Tongaat Hulett: Creditors are in control
By Ryk de Klerk
JOHANNESBURG - After years characterised by wrongdoing and mismanagement Tongaat Hulett (Tongaat) is on the mend.
After deciding to dispose Tongaat’s starch and glucose operation and focus on the turnaround of the sugar operations, the company’s new executives are doing a sterling job by sweating the company’s assets and loss-making business units have returned to profitability.
Creditors are, however, in control.
Tongaat owes South African banks R10.1 billion and Mozambique lenders R1.3bn. The South African debt is secured by Tongaat’s South African assets and the Mozambique assets in that country.
I attempted to deconsolidate the Zimbabwean operations from Tongaat’s other operations at the end of Tongaat’s recent financial year (March 31, 2020).
My analysis indicates that Tongaat’s share of the Zimbabwean net asset value (NAV) amounted to R21 per Tongaat share, while Tongaat’s NAV of the other operations amounted to a negative R41 per share.
The Tongaat board and executives face a mammoth task. In terms of the original agreement with South African lenders, Tongaat was committed to reduce its level of debt by R8.1bn through the sale of assets and/or an equity capital raise by March 31 next year.
The default milestones have been extended to R8.1bn by September, 30, 2021. The milestone for December 31, 2020, is R5.5bn and R6bn at the end of the following two quarters.
Signed debt transaction agreements to date amount to R6bn (Liquidation of legacy pension fund R512million, Namibian Packing R109m, Starch R5bn, eSwatini R372m, land holdings R101m).
According to the latest annual report, the balance of the R8.1bn was anticipated to be achieved through strategic transformational partnerships within the group’s South African sugar operation and its land holdings, the liquidation of a second legacy pension fund and additional land sales. I estimate that the pension fund proceeds could amount to just more than R200m.
I think a major stumbling block at this stage is the state of the property market and the impact of the lockdown on the conclusion and negotiation of other related deals. A standstill agreement in respect of debt owed to the lenders of the Mozambique operations covers the period to June 30, 2021. In terms of the agreement, the group delivered a debt reduction proposal to the lenders which inter alia comprises of the sale of assets.
Although Tongaat’s Zimbabwean operations contributes significantly to the group’s profits and financial position, it is not a fair reflection of Tongaat’s actual state of affairs. Due to shortages in foreign currency within Zimbabwe and the current economic and political situation, Tongaat’s ability to repatriate these cash balances within the requirements of the Reserve Bank of Zimbabwe is severely constrained. The continued hyperinflation and extremely weak currency are likely to lead to further monetary losses arising from hyperinflation and other impairments carried in Tongaat’s financial statements.
Accounting practices require the translation of assets and liabilities held in other currencies to be converted at the official exchange rates.
According to the omir.today website, Zimbabwe’s RTGS dollar officially floats against other international currencies on the Interbank Foreign Exchange Market, on a willing seller-willing-buyer basis. However, a significant amount of transactions happen outside the official market, at an unofficial exchange rate. One of the few gauges of the Zimbabwe exchange rate is the so-called "Old Mutual Implied Rate" (Omir), a comparison of the price of shares of insurer Old Mutual Limited in London and Harare.
By applying the official exchange rates of the Zimbabwean dollar to the rand from the end of the last financial year until now and assuming that Tongaat’s share of the Zimbabwe operations remained unchanged from the end of the financial year, it is evident that the NAV fell by more than 70 percent to R6 from R21 per share.
In comparison, using the Omir, the NAV of the Zimbabwe operations was R8 per Tongaat share at the end of the past financial year and fell by 55 percent to R3.64 per share.
There is not much what Tongaat can do except to try to find ways to repatriate cash. It is, therefore, no wonder that none of the assets of the Zimbabwean subsidiaries were encumbered in the South African lending and Mozambique debt standstill. The lenders did not want it.
The short-term incentives for executive management includes cash flow targets of about R593m in the sugar operations in South Africa, Botswana and Mozambique. Achievement of these targets will undoubtedly strengthen Tongaat’s financial position.
If Tongaat and the South African banks stuck to the original agreement of repaying R8.1bn debt by June 30 next year and after allowing for the use of deferred tax and reduction in the other non-current financial assets item (pension fund surplus), my estimate for Tongaat’s NAV excluding Zimbabwe was R10 per share based on the 2020 financials.
Borrowings would be around a manageable R4.3bn as cash flows would be sufficient to service the debt.
My calculations on the renegotiated agreement of repaying R8.1bn by September 30 next year indicates a negative NAV excluding Zimbabwe of R6 per share by June 2021. Borrowings could amount to R6.3bn and may exert downside pressure on Tongaat’s earnings.
The eventual impact of the coronavirus on the global economy and specifically the economies in which Tongaat operates, remains uncertain. In my personal opinion, Tongaat’s board and executives are very successful in what I see as effectively business rescue.
It may be worthwhile for Tongaat to proceed with a rights issue to strengthen the company’s financial position - similar to what Sasol is contemplating. Yes, to unlock the estimated fair value of properties of about R11bn, shareholders have to come to the party.
Ryk de Klerk is analyst-at-large. Contact [email protected] His views expressed above are his own. He has no direct interest in Aveng and no other companies mentioned. You should consult your broker and/or investment adviser for advice. Past performance is no guarantee of future results.