Johannesburg - Illovo [JSE:ILV]
Sugar has warned that a drastic slide in sugar prices during the last three months may weigh heavily on earnings in its current financial year.
This follows publication of its full-year financial results on Monday, which showed only a modest increase in profitability for the year ended March.
The performance failed to dazzle analysts. Shares in Illovo Sugar were about 2.5% weaker on the JSE and were last trading at R29.70 per share.
World sugar prices have shed 51% since March even though supplies were expected to be in deficit, according to trade figures on the New York Mercantile Exchange.
"If prices remain at present levels this would be negative for sugar revenues," said Illovo in commentary to its year-end results. "Market sentiment is now very fragile."
Revenue from sugar comprises about 60% of Illovo's total top line, with the balance derived from cane and other products. Total revenue was 2% lower at R8.47bn in the period under review.
The company, which operates in six southern African countries, did manage to squeeze out an 8% increase in operating profit to R1.5bn. Margins expanded to 18% from 16% in the period.
"These were not the worst set of results, but they were somewhat disappointing," said a fund manager in an interview.
However, contributing factors to the bottom line were favourable world and regional sugar prices, the first of which actually rose to a 28-year high during the year.
"They have benefited from better prices, but at current prices that would not be the case," said Sasha Naryshkine, an analyst at stockbroking firm Vestact. "It's tricky for Illovo. The sugar price is pretty volatile," he said.
Favourable pricing in the European Union (EU) market, to which Illovo was exposed, expired in October, adding a further downside price pressure, said Naryshkine. This was unfortunate as Illovo wanted to derive more trade from the EU.Balance sheet bolstered
Illovo posted an much improved balance sheet, despite the dilutionary effect of an earlier R3bn rights issue.
Naryshkine said that Illovo's rights issue was overly borrowed and that precarious position has now been replaced by a more stable net positive cash position of R213m.
The proceeds of the rights issue will be used to change the geographical profile of Illovo by growing its sugar and cane production in Swaziland and Mozambique. The group derives sales predominantly from South Africa, Malawi and Zambia.
In addition, Illovo has also unveiled a greenfields project in Mali where "pre-project activities" are at an advanced stage, it said.
In total, Illovo has spent over R1.1bn on acquisitions and expansion. It expected to increase volumes to exceed current levels of 1.7 million tonnes of sugar and 6.1 million tonnes of cane. Zambian operations in particular should increase output by a quarter.