Published: 13 November 2013

Hippo reported a set of depressing results showing a 43% drop in revenue to $52m due to a weak price of sugar on the international market as well as a reduction in local volumes. The price level in the EU was US 6 cents/lb lower than the levels achieved in the last two years.

Plans to expand cane production and root replanting in Zimbabwe have been hindered by depressed global sugar prices and irrigation challenges, South Africa based agricultural commodities processor Tongaat Hulett said.

Cane valuations have been impacted by lower prices and the effect of curtailed root replanting as a consequence of the current water dynamics, Tongaat CEO Peter Staude has said.

The industry's domestic and export sales volumes for the period to 30 September 2013 totalled 192,542 tonnes (2012: 247,741 tonnes) with Hippo contributing 84,990 tonnes (2012: 117,532 tonnes), a 28% decrease as a result of lower local market sales and a timing difference on export shipments. Operating profit was down 37% to $6.9m while net profit was down 47% to $5.8m.

Total assets grew 10% to $401.0m due to increased investment in short term current assets and a modest growth in plant and equipment. The significant investment in current assets was inventories which rose from $47.4m to $70.7m. Due to a lower international price both long term and short term biological assets declined marginally and any further price reduction will result in impairments of these assets. Current liabilities increased on the back of increased borrowings from $56.7m to $77.9m mainly to fund increase in slow moving inventories locally.

The cash flow statement shows an operating cash outflow of $12.4m compared to an inflow of $4.8m, due to increased investment in working capital commitments. Hippo continues to invest in property, plant and equipment to increase efficiencies in the face of a slowdown in international sugar prices. The company closed the period with a positive cash position of $23.6m with the bulk of the money obtained from increased borrowings from $13.5m to $29.4m.

In a note to investors, Imara Edwards analyst Tonderai Maneswa said, "With its very strong balance sheet, high cash generative abilities and sound management, the group remains a solid investment."

Mr Maneswa expexts margins to recover as a result of the mill refurbishments. He also expects the international sugar price to remain under pressure and imports to impact on the local volumes.

"We expect the company to have a better second half given the huge cash demand in the first half that is not likely to recur in the second half. We believe Hippo can improve its earning capacity by investing in efficient production and increased utilisation of excess capacity. Although the dam levels remain a concern the completion of the Tokwe Mukosi dam will significantly improve the water situation in the lowveld."

Imara downgraded the stock from a buy to accumulate in the face of the headwinds on sugar prices internationally and lower local volumes and a possibly untenable water levels.
- businessdaily

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