombe South and Shongweni.
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Starch and glucose
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African Products’ operating profit reduced to R96 million in 2006 (2005: R112 million) under difficult trading conditions. Starch and glucose selling prices were under pressure from imports and maize input costs were higher, resulting in depressed trading margins. Maize costs rose towards import parity levels as a result of the smaller 2005/6 crop. Sales volumes in the domestic market increased by 3,7% with growth in excess of 13,5% being achieved in value added spray dried glucose. Overhead cost increases were contained to levels below inflation for the third consecutive year, as the benefits of the organisational restructuring process were achieved. World starch and glucose markets saw significant changes in the last quarter of 2006 with international prices increasing by over 30% in certain instances driven by a 60% increase in world corn prices. The effect of these changes combined with a move in the South African 2006/7 season maize price towards export parity levels should benefit African Products during the second half of 2007. African Products has priced 35% of its maize requirements for 2007, following its back-to-back pricing model.
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Aluminium
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Hulett Aluminium grew its operating profit by 32% to R422 million (2005: R319 million), with the Group’s share being 50% thereof. Sales revenue exceeded R5 billion for the first time. Sales volume growth continued and record annual rolled products sales of 183 000 tons (2005: 173 000 tons) were achieved. Local market sales of both extrusions and rolled products grew firmly, with increases of 15% and 11% respectively. Strong sales into the distributor, automotive and transport sectors were achieved. The higher LME price of aluminium continued throughout 2006, resulting in reductions in rolling margins while benefits accrued from the metal price lag effect on cost of sales. Manufacturing costs increased due to sharp rises in metal and energy costs, and from spot purchases of LP Gas during the SAPREF supply disruptions, which also had a significant negative impact on volumes in 2006. Benefits are expected in 2007 from further volume growth, improved product mix and cost controlling actions. In October 2006, a R950 million rolled products expansion project was approved, to grow annual capacity to 250 000 tons and increase output of high margin products, including light gauge foil and heat-treated plate. Project contracts totalling R63 million have been concluded.
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Peter Staude
Chief Executive Officer
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Amanzimnyama, Tongaat
19 February 2007
