ADVISORY firm Inter-Horizon Securities (IH) has projected that sugar producer, Hippo Valley’s earnings before interest, taxes, depreciation and amortisation (EBITDA) margins will moderate in United States dollar (US$) terms during the 2023 financial year.

In an analysis of the firm’s financial statements for the full year ended March 31, 2022, IH said that downside risks still existed from high financial costs.

“For forecasts to remain relevant in the present inflationary environment, we have shifted to a US$ based valuation of the business,” IH said this week.

“The US$ revenue for financial year 2023 (FY23) is forecast to remain flat. We are conservative as we wait for updates on recovery from the aphid infestation. We have forecast a moderation in EBITDA margins to 38%, which is above historical averages of 20%. However, downside risk exists from increasing financial costs. Net income is forecast to close the year 18% down from FY22 as revaluations ease. Net debt to EBITDA is expected to creep up from 4,5% to 5% in FY23 as the company borrows for… projects…”

In light of the positive outturn expected for the 2022/23 rainfall season, IH said the sugar industry would receive a full water allocation in the season which has potential to boost production levels.

“Of concern is the risk of uneven rainfall that may yet again lead to water logging,” it said.

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In the medium to long term, the financial services firm said additional cane was expected from private farmers as the Kilimanjaro and Pezulu projects are developed.

So far 700 hectares under the 4 000ha Kilimanjaro project have been developed and distributed to beneficiaries for planting.

“Local disposable incomes have come under pressure given the triple digit inflation environment. This may negatively impact sales volumes for manufacturers that use sugar as a key ingredient, this may in turn impact local demand and sales for sugar,” it said.

For the financial year 2022, cane deliveries from the company were 14% below the same period in prior year as aphid infestations and waterlogging reduced yields.

Cane deliveries from private farmers were up 30% year-on-year. The incessant rains in December 2020/21 disrupted the harvesting programme resulting in 555 hectares being carried over for harvest in the FY22 financial year.

The company’s sugar production increased by a marginal 3% year-on-year from 204 000 tonnes in FY21 to 209 000 tonnes in FY22. The company’s share of total industry sales volume was 53% from 50% in the prior year. Sales volumes into the domestic market were up 10% as demand firmed and supply improved.

Following a reduction in the Common Market for Eastern and Southern Africa quota allocation in Kenya, total industry exports fell by a drastic 67% year-on-year to 38 000 tonnes from 115 000 tonnes.

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