Illovo Sugar is bracing itself for another tough year in South Africa as the drought this season will continue to affect output in the year to March 2012.
Illovo’s chief executive, Graham Clark, said yesterday that South African sugar production had been hammered by drought in KwaZulu-Natal and would take strain in the season to March 2012.
“We expect the rest of the group will offset that and are doing what we can to lower costs and hedging,” he said.
He said the base business, other than in South Africa, was in good shape and “we are seeing the results of investment in capacity in Mozambique, Zambia and Swaziland”.
Over the past five years the group has invested about R5 billion in these countries.
The company reported a 14 percent drop in headline earnings to R574.2 million for the six months to September and on a sugar season basis headline earnings fell 33 percent to R258.6m.
Illovo reports on both bases to reflect the seasonal nature of the business. The results on a sugar season basis represent the company’s view of the position at end-September as it relates to the season as a whole.
The strong rand depressed export earnings and adversely affected the conversion of foreign profits. Outside South Africa the weather also played havoc. Late and unseasonal rains early in the season in Malawi, Mozambique and Swaziland disrupted harvests and reduced cane quality.
Sugar production contributed 71 percent to operating profit, cane growing 22 percent and downstream 7 percent.
By country, Malawi contributed 47 percent, Zambia 28 percent, Tanzania 12 percent, South Africa 7 percent, Swaziland 4 percent and Mozambique 2 percent.
This season, which ends in March next year, sugar production in South Africa is expected to fall by almost 15 percent due to a lack of rain during the critical growing period. Illovo typically produces between 650 000 and 680 000 tons a year.
Earlier this week competitor Tongaat Hulett reported a 12 percent increase in headline earnings to R507m.
Abdul Davids, the head of research at Kagiso Asset Management, said geography and the structure of Illovo and Tongaat’s businesses played a big role in the differing results.
Davids said Zambia was a disappointment as Illovo had spent about R2bn there and yields were lower than expected, considering that Zambia offered one of the best locations for growing cane in the world. In the season to March 2010 earnings from Zambia fell to R147m. But the outlook is still for significant growth from Malawi and Zambia.
Warwick Lucas at Imara SP Reid said looking ahead, Zambia and Malawi were just as important as South Africa for Illovo as they were far more cost competitive locations.
Illovo shares fell 1.11 percent to R25.91 and Tongaat rose 1.83 percent to R105.40.