We have extracted the Chairman’s Statement from the 2019 abridged report of Hippo Valley Estate (HIPO.zw), listed on the Zimbabwe Stock Exchange:
The results for the year ended 31 March 2019 were achieved in a very difficult environment, characterised by severe liquidity constraints compounded by the introduction of the 2% Intermediated Money Transfer Tax (IMTT), increased arbitrage activities and the resultant cost push inflation, combined with landmark changes to the currency and exchange rate dynamics. These changes involved the separation and creation of distinct bank accounts for depositors, namely Nostro FCA and RTGS FCA in October 2018, and were immediately followed by a proliferation of increased arbitrage activities and the resultant price distortion, further compounded by the subsequent introduction of the Inter-bank foreign exchange market in February 2019 and the concurrent introduction of the RTGS dollar as a currency. The combination of these changes precipitated increases in inflation rate, which reached a high of 67% by March 2019 on the back of a multiplicity of exchange rates to the US dollar, fueled by the parallel market activities. Notwithstanding the post-election disturbances and the socio-economic dynamics, the operating environment remained relatively stable. The financial performance for the period under review is being evaluated in the context of these local macro-economic dynamics.
An operating profit of RTGS$113,6 million for the year ended 31 March 2019 was achieved, compared to RTGS$11,1 million (restated) in the prior year. This was mainly due to an improvement in the sales mix, an increase in sales volume for both local and export markets and timely adjustments of prices in response to inflationary pressures. The availability of irrigation water positively impacted cane yields, resulting in the increase in sugar production to 239 000 tons (2018: 197 000 tons).
A total of 1 862 000 tons (2018: 1 534 000 tons) of cane was crushed during the season, of which 1 068 000 tons (2018: 875 000 tons) was Company cane and 730 000 tons (2018: 659 000 tons) was delivered by private farmers. In addition, 35 000 tons and 29 000 tons were received from Green Fuel and Triangle Limited, respectively. A total of 239 000 tons sugar was produced (2018: 197 000), a 21% increase from the last season, on the back of improved cane yields. Cane plough out and replanting programmes continued during the year with a total of 1 670 hectares (2018: 2 841 hectares) being replanted for the year ended 31 March 2019, as part of the continued initiative to restore cane yields to optimal levels in the shortest time possible. The momentum established in previous years to reduce costs through operating efficiencies and conversion of fixed costs into variable was maintained throughout the current reporting period.
Total industry sales of 371 000 tons (2018: 349 000 tons) were realised in the local market, an increase of 6% from the previous year. Total industry exports to Europe, the US and regional markets increased to 112 000 tons (2018: 58 000), an increase of 54 000 tons due to increased production. The combination of a favourable sales mix and the price adjustments achieved in the domestic market resulted in an average mill door price for the season of RTGS$861 per ton (2018: RTGS$626 per ton), a 38% overall increase.
Due to the economic volatilities and the resultant price distortions, coupled with the introduction of the RTGS dollar in February 2019 at an unrealistic exchange rate (not reflective of the economic fundamentals), financial results for the year are not readily comparable to prior year. In this regard, the financial performance is being reviewed in the context of the inherent economic distortions, with particular reference to the implications of SI 33 of 2019 which introduced the RTGS dollar at an exchange rate of 1: 1 to the US dollar.
Revenue for the year amounted to RTGS$244,9 million (2018: RTGS$159,0 million), an increase of 54% mainly due to the 21% increase in sugar production, combined with the impact of domestic market sugar price adjustments prompted by cost push inflation experienced in the period post October 2018. As a result, operating profit increased to RTGS$113,6 million (2018: RTGS$11,1 million).
Operating cash inflow (after working capital movements) was RTGS$21,1 million (2018: inflow of RTGS$29,6 million), a decrease of RTGS$8,5 million as a result of an increase in cash absorbed in working capital. Cash generated from operations amounted to RTGS$37,2 million (2018: RTGS$16,6 million), while working capital decreased by RTGS$16,1 million compared to a RTGS$13,0 million increase in the prior year. Overall, after taking into account capital expenditure and root replanting costs totalling RTGS$9,8 million (2018: RTGS$17,8 million), a total net cash outflow before financing activities of RTGS$0,5 million (2018: RTGS$5,3 million inflow) was realised.
The Company’s net debt at 31 March 2019 amounted to RTGS$37,1 million compared to the prior year net debt level of RTGS$33,2 million. A total of RTGS$6,7 million (2018: RTGS$4,7 million) was incurred in finance costs, commensurate with the level of borrowings over the period under review, all of which were unsecured at an average interest rate of 6,43% (2018: 7,97%). An attributable profit of 38,2 RTGS cents per share was achieved for the year compared to 2,8 RTGS cents per share realised in the prior year.
Land and Milling License
The attention of members is drawn to note 9.8 of the financial statements on the de-recognition of land measuring 54 205 hectares whose ownership effectively transferred to the Government of Zimbabwe (“Government”) in July 2005, in terms of the Land Acquisition Act (Chapter 20:10) and the Constitution of Zimbabwe Amendment No. 17. The Directors believe that the adoption of industry practice in the past in recognising the land in the statement of financial position of the Group and Company, which was not consistent with the substance and legal form of land dynamics in the country after considering the terms of the Constitution of Zimbabwe Amendment No. 17 and the Land Acquisition Act (Chapter 20:10) together with the gazetting for acquisition of 70% of the land by Government in August 2003. In coming to this conclusion, the Directors obtained legal opinion.
In order to secure its assets and provide certainty of tenure, in February 2019, the Group and Company formally applied to the Government of Zimbabwe for a 99-year lease, on the agricultural land under their use, which lease is still to be formalised and finalised. The Group’s milling licence expired in prior years. Applications to renew the licence were lodged with the relevant authorities and their response is still awaited. Notwithstanding the land dynamics in Zimbabwe and the absence of a milling license, the Directors are satisfied that the Group and Company will continue to operate as a going concern into the foreseeable future.
Members will recall that in June 2019 and in November 2019, the Company issued cautionary statements in which it advised that the parent company, Tongaat Hulett Limited (“THL”), was conducting a strategic and financial review the outcome of which was likely to impact the Company’s financial results, arising mainly from changes in accounting policies, estimates and correction of prior period errors. This review by THL has resulted in the Group and Company changing the accounting treatment of various elements of the financial statements. The impact of these changes in treatment, which resulted in prior period errors in respect of the respective elements, are detailed in the notes to the financial statements. The review of the THL financials is complete and key findings are available on the THL website.
Due to the persistent economic volatilities and the resultant price distortions, combined with the currency changes introduced in February 2019, the Directors have decided not to declare a dividend for the year ended 31 March 2019.
Sustainable Rural Communities
Private farmers continue to make a significant contribution towards the overall performance of the industry. During the 2018/19 season, private farmers replanted 1 908 hectares (2017/18: 1 226 hectares) under sugar cane following the improved availability of irrigation water. During the past season, total private farmer cane deliveries to the two sugar mills amounted to 1 067 112 tons (2018: 1 075 740 tons) from 872 active farmers who directly employ approximately 8 000 workers.
The Company continues to pro-actively engage with all its stakeholders with a view to creating successful communities on a sustainable basis. As part of the Company’s ongoing community empowerment drive under its Socio-Economic Development programme, a total of RTGS$5,0 million (2018: RTGS$2,7 million) was spent on various community development initiatives.
While the recent surge in inflation, leading to the re-emergence of a hyperinflationary economy, is cause for concern, the Company remains optimistic that the Transitional Stabilization initiatives by Government will yield positive results in restoring the economic fundamentals. As such the industry will continue to expand its sugar cane production (through both vertical and horizontal growth) and supply to the sugar mills, aimed at utilising available total milling capacity. Of note, under this initiative is the Kilimanjaro Project where a total of 4 000 hectares is targeted to be developed and work is already underway. As part of the Tongaat Hulett Group, the Company has embarked on a turnaround strategy, code-named ‘Project Crystal’, focusing on three main areas of right-sizing and fixing the business fundamentals, leveraging the value chain and creating a platform for long-term growth.
Cost reduction will continue to be a focus area. Given the high fixed cost nature of sugar operations, unit costs of sugar production for the Company are expected to reduce further with the benefit of future volume increases thereby increasing the competitiveness of its sugar on both the domestic and export markets.
By Order of the Board
D L Marokane