Founder: Turnaround Talk
South Africa has long been regarded as an economic powerhouse of Africa. While this was initially based on our rich mineral resources, plenty of work has been put into building an economy that is as diverse as the public that it serves.
This diversity is so deeply entrenched that the failure of one company does not threaten the survival of others within the industry. However, some industries are dominated by one company. And if this company sneezes, the rest of the industry catches a cold.
This is currently the case with Tongaat Hulett, where the rest of the sugar industry is feeling the impact of one company being in trouble. While not a monopoly, Tongaat’s dominating force is proving to be an industry disrupter.
Quarter of a billion rand hit
The article points out that Selati owner RCL Foods, which is majority-owned by Johann Rupert’s Remgro, says the fallout from Tongaat Hulett’s collapse helped prompt a nearly quarter of a billion rand hit to its sugar business.
It warned on Tuesday that full-year earnings could fall by nearly a third in its year-to-end June as it dealt with the spillover effect of Tongaat and another smaller sugar producer, Gledhow Sugar Company, entering business rescue.
The article adds that it also faced escalating load shedding and unrecovered feed costs in its poultry business and, as a result, it expects headline earnings per share to be at least 30% lower than the 118.5c it reported last year.
Shares in the group, which is valued at about R8.9 billion on the JSE, were unchanged on Tuesday, but the stock has lost more than 4% of its value since the beginning of the year.
Sugar levy problem
The article points out that at the centre of the additional costs to its sugar unit was a special levy that the South African Sugar Association (SASA) was forced to raise from other companies as it dealt with the shortfall caused by Tongaat and Gledhow not paying their dues.
SASA is a body set up to represent the interests of all the sugar millers and refiners in SA, collecting both industry levies, as well as payments for redistribution. RCL said the net pre-tax impact on RCL of special levies raised to date for SASA was R234 million.
RCL, which also owns Rainbow Chicken, Yum Yum peanut butter, Pieman’s and Epol pet food, among other brands, said the local sugar industry was in a “state of significant uncertainty” since business rescue proceedings started at Tongaat and Gledhow in October 2022 and March 2023, respectively.
It said “pre-commencement levies and redistribution payments” owed to SASA had not been paid, with the situation being “aggravated” by Tongaat’s business rescue practitioners suspending payment of their statutory industry obligations as at the end of March 2023.
Image By: South African Sugar Association
Legal challenge
The article points out that as a result, the remaining industry participants had to bear additional costs in the form of a special levy imposed by SASA in order to cover the resulting shortfall.
“Any recovery of unpaid levies and redistribution payments from Tongaat Hulett Sugar and Gledhow Sugar Company remains a material unknown at present.”
The article adds that RCL was also taking legal action to determine the lawfulness of the decision by Tongaat’s business rescue practitioners to “suspend compliance with its statutory obligations”.
Perfect storm
The article points out that Makwe Masilela, who heads up Makwe Fund Managers, said RCL’s profit warning highlighted how what happened to Tongaat, SA’s biggest sugar producer, could not be viewed in isolation from the rest of the industry. According to Masilela: “It shows how serious a player Tongaat is. Look at the multiplier impact that it is having on other companies. Nevertheless, of greater concern for Masilela was the ongoing impact of feed costs on RCL’s business, as it had “always been a problem for them”.
He said the challenge for RCL was to try to pass on increasing costs to consumers, but at the same time make sure it did not lose market share to rivals in an intensely competitive environment.
The article adds that Small Talk Daily analyst Anthony Clark said RCL had been hit by the “perfect storm of agricultural and sector bad news”. Not only was it facing this sugar levy, but it was seeing its poultry division “slammed” by high maize and soya input costs, while also facing load shedding.
RCL’s problem, he said, was that it was often “hit much harder than other companies because the companies it owns are so diverse and unrelated”.
But Clark also believed the sugar levy issue was a “once-off” problem, adding that “at some point” Tongaat would pay all the money it owed as it would be unfair for the rest of the sector to continue to pick up the slack because “other companies have gone bust”.
Image By: Swaziland Justice Forum
A more favourable outlook
The article points out that Clark expected a more favourable environment for RCL in the first six months of its new financial year, adding that sharply lower input prices for maize would also start to feed through to Rainbow from September to December.
At the same time, higher sugar prices were expected for the sugar industry, and this together with “hopefully a revision” of the levies given the reduction of players, would provide a further fillip for the company.
The article adds that Peter Armitage, who heads up Anchor Group, agreed that it appeared as if RCL had “absolutely everything thrown at them, all in the same year”.
This included high commodity prices, inflation, an inability to pass on costs because of a weak consumer, a weak rand, as well as this levy issue with SASA.
“Quite frankly, the fact that they were able to make some reasonable money in these circumstances is quite remarkable,” said Armitage.
Ominous signs
It may seem unfair that an industry has to feel the impact of one company becoming financially distressed. However, that is just the nature of the beast.
This provides a scary insight into what will befall the country should Eskom become financially distressed, or the country faces a total grid collapse. These are prime examples of how monopolies, or a situation where power is significantly skewed in one company’s favour, are unsuitable for any economy. Diversity ensures continuity and equality in that the whole business ecosystem is not thrown off balance because of one company’s actions (or inaction).
