Johannesburg - The possible expropriation of land from Tongaat Hulett in Zimbabwe could see the company’s profit margins suffer as well as signal a need for the sugar manufacturer to expand to other regions, analysts say.
Media reports suggest that the company’s problems with the indigenisation law may soon come to a head with local authorities asking the government to sanction land grabs.
The Mail & Guardian said last week that authorities in Masvingo province, where Tongaat Hulett operates, wanted to expropriate 10 000 hectares of land for resettlement.
Tongaat Hulett operates on 44 519 hectares of land in the Mwenezi district of Masvingo province. The Zimbabwean operations accounted for R3.2 billion of the company’s total revenue of R14.3bn, according to its latest annual report.
The stand-off comes after Zimbabwe’s enactment of its indigenisation policy, which had a deadline of January 2014 for all foreign-owned companies to transfer 50 percent of their shares to locals.
While Tongaat Hulett was not available to comment on possible land grabs, in its interim results the company said it had a strong relationship with indigenous private cane farmers. “At the end of the 2012/13 season, at least 670 active indigenous private farmers, farming some 11 200ha and employing more than 5 600 people, supplied 850 000 tons of cane which generated $56 million [R607m] in annual revenue for them,” the company said.
It added that it had the potential to further develop indigenous private cane farmers substantially.
Daniel Isaacs, an analyst at 36One Asset Management, said last week that this could play out in a few different ways.
“Since the land is covered with cane it is reasonable to assume locals would want to grow sugar cane and sell it to Tongaat.”
He believed that this was a better outcome than just taking 50 percent of the company, as Tongaat Hulett would not have to split the profit. However, Isaacs said it would need to pay more for cane. “This could affect their profit margins.”
Isaacs said the other risk was that the new farmers could ruin the crop and jeopardise Tongaat Hulett’s supply of sugar cane.
Ron Klipin, an analyst from Cratos Wealth, said the Zimbabwe issue was a concern but not catastrophic. “Hulett seems to have the right contacts within the government and have been working closely with the smaller cane growers.”
Tongaat Hulett, he said, had managed to develop a good relationship with rural communities, presumably in conjunction with the powers that be in the capital, Harare.
The company has also been instrumental in giving advice to smaller growers. “Hopefully, this will have helped Tongaat’s business model to suit the circumstances around the land issue,” he said.
Klipin said should Tongaat Hulett lose the land in Zimbabwe, which he believed was unlikely, it could mean that the company would continue to strengthen its African expansion programme and look for additional land suitable to grow sugar cane.
“They could expand in other regions such as Zambia, Mozambique and Malawi, which are relatively politically stable with good climates and good water resources.”
He believed Tongaat Hulett’s chief executive, Peter Staude, was an astute operator who had been able to build good relations with the Zimbabweans.
Kagiso Asset Management’s head of research, Abdul Davids, said: “In the event of land expropriation, the mills would still be able to operate provided the expropriated land continues to produce sugar cane.”
He said that Tongaat Hulett had been at the forefront of empowering indigenous farmers in Zimbabwe and with the help of the EU, the company had created a successful and economically viable small-scale grower programme.
“While it is difficult to comment on the politics in Zimbabwe, these threats are not new and the Tongaat share price already reflects a significant discount for the Zimbabwe business as a result.”
Isaacs agreed, saying that it would not be the first time someone in the government in Zimbabwe had said something sensationalist in order to get some attention.
However, he believed that Tongaat Hulett would have to do something about the situation. He did not believe that there would a total collapse of operations and it might be less negative for the group than what people thought, but it was not positive. “There will be some negative repercussions from this.”
Tongaat Hulett shares fell 0.61 percent to close at R119.52 on the JSE yesterday. - Business Report