Tongaat Hulett’s Zimbabwean listed unit – Hippo Valley – has had to divert domestic market volumes to the export market owing to decreasing local sales due to unfriendly fiscal conditions that drove up the cost of doing business during the year to end-March.
Hippo Valley and non-listed Triangle Sugar Corporation make up the Zimbabwe operations for troubled Tongaat Hulett. The company opted to skip a dividend for the year under review.
Hippo Valley reported on Wednesday that volatile Zimbabwean “exchange rates and high inflation disrupted liquidity flows” for the company during the period under review.
This had created cash-flow gaps which the company plugged with utilisation of short-term loans with financial institutions. In any case, these financial institutions battling a liquidity crunch struggled “to satisfy working capital” requirements.
“The operating environment for the period remained challenging, characterised by hyperinflation, local currency depreciation, and liquidity constraints which created cash-flow gaps for the company,” said analysts at IH Securities.
Moreover, explained Hippo Valley, the introduction of a cane purchase agreement as an alternate to a cane milling agreement had placed further pressure on working capital requirements for the business.
Under this agreement, cane supplies have to be paid for on delivery and not when the sugar produced from the cane is sold.
Hippo Valley had largely experienced this challenge in the period between June, 2023 and March, 2024 resulting in the company having to carry “long outstanding supplier obligations most of which were subsequently settled post March 31, 2024 after receipt of a significant portion of the export” proceeds.
There was immense competition in the local market from cheap sugar imports over a period spanning eight months after the government lifted import duties on sugar. This resulted in an influx of cheaply imported sugar which bumped up competition for the company in the domestic market.
“This, together with the working capital requirements of the new cane purchase arrangements for the season and the inability to recover cost pressures due to the relatively lower export prices, placed strain on the company’s liquidity,” said Hippo Valley.
“As a result, there was an increase in the borrowing levels of the company and delays in settlement of amounts owed to suppliers.”
Positively though, the IH Securities analysts said Hippo Valley has made headway in securing its 99-year land leases, with 16 802 hectares (95%) having been signed off at the end of the period.
Moreover, the government of Zimbabwe has now re-imposed import duties on sugar, a much-needed reprieve for local producers of the sweet commodity.
“But the company faces significant downside risk into FY25 as consumer spending is likely to come under pressure owing to the trailing effects of the drought on bottom-of-the-pyramid liquidity,” said IH Securities in a note released yesterday.
“Moreover, the bulk of the company’s earnings were non-cash and in our view returning to profitability in real terms will be a tall order,” it said.
BUSINESS REPORT