The falling price of sugar means the company is likely to face some difficult trading conditions over short to medium term. However given Mackay Sugar’s asset base and investments, it has a number of options available to manage through the commodity cycle
While Mackay Sugar’s (MSL) underlying business reported solid growth and improved credit metrics in FY15 the continued fall in sugar prices means that the coming years are likely to be difficult for the group.
However, MSL has operated through cycles before and its extensive asset backing and easily divestible and marketable securities gives the company many options for generating cashflow. This is demonstrated by the recently announced agreement to monetise its rights to forward cashflow relating to MSL’s Sugar Terminals joint venture.
FY15 financial results
MSL has reported strong underlying financial results with revenue increasing from $443.4m in FY14 to $487.8m in FY15. EBITDA was also up from $34.3m in the previous year to 41.8m FY15. The results were driven by improved growing and crushing conditions in both Mackay and Mossman, due to favourable weather leading to higher crop yields. The result was an increase in cane and sugar production across the business.
The results led to an improvement in credit metrics with net debt to EBITDA reducing from 5.0x in FY14 to 3.9x in FY15, while EBITDA interest cover increased from 2.7x in FY14 to 3.1x in FY15.
The group however recorded a net loss of $11.4m ($5.2m profit FY14) after the revaluation of milling assets (a non-cash item) led to a write-down of $19.6m. See Figure 1 below for the company’s profit and loss statement summary.
Profit and loss summary
| ($m) | FY14 | FY15 |
| Total Revenue | 443.4 | 487.8 |
| EBITDA | 34.3 | 41.8 |
| Margin (%) | 0.077 | 0.086 |
| Depn & Amort | 16.6 | 20 |
| EBIT | 17.7 | 21.8 |
| Interest | 12.6 | 13.5 |
| NPBT | 5.2 | 8.2 |
| Extraordinary Items | 0 | -19.6 |
| Tax | 0 | 0 |
| NPAT | 5.2 | -11.4 |
| Credit Statistics | | |
| Total Debt / EBITDA | 5.6x | 4.6x |
| Net Debt / EBITDA | 5.0x | 3.9x |
| EBITDA / Interest | 2.7x | 3.1x |
| EBIT / Interest | 1.4x | 1.6x |
Figure 1
Source: FIIG Securities, Mackay Sugar
Revaluation of Milling Assets
Given the outlook for the company’s raw sugar milling operating segments (predominately affected by the sugar price), Mackay and Mossman milling assets have been revalued. The revaluation was in accordance with the Australian accounting standards and Australian Securities and Investments Commission’s (ASIC) fair value testing requirements. This resulted in a reduction in the carrying value of property, plant and equipment by $27.5m offset by $7.9m in the revaluation reserve account leading to a net amount of $19.6m. This is a non-cash entry which does not affected the company’s ability to meet its obligations but has been necessary to comply with accounting standards.
Sugar Prices
Sugar prices continue to fall as the global raw sugar market deals with another year of oversupply. Futures prices have traded as low as 10.13 US cents per pound - the lowest level since mid-2008.
Commodity Futures Price Quotes for Sugar (US cents per pound)
Figure 2
Source: FIIG Securities, NASDAQ
While the falling AUD has offset this somewhat it has still resulted in lower overall sugar prices in Australian dollar terms, with the spot price trading in the low A$300’s per IPS tonne in August this year. While MSL has hedged two-thirds of sugar this season, should these prices prevail it is likely to bring the average sugar price for the 2015 season below A$400 per IPS tonne which MSL suggest is below its cost of production (and below that of a lot millers around the world).
Sugar price (AUD/tonne)
.jpg?sfvrsn=5242b65a_0 "Sugar price (AUD/tonne)")
Figure 3
Source: FIIG Securities, Queensland Sugar Limited
The CEO Mr Hildebrand has commented that "this is a price level at which we don't cover our costs at the raw sugar milling level, so it is of concern." Mr Hildebrand said that when the sugar price was at 36 cents per pound, just four years ago, it sparked a surge in production leading to a massive oversupply on the market. He said prices would inevitably recover when supply is reduced, but it was a question of when.
As this is a cyclical business with a long trading history, MSL has managed through similar periods before. There is not likely to be a correction in the short term, so the outlook for MSL is for some challenging years ahead. However MSL has a significant asset base in marketable, easily divestible assets and many options to sell or monetise assets as needed. With a book value of $325m in property, plant and equipment and $153m in associated investments MSL has a net asset position of $267m at FY15.
Balance sheet summary
| ($m) | FY14 | FY15 |
| Cash | 22.2 | 30.1 |
| Accounts Receivable | 27.2 | 31.5 |
| Inventory | 12.3 | 15.5 |
| Property, plant & equipment | 344.7 | 325.2 |
| Investments (equity accounted) | 119 | 119.4 |
| Investment properties | 2.2 | 2.2 |
| Intangibles | 0 | 0 |
| Financial investments/other | 26.6 | 33.9 |
| Total Assets | 554.2 | 557.8 |
| Accounts Payable | 50.4 | 53.5 |
| Employee Benefits | 4.2 | 4.7 |
| Secured Debt | 0 | 0 |
| Unsecured Debt | 141.5 | 55 |
| Other | 84.4 | 176.8 |
| Total Liabilities | 280.6 | 290.1 |
| Total Equity | 273.6 | 267.7 |
| Credit Statistics | | |
| Total Debt/Tangible Assets | 34.9% | 34.5% |
| Total Liabilities/Tangible Assets | 50.6% | 52.0% |
| Debt/(Debt+Equity) | 41.4% | 41.8% |
Figure 4
Source: FIIG Securities, Mackay Sugar
Sugar Terminals Limited shares transaction
To maintain the group’s capital expenditure programme, to improve the performance of the core business over the next five years, MSL has entered into an agreement to monetise the income stream from its 25.1% shareholding of M class shares in STL. The arrangement is with One Tree Agriculture Pty Ltd (OTA). OTA is a subsidiary of Black River Ag Fund 2 Investment (Australia) Pty Ltd, which owns four operating subsidiaries in Australia, including Racecourse Projects Pty Limited - a joint venture company in which Mackay Sugar holds a 14.7% shareholding interest.
Under the arrangement, OTA has paid MSL a capital sum of $26.5m in exchange for the rights to the income stream from Mackay Sugar’s M class shares in STL for period of 8.6 years. At the end of that period (or earlier in certain scenarios), MSL will reacquire the rights to the income stream for a price related to the prevailing STL share price at the time. MSL will continue to be the registered owner of the STL shares and as an active miller will continue to exercise its voting rights in relation to its STL shareholding.
Board changes
MSL’s board has appointed Jason Lowry to the position of CEO effective 15 September after outgoing CEO, Quinton Hildebrand announced his decision to stand down from the role in April. Jason has been a key member of MSL’s management team for over three years. He is currently the General Manager Milling Operations and is responsible for managing the company’s three Mackay mills, the Racecourse Cogeneration Plant, and diversification and business improvement initiatives.
Prior to joining Mackay Sugar in early May 2012, Jason was Director of Factory Operations at American Crystal Sugar Company where he was responsible for the beet sugar company’s five production facilities. Jason holds a Degree in Chemical Engineering from Montana State University and a Master of Business Administration from St. Ambrose University.
Given Jason’s history with the company and background in the industry, the move is considered a natural progression and he appears more the capable to lead the company.
Conclusion
While MSL has reported solid results for FY15, the continued fall in sugar prices is likely to have a negative effect on its business over the next financial year or longer depending on when a price correction occurs. However the group has operated through industry cycles before and the extensive asset backing and easily divestible and marketable securities gives the company many options. The Sugar Terminals transaction is an example of easily being able to monetise assets and means the company can maintain its capital expenditure programme to keep the facilities efficient into the future.