Johannesburg - The rand is unlikely to strengthen significantly, a development that would put a spring in the step of sugar producer Illovo Sugar, say analysts.
They were commenting in the wake of an 36% increase in headline earnings for Illovo, which said on Thursday its high-margin Malawian operations and general buoyancy in sugar production had more than offset a dry SA winter crop.
For the six months to end-September, Illovo reported a 30% rise in revenue to R4.469m and a 31% increase in operating profit to R687m. Its net profit for the period went up by 35% to R385.5m.
But the market was non-committal. Illovo Group's share price on the JSE was a shade off at 2 347 cents, but even its 0.13% decline mid-afternoon proved to be less brutal than the 3.33% fall in the JSE's all-share index.
Malawi ops add frosting
Having its Malawi operations is a sweet deal, as the climate is one of the most favourable on the continent. It contributed 45% to Illovo's operating profit, which is significantly higher than the 16% contribution from the SA operations.
Analysts said that the Malawian operation looked like "a dream" for Illovo, possibly because of its ideal growing conditions.
"In SA you can't just grow sugar in your back yard - it's too cold. But Malawi is much warmer; it has the right climate to grow sugar," said Sasha Naryshkine, a market watcher from Vestact.
It's no wonder that Malawi would want to increase production. In August, media reports said the Malawi operation had already injected 1.5 billion kwacha (Malawi's currency, which is trading at 14.74087 to the rand) for the year-to-date to increase production, before adding a further K2bn in 2009.
A report said that this had coincided with a European Union announcement which had increased Malawi's annual sugar quota for 2008 by 7.5% from 20 000 tonnes to 21 500 tonnes. Malawi exports about 28% of its sugar to EU countries.
It cited the announcement: "Production is to increase by 10%." This will be achieved by expanding one of its sugar estates, Nchalo, by 1 200 hectares.
According to Illovo CEO Don MacLeod, sugar production for the group is expected to grow for the rest of the season by about 130 000 tonnes more than last year to 1.925 million tonnes.
Rand cushions fall
"Locally, the rand strength has cushioned the fall in commodity prices to some extent, and I don't think the rand is going to recover any time soon," said BOE private clients analyst Barbara Price-Hughes.
She said that the weaker currency "could help" lift the SA operating profits, but only if commodities don't fall further.
Naryshkine said: "It's all about commodity prices, and as you know over the last while, all soft commodities have been coming off sharply."
The raw sugar price moved from 12.50 US cents a pound in January to a year-to-date-high of just over 14c/lb in April. In October, it traded at about 12 US cents a pound.
"The world sugar price has been extremely volatile. In the early part of the year, prices were much stronger as a result of a forecast deficit in production; however, during recent months, prices have fallen similarly to other commodities," said Illovo's MacLeod.
According to the MacLeod, if the rand, world sugar prices and final sugar production don't experience any "major changes" for the remainder of the year, Illovo's annual results to end-March 2009 should reveal a 25% increase in headline earnings, from the corresponding period the year before.
-Fin24.com