Troubled agriculture and agri processing company Tongaat Hulett has entered into negotiations for the potential sale of its starch division. Photo: Supplied
DURBAN - Troubled agriculture and agri processing company Tongaat Hulett has entered into negotiations for the potential sale of its starch division as it grapples to reduce its huge debt following an accounting scandal.

The talks come after Tongaat had committed itself to reducing its debt by R8.1billion by March 2021 in South Africa and identified a combination of cost savings and cash flow initiatives. These included the sale of certain non-core assets as well as an equity capital raise and the disposal of core assets or majority stakes in core assets.

Tongaat Hulett is trying to recover following a forensic probe by PricewaterhouseCoopers (PwC) which found that its assets and profits for the year to end March 2018 were overstated.

The report by PwC fingered 10 executives, including its former chief executive, Peter Staude.

In June, Tongaat informed the JSE that it was suspending its listing on the bourse after its share price declined by more than 75percent in one year.

The JSE lifted its suspension at the beginning of February and the stock continued falling, losing 65percent in one day following a seven-month absence from the bourse.

In the six months to end September results, released at the end of last year, Tongaat said it viewed the starch and glucose business as a consistent, strong cash generator.

The division posted an operating profit of R306million during the period, marginally up from the restated amount of R305m compared to a year earlier.

The business grew its sales volumes by 4.5percent to 254000 tons, up from 243000 tons compared to 2018.

The starch and glucose sales benefited from increased demand in the alcoholic beverages sector, following customer marketing campaigns, the continuing growth in the coffee creamer sector and the recapture of imported glucose volumes within the confectionery sector, which also benefited from new customer investments.

Pritu Makan, a research analyst at FNB Wealth and Investments, said despite the inherent cyclicality of the business, it was unfortunate that the company had to sell one of its more stable, better-performing divisions to reduce debt.

“The starch and glucose operations is a strong cash generator for Tongaat and made up to 26percent of total revenue and 25percent of adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) in the six months to end September. It also reported revenue growth of 12percent and adjusted Ebitda growth of 2percent,” Makan said.

However, he said margins came under pressure during the period due to higher maize costs.

“Management highlighted in the half-year results that a slowdown in growth for the division was expected in the second half due to muted domestic market demand and operational constraints, including load shedding."

He said the proceeds from the disposal would most likely be used to reduce debt, in line with the group's strategic initiatives and financial turnaround plan.