Analysts predict subdued margins at Hippo Valley

Margins at sugar processor, Hippo Valley Estates Limited, are expected to remain under pressure in the short to medium term according to analysts’ predictions.

During the past year, the company already registered depressed volumes albeit an increase in revenue earnings.

“Key changes to the cost structure for companies includes accelerated dollarisation of rates and inputs thereby putting margins under pressure,” said research firm IH Securities.

“In our view, EBITDA margins will start moderating going forward initially slowing to 25 percent in FY24, then down to 16 percent by year 5. Our forecasts did not take into account adjusted EBITDA as we cannot build a constructive view on fair value adjustments going forward, however, on that basis we have placed a significant 25 percent discount on earnings to maintain a conservative view on quality of earnings,” said IH Securities.

Meanwhile, sugar production for the year to March 31, 2023 declined marginally by 1 percent to 1,809 tonnes compared to the previous year although cane deliveries from own plantations increased. The group attributed the decline in sugar production to compromised cane quality.

During the period, an additional 48,189 tonnes or 3 percent of cane was delivered to the mill for crushing.

“Ordinarily, this additional volume of cane would have increased sugar production by approximately 6,000 tonnes.

“The decrease was occasioned by lower cane quality attributable to prolonged wet weather and significant rainfall received at both the onset and end of the season,” said chief executive officer Aiden Mhere in an operations review for the period.

Rainfall hinders both the harvesting and hauling of cane to the mills resulting in the cane remaining in the fields for extended periods and leading to reduced sugar content, while posing difficulties in achieving efficient milling recoveries.

“The off-crop maintenance programme, which encompasses annual maintenance, including repositioning the mill for improved efficiencies, was successfully completed and the mill commenced crushing for the 2023/24 season in April 2023 as planned,” he said.

According to the group, cane deliveries from the company’s own plantations (miller-cum-planter) were 13 percent above the prior year on the back of a 6 percent improvement in yields to 97,98 tonnes cane per hectare in response to improved control of yellow sugarcane aphid infestations through aerial spraying, as well as an increased area of cane harvested compared to the prior year.

Private farmer cane deliveries contributed 42 percent of the total cane supply, and were 2 percent below prior year having achieved yields of 71,85tch in November 2022, one of the company’s two production lines suffered a major breakdown that resulted it being inoperative for the balance of the season.

Resultantly, the milling season was extended to 29 December 2022 to accommodate the reduced production capacity, while 27,001 tonnes of cane had to be diverted to the Triangle sugar mill for crushing.

In terms of financial performance, revenue jumped 37 percent to $139,3 billion on the back of price adjustments in response to increasing cost pressures, amplified by currency dynamics embedded in CPI indices.

Resultantly, operating profit and profit for the year grew by 22 percent to $25,9 billion and by 24 percent to $17,2 billion respectively, with the majority of the growth attributable to changes in the value of biological assets.

Profit margins declined to 7,5 percent from 10,4 percent in the prior year.

“This squeeze on margins arose from lower sugar production, significant increases in fertiliser and fuel costs, and the impact on manpower costs post the finalisation of the wage negotiations.

“Ultimately, the increase in price realisations achieved was not sufficient to offset these inflationary pressures on cost,” said Mhere.

Net cash outflow from operating activities was $3,4 billion from $3,3 billion on account of decreased EBITDA and increased working capital requirements.

During the year under review, a total amount of $3,4 billion was spent on capital expenditure of which $1,8 billion was for root replanting.

The company declared and paid an interim dividend of US0,3 cents per share during the year ended for the year.-ebusinessweekly