Worth sticking to Illovo in global sugar deficit

A FEW days ago, as you would have read, at Illovo ’s annual general meeting, chairman Robbie Williams reported that Illovo was in the process of raising new capital by way of a rights issue to its shareholders. You may also recall that I had said early in June that the Private Investor portfolio had not bought shares in the sugar sector, not even in as strong a performer as Illovo, mainly because of an aversion to sugar price volatility.

To some followers of this column, this aversion to volatility may conclude that my investment view on volatility risk – shared of course with Jean — is contradictory. After all, the Private Investor portfolio holds counters whose market prices are intrinsically sensitive to the volatility of the investment fundamentals that drive its financial performance.

The market price of NewGold, the investment in gold at rand price , for example, is a yo-yo, jumping up and down as demand and supply in the markets for the rand, dollar and gold change almost from moment to moment. Sasol ’s share price, another example, jumps up and down with the oil price and is also sensitive to the rand-dollar exchange rate.

Just more than a month ago, I wrote, when Illovo’s share price was at R28, that Jean and I were less wary of the sugar market now but reckoned there were shares that had as much value and less risk of volatility.

This was a comparative judgment, and Illovo’s trading volume and price trend since then have, with some blips, been up. Its closing price on Wednesday was R30. Demand has been the driver for trading.

Technically, the shares are not overbought, and Wednesday’s low volumes suggest that holders are sticking to their holdings in the hope that there will be a favourable discount on the price for the new shares.

Illovo’s capital growth is needed for its expansion plans. It has been timed relative to the sound medium- to long-term prospects for the sugar market. If you’re a shareholder then you believe that the company’s management has the necessary acumen to evaluate the investment fundamentals of the market.

At the annual general meeting Williams pointed out that the world sugar market was continuing on its upward trend on a record high global deficit in production compared with demand. There are production constraints in India.

Brazilian producers, he said, are perceptibly unable to respond to the rising world price by increasing their production. Brazil, because of restricted financial resources, already has a production deficit and another deficit has been forecast for next year.

Future sugars, when he spoke, were trading in excess of 0,17/lb and the market would probably become more volatile. However, the SA sugar industry had priced 60% of its current year’s export availability at 0,15,5/lb.

He was bullish on Illovo’s operating profit, which, would, however, be offset by financing costs and the company’s rise in effective tax rate.

A strong rand, especially against the dollar would have an adverse effect on profitability — just another volatility risk.

If I held Illovo’s shares, I would stick to them and, dependent on the discount, follow the rights.

source: businessday.co