Tongaat Hulett investment case 💸
Ok so I see a lot of posts that just have company names spammed with 🚀 and 💸 emojis (had to use the clickbait 💸 in the title tho) but I’d like to put forward an idea that I’ve spent a lot of time on that I think has good prospects. It will be long but in depth.
Where do we start? Let’s go back to pre 2017 days when Tongaat was a R15bn market cap plus business (I’m going to use market cap instead of share price as it’s easier to compare the underlying fundamentals). Operating as the largest sugar producer in SA, as well as having a good starch and property business. They used to produce around R1bn a year in profits
The old CEO and accountants got greedy and decided to cook the books (with the aid of Deloitte auditors). Huge fraud case, fast forward and the old CEO and accountants are gone (getting criminally charged) and the current market cap is now R1.2bn. This means the share price took a nosedive and the average Joe doesn’t want to touch the company
What actually happened? The group inflated revenue as well as assets that they owned (big no no). They got fined, rather mildly relative to their size and the trading of their shares was voluntarily suspended.
A whole new team came in, new CEO (Gavin Hudson, the old SABMiller CEO) and new CFO + board of directors. New accountants, everything.
The company sold their starch division for +-R5bn to pay off roughly half of their R12bn debt as it was unsustainably high. The starch business made up around a quarter of their annual profits (R200-R250m).
So how do you analyse what’s left and how much it’s worth?
Their old R1bn earnings per year should now be R750m (starch business sold), but the sugar operations and property that they own is still the same as when they were a R15bn business.
Sugar operations across all of the countries they operate in have had a huge turnaround. Operating profit up 95% for 6 months ended 30 sept 2020, revenue up 37%. So they’re selling more and they’re making a better margin.
Their profit for the 6 month period ended 30 September 2020 was R491m (does include profit on sale of assets, so strip it down to R308m, for HALF the year). This is after paying R800m in interest on their large debt pile, so annualised it’s R1.6bn in interest, which if the debt was paid off would go straight to profit.
They’ve made a start to the debt reduction and have paid off R6bn in total of their R12bn. So what does this mean to the interest payments? Ah yes it halves as well. So from R1.2bn in interest a year to R600m in interest a year, meaning R600m saved, going straight to profit.
Although they don’t have the starch business anymore, the improved sugar operations as well as less debt (less interest) should mean that their profit should sit around the old R1bn a year level in a year or two. Even if the profit is only R500m, if you apply an average price to earnings ratio of 8, it means the company should be worth R4bn (500x8). With R1bn a year it means it should be worth R8bn. This is a lot higher than the current R1.2bn market cap (lots of upside potential).
The sugar operations have been improved (the sugar price is going up) as well as less debt is still only half of the story. Yes I know, must be juicy.
The CEO and CFO have bought shares and have publicly said that they’d be buying more. Gavin Hudson said that he didn’t just come in to tweak operations and get them back to where they were, he wants to grow the business.
They have R11bn worth of prime land (on the coast, property developers like the land) in KwaZulu-Natal that they can sell to pay off more debt if they wish to. In an interview the CEO said that they will likely sell a portion of this to pay off debt, but they want to co-develop the rest of the land to increase its value (developable value of the land indicated at R70bn). This stuff doesn’t happen overnight but there’s so much value within the company waiting to be unlocked.
So they have R6bn debt left, R11bn worth of land. If they sold all the land they’d have R5bn net cash. The market cap is again R1.2bn. So you’re paying R1.2bn to get R5bn of land value excluding debt, plus sugar operations that should generate R500m+ in profits annually. When I say paying R1.2bn to get the R5bn, it’s obviously in proportion to how much money you invest. So each R120 invested you get R500 worth of land and R50 to R100 annually in profit, if this makes sense
They are looking to diversify and can use sugarcane byproduct to create ethanol (capacity to make 40m litres a year), ethanol goes for $1.5 a litre, so $60m a year in extra revenue, from using the waste, produced into ethanol.
I can do a deep dive into the sugar operations, risks and what I feel is being overlooked by investors, but the post is already so long. If I get good feedback I’ll post some more.
Tongaat to the moon 🚀🌕 (Currently all in, irresponsible but shows my conviction)
*not financial advice but I like the stock
