Hippo's 55th AGM passes all tabled resolutions

Hippo's 55th AGM was held yesterday, Monday 22 September 2011, and all resolutions tabled were passed without amendments. Management also gave a detailed trading update. The company is in line to achieve the target production for the 2011/12 season of between 360,000 tons and 380,000 tons at improved cane age and yields while raw sugar production is expected to range between 150,000 and 170,000 tons up 22% from the prior period. A total 95,887 tons have been produced so far up from 38,484 tons the prior year.

The four year recovery programme is ongoing as the sugar industry aims for the reestablishment of a successful and sustainable private cane farmer sector in Zimbabwe. The programme is based on an accelerated plough out and replacement of 15,880 ha private farmer area to rehabilitate private farmer cane production from 413,000 to 1.4m tons per year by 2015. A total of 750 ha of indigenous farmer cane lands at the Chipiwa Settlement Scheme have been replanted, while 450 ha will be replanted by October 2011 to complete the 1,200 ha replanting program for harvesting in 2012. Approximately 3,990 ha have been planned for replanting in the 2011/12 season and tenders have been awarded under the Sustainable Rural Cane Farming Community program. The funding for the programme has been sourced from local financial institutions through Tongaat Hulett's Zimbabwe operations. By November 2011, approximately 3,300 ha are expected to have been planted.

In the last 24 months, the company refurbished its mill, thus value addition in refining has not been a key issue. Post the refurbishment, management expects improved recoveries and yields of upwards of 90 tons/ha. Currently the company is operating at 63% of installed capacity and focus is on getting back to full capacity. Co-generating electricity with Zesa was stopped during the 2009/10 when capacity utilisation fell to 23%, management said it was still early to resume but added it would be necessary going forward. Hippo can produce about 33MW when operating at optimum capacity.

Demand for sugar continues to outstrip supply especially in the international market where commercialisation of the sugar-ethanol production process has raised the demand for sugar, leading to increases in sugar prices. When oil prices rise, biofuels become more attractive, elevating the demand for ethanol and sugar. Hippo's sugar is currently fetching attractive prices at $623/ton on the local market, and averaging $666/ton on the US market and about $571/ton on the European Union. For FY 2011, 133,000 tons of raw sugar was exported to the European Union and the United States under preferential market access. Under the Economic Partnership Agreement with the EU, Zimbabwe's exports to the EU are secure for the five years from September 2010 to 2015.

Hippo's current ratings are demanding at a forward PER of 13.5x, however the company's prospects could justify the ratings. We see Hippo as a definite play on both the local and international economic recovery and growth. A growing middle income class, and improving disposable incomes should support growth in sugar consumption per capita. Current profitability margins are being adversely impacted by on going capex projects however we expect margins to expand supported by the growth in sales volumes and improving efficiencies. Management said the private grower initiative that the company is engaged in should allay any fears investors may have about indigenisation.