Sugar miller can realise significant synergies

The First State Global Agribusiness fund has an investment in a small sugar miller in Northern Queensland called Maryborough Sugar Factory. We remained committed to the investment throughout the recent tropical cyclone Yasi, as our site due diligence gave us significant insight that we drew upon to make an informed decision.

Hurricane hardiness

As tropical cyclone Yasi was bearing down on the prime sugar cane growing and milling region of Australia, where 30% of the nation’s sugar is produced, we remained comfortable with our investment in Maryborough Sugar Factory. The category five tropical cyclone was bigger than the tropical cyclone Larry that caused crop losses two years earlier.

Leading up to the cyclone, the Canegrowers Association estimated the damage from tropical cyclone Yasi would exceed $500m including crop losses and damage to farming infrastructure. This excluded broader damage to infrastructure such as mills and ports. Maryborough’s share price declined 15% in the two days leading up to the cyclone as the market was spooked by concerns of widespread damage.
Comfortable investment

So why were we still comfortable with this investment? We visited some of Maryborough’s operations in early December 2010 including their Mulgrave Mill and cane fields. The Mulgrave Mill was constructed in 1896 and despite being expanded most of the original structure is still in place.

The fact it has been in existence for over 100 years is testament to the solid nature of its structure and one could not help but be impressed. In the region where tropical cyclone Yasi crossed the coast, the past 100 years has seen 15 tropical cyclones impact this area. Sugar cane is a hardy and highly resistant plant ideally suited to growing in North Queensland benefiting from the high rainfall and sunshine.

The day after tropical cyclone Yasi ripped through northern Queensland, Maryborough Sugar Factory reported they had sustained a 5% to 10% reduction in their catchment area’s sugar cane crop and there was no material damage to the company’s infrastructure and mills.

The Tully Mill, not an asset of Maryborough Sugar, took a direct hit from tropical cyclone Yasi which saw their water tower collapse. Otherwise the mill sustained modest damage and it is anticipated it will be operating at 80% capacity in the forthcoming crushing season which starts in July and ends in December.
Gold-plated facility

Sugar Terminals Limited, owners of the port facilities at Cairns and Mourilyan reported neither facility had sustained significant damage. Having seen the Cairns port first hand we can testify to the gold-plated nature of this facility. Both of these ports are used by Maryborough to store and load its raw sugar for export. Maryborough is a shareholder of Sugar Terminal Limited.

At First State, a strong emphasis in placed on site visits. The insights that are achieved through these visits and talking to site management help see us through the volatility of market sentiment. Maryborough Sugar Factory remains an attractive investment as it has made significant steps to consolidate the sugar milling industry of North Queensland. We expect the company to realise good synergies with their recent acquisition of Bundaberg Sugar.

source: investmentweek