Wednesday, November 4, 2009

Sugar: Experts split on sweeter share prices

November 4, 2009


Illovo Sugar and Tongaat Hulett's share prices have surged over the past 10 months, buoyed by the strong sugar price that reached a 22-year high recently, but analysts are divided on whether the party is now over.

Lonwabo Maqubela, an analyst at Allan Gray, said: "The world sugar market is highly volatile. As contrarian investors, when we observe the strong momentum in the sugar sector today we become cautious."

Yet despite these concerns Allan Gray remains positive about the prospects for Illovo, due to the company's success in Africa so far.

"We are confident that the African operations will continue to generate attractive returns for shareholders."

Illovo's share price climbed 71 percent to R37 between November last year and last month.

Competitor Tongaat Hulett has also had a good ride.

Between December last year and early August this year Tongaat's share price more than doubled to R102.55.

Mohamed Loonat, a portfolio manager at Element Investment Managers, said: "We are generally bullish on sugar as urbanisation and growth in emerging markets will drive sugar consumption."

Tongaat and Illovo are exposed to stable low-cost sugar-producing countries. Loonat said higher share prices were sustainable on a three-year horizon, although there might be short-term volatility.

But others disagree.

One analyst said the higher sugar price was not necessarily sustainable at these levels and although sugar firms would have a very good year this year and maybe next year, these companies had not become more valuable.

Tongaat offered more upside, the analyst said, as it had a property arm to underpin it and was expanding in Mozambique, while all the good news on Illovo was out.

The world market is due to swing into a deficit in this year's sugar season due to drought causing substantial production declines in India.

In the EU production has fallen due to World Trade Organisation restrictions on its exports and a cut in subsidies to farmers, which has caused inefficient sugar farmers to reduce production.

Illovo operates in South Africa, Zambia, Malawi, Swaziland, Mozambique, Tanzania and plans to expand into Mali. Tongaat operates in South Africa, Zimbabwe, Mozambique and Swaziland.

Illovo fell 6.47 percent to R33.40 yesterday, while Tongaat added 2.07 percent to R98.