Durban - Illovo Sugar will almost certainly be asking shareholders for funds this year as it seeks to reduce its high debt levels and finance ongoing expansion plans.
It's likely to be a substantial rights issue.
New MD Graham Clark said it's difficult to say how much capital Illovo will seek to raise, as the rights issue has not been finalised. But he pointed out that Illovo has "a heavy capital expenditure bill of just over R4bn".
News of the rights issue came on the back of strong annual results, with headline earnings per share up by 23% and a 24% increase in the dividend.
But net borrowings have grown from R1.17bn to R2.41bn, leaving Illovo with gearing at 70% (39.9% in the previous financial year).
"In the current environment a heavily geared situation is not ideal. We want more financial security. A Sens (Stock Exchange News Service) announcement will probably be released next month with details on the terms and price of the rights issue, after which we will seek shareholder approval," said Clark.
Associated British Foods, the London-listed group which holds 51% of Illovo, has indicated its support for the rights offer.
Earlier capital spending in various African countries will start to pay from October 1 this year. Reform of the European Union (EU) sugar regime has been completed and will allow virtually free access for exports from many of Illovo's operations in Africa.
Strong rand affects EU boon
These markets were previously protected by EU export subsidies and farm support for the union's beet growers.
The net effect is that about 6 million tonnes of sugar has been taken out of the EU market, moving it from a surplus into deficit. The gap will be made up by exports, much of these from African countries.
"It is a nice opportunity for us in the year ahead, but the big worry is the currency," said Clark.
"The strong rand affects our exports, so we don't expect export earnings to rocket in the current year."
Clark said Illovo will continue to focus on the SA domestic market, where its gets the highest prices (ex-factory) for sugar, as well as regional markets in Africa.
The effect of a strong rand is also one of his main concerns for the current financial year.
"We will also have additional finance costs and a higher tax rate, having worked through the tax benefits we were getting in Zambia. It's still early days but I think it will be a tough year."
Illovo's share price has proved resilient in the falling local equities market, down by about 13% over the past year. It has gained 12% in the past six months.
- Fin24.com