CHAIRMAN’S STATEMENT AND CHIEF EXECUTIVE’S REVIEW FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2022
*Adjusted EBITDA is operating profit adjusted to exclude depreciation, amortisation, any impairment (or reversal thereof) and fair value adjustments relating to biological assets.
Hippo Valley Estates Limited (HIPO.zw) HY2023 Interim Report
The economic environment remains volatile and hyperinflationary. Annual inflation saw a rise to 280% (30 September 2021: 52%) from 96% recorded at the beginning of the financial year. The Zimbabwe dollar (ZWL) has also suffered depreciation with the Foreign Currency Auction System (FCAS) registering a 291% increase on the USD/ZWL rate. During the period under review, Mosi-oa-Tunya gold coins were introduced by the Reserve Bank of Zimbabwe in order to ease demand of the US dollar as a store of value. The economy has seen a shortage of the local currency which has resulted in transactions of most goods and services being done in foreign currency. The agricultural and agro-processing sectors have benefited from the satisfactory rainfall season which has had a positive impact on the wider economy, whilst domestic consumption of sugar remained steady and impact of Covid-19 is now very marginal. Industry sugar sales into the local market remained under pressure from competing sugar imports driven by the then existing suspension of import duty on basic commodities.
Cane and sugar production (tonnes) for the half year ended 30 September 2022
Cane crushed from the Company’s plantations (Miller-Cum-Planter) is 12% higher than that reported for the same period prior year. Good deliveries were also backed by relatively better yields, at 107.33 ton per hectare (tph) compared to 101.22 tph same period last year. Cane deliveries from private farmers were below prior period largely due to the delayed commencement of harvesting which was caused by the wet weather. Overall, total cane milled was above prior period, however, sugar produced declined on account of lower cane quality. Again, this was largely driven by the wet weather which affected normal cane drying off processes prior to cane harvesting. Factory recovery performances remain above regional industry standards and have contributed to decent cane to sugar ratios despite reduced cane quality.
At brown sugar level, the Zimbabwe sugar industry has a single marketing desk, administered by Zimbabwe Sugar Sales (Private) Limited (ZSS).
The total sugar produced by the industry for the six months to 30 September 2022 was 289 394 tons (2021: 296 915 tons). The Company’s share of total production to 30 September 2022 was 53.11% (2021 :52.9%).
Total industry sugar sales for the period under review at 212 519 tons (2021: 223 892 tons) were 5.08% below same period prior year due to subdued demand on the back of imports as the market responded to $1198 which allowed duty free importation of cheaper sugar.
Total sugar industry export sales for the period increased by 19.31% to 35 265 tons (2021: 29 558 tons) due to improved volume allocation on the United States Tariff Rate Quota from the 13 087 tons shipped during the same period in prior year to 17 751 tons. Exports to Kenya, a key regional deficit market, increased to 8 113 tons (2021: 5 875 tons) despite import restrictions instituted to safeguard its local sugar industry which is registering sustained growth. Export sales to Botswana dropped by 23.35% to 7 041 Tons (2021:9 186 tons) due to delayed export shipments at the beginning of the season during which the higher yielding domestic market sales were prioritized.
The season’s total contracted volume to this market is 15,000tons and the Company remains confident that this will still be fulfilled.
The financial results of the Company have been inflation adjusted to comply with the requirements of IAS 29 Financial Reporting in Hyperinflationary Economies (‘IAS 29′). As such, the commentary on financial performance is based on inflation adjusted financial results. Historical figures are included as supplementary information alongside the inflation adjusted financial results to enhance comprehension and analysis. The directors however would like to caution users on the distortion emanating from the adjustment to the fair value of biological assets. The distortion is mainly as a result of hyperinflation dynamics. In complying with the requirements of IAS 29 and IAS 21: The effects of Changes in Foreign Currency Rates, the Directors applied, where appropriate, necessary judgements and assumptions with due care. However, users are cautioned that in hyperinflationary environments inherent economic distortions may have an impact on these financial statements. As such, the Directors would like to advise users to exercise caution in the use of these inflation adjusted financial statements with respect to the reporting currency and conversion to comparative currencies.
Despite a 5% decrease in industry sales volume, Company revenue increased by 61% from prior year to ZWL63.1 billion (2021: ZWL39.3 billion) whose movement was affected by dynamics introduced by hyperinflation accounting. Resultantly, adjusted EBITDA grew by 63% to ZWL18.9 billion (2021: ZWL11.6 billion). Operating profit however receded by 14% from ZWL10.4 billion attained in prior year largely as a consequence of a fair value loss on biological assets of ZWL7.7 billion compared to a gain of ZWLO.3 billion in prior year. The fair value movement was also affected by hyperinflation accounting dynamics. The impact of this on operating profit was partially offset by an increase in other operating income from ZWLO.6 billion to ZWL3.3 billion. Profit for the period decreased by 54% from prior year to ZWL2.5 billion (2021: ZWL5.4 billion) due to an increase in the net monetary loss from ZWLO.2 billion to ZWL1.4 billion following the application of hyperinflation accounting.
Net cash inflow from operating activities decreased by 31% to ZWL 2.6 billion (2021: ZWL 3.7 billion), mainly on account of the increased cash consumed in working capital. Due to increased trade in multi-currency, the Company in the period under review was able to review its credit terms to its major customers in response to competition brought about by the suspension of import duty on basic commodities hence impacting on working capital. A total of ZWL1.2 billion (2021: ZWL1.5 billion) was spent on capital expenditure of which ZWLO.7 billion (2021: ZWLO.6 billion) was for root replanting. As at 30 September 2022, the Company had a net borrowing position of ZWL1.4 billion compared to ZWLO.9 billion as at 31 March 2022 in response to more cash consumed in working capital. The Company has established adequate borrowing facilities in both local and foreign currency to finance both operating and capital expenditure requirements.
The effective tax rate on the inflation adjusted accounts was 60.32% (2021: 41.94%), impacted by the net monetary loss of ZWL1.4 billion (2021: ZWLO.2 billion), that was treated as a permanent difference for income tax purposes.
In light of the Company’s positive financial performance for the six months ended 30 September 2022, the Board has declared an interim dividend of 0.3 US cents per share for the year ending 31 March 2023 payable in respect of all the ordinary shares of the Company. This dividend will be payable in full on or around the 6th of January 2023 to all Shareholders of the Company registered at the close of business on 30 December 2022.
Environmental, Social & Governance
As part of their broader sustainable socio-economic development programmes, meant to alleviate challenges faced by surrounding communities, Hippo Valley Estates Limited and Triangle Limited (Tongaat Hulett Zimbabwe -THZ) fabricated and constructed two footbridges in Chiredzi at a total cost of US$12 257.
In addition, as part of giving back to communities and support the less fortunate, THZ identified and contributed over US$12 000 to charitable organizations such as Margret Hugo School of the Blind, SOS Children’s Villages, St Giles Rehabilitation Centre, Henry Murray School of the Deaf and Mutimurefu Psychiatric Hospital.
Projects and initiatives
Recent engagements with the Government of Zimbabwe resulted in an agreement that the balance of 3 300 hectares of Kilimanjaro be developed and managed by the Company on a full cost recovery basis for the sole benefit of new farmers to be identified and allocated plots upfront by Government. It is envisaged that the same model already applied to the initial 700 hectares of the Kilimanjaro Empowerment Block will be extended to the remaining 3 300 ha and funding will be sourced from Banks through the Lowveld Sugarcane Development Trust (“LSDT”). About 165 farmers farming on 20 ha plots are expected to benefit from the 3 300 ha when fully developed, resulting in 1 500 jobs which will in turn benefit 6 000 dependants. Various service providers will partake in the project development value of about US$25 million.
A management agreement for the Mteri wildlife and lodges was entered into with Magnum Alley (Pvt) Ltd, a private operator with experience in wildlife management to address SHE and related issues that were being experienced due to lack of adequate skills internally. Since their engagement in June 2022, reports of human and wildlife conflict have been reduced significantly with efforts still to be stepped up in the area of fish poaching which is still being experienced although at a lower rate. An offer was made to the Chilonga community to benefit from the wildlife operations which include a share of income from the lodges and fish harvested from the dam as well as meat from animals hunted to encourage the community to participate in the protection of wildlife against poaching. The Chilonga community was also engaged to provide some security around the Mteri game area providing the much needed employment to the locals.
Hippo Valley Estates Limited and Triangle Limited (Tongaat Hulett Zimbabwe) currently provide input and extension support to over 1 000 farmers operating on approximately 20 000ha. Tongaat Hulett Zimbabwe is continuing to partner some out-growers by co managing their previously underperforming farms with a focus on those achieving below the break-even yield of 65 tons per ha. To date, this has seen 741ha under the co management arrangement. The Company also continues to provide technical services assistance to a number of new sugar-cane out-grower development projects for the benefit of local farmers.
The Company awaits the finalization of the 99-year lease relating to Hippo Valley North (23 979 ha) where some 3 804.23ha has been signed to date by the Minister. Freehold title on Hippo Valley South (16 433 ha), largely a Game Park and wildlife conservation area, is being maintained. As previously reported, Government has since assured the Company that the administrative processes are nearing completion, paving way for the issuance of the 99 Year Lease. There has been some progress in the administrative processes being conducted by the Government of Zimbabwe which has seen reviews of the 99-Year Lease document by the Attorney General’s Office at an advanced stage.
Mr Ngoni Kudenga, a long-serving and dedicated director and Chairman of the Audit Committee, retired at the Annual General Meeting held on 27 October 2022. Further, Mr Robin Goetzsche resigned from the board on 3 November 2022. The Board expresses sincere gratitude to Messrs, Kudenga and Goetzsche on their contribution to the Company and wish them well in the future endeavours.
Irrigation water cover for approximately two seasons at normal water duty is secured within the industries water supply dams. Latest national and regional weather forecasts indicate normal and above normal rainfall which will further strengthen the industry’s security of irrigation water well into the future.
The Company’s sugar production for current season is forecast to be marginally within the levels achieved in prior season. The production growth impact of current cane expansion and yield improvement initiatives will crystalize in future seasons due to the long cropping cycle for sugarcane.
Current marketing focus is on optimizing returns, specifically through prioritizing local market requirements and allocating residual stocks to regional and international premium markets to generate additional foreign currency. The Company continues to cushion its working capital from the potential impact of liquidity and currency distortions through both local and foreign currency funding facilities with reputable financial institutions.
Declining inflation, prospects of stable exchange rates at the back of the recent injection of nearly US$1bn in SDRs by the International Monetary fund (IMF), the record maize harvest and the opening of the economy in light of the receding Covid-19 risks, all bode well for the economy in the medium term.
The Company remains committed to improving matters of occupational safety and environmental stewardship. The Company is also not only on a drive to adopt sustainable practices but is also conscientizing its key stakeholders on the same. As part of its efforts towards governance, management of controls and key risks continues to be enhanced. The Company welcomes the recent announcement by the Government that the suspension of duty on basic commodities which expired on 18 November 2022, will not be extended, as this will strengthen the industry’s position against duty-free sugar imports.
By Order of the Board
Chief Executive Officer
6 December 2022
DIRECTORS: C F Dube (Independent Non-executive Chairman), A Mhere* (Chief Executive Officer), R D Aitken, J G Hudson, N Kudenga, T Masarakufa*, R T Masawi, G Sweto, R J Moyo, N J J Mangwiza, D K Shinya *Executive