IH Securities predicts 6% Hippo Valley revenue drop

FINANCIAL services firm, IH Securities projects revenue for sugarcane miller Hippo Valley Estates Limited (HVEL) to reach US$141 million for its current financial year, a decrease from the comparative period owing to duty-free sugar imports.

Based on its financial results released last month, HVEL revenue was $139,26 billion in the year ended March 31, 2023, which translates to US$149,76 million.

Thus, IH Securities projection is nearly 6% down from the 2023 period.

HVEL explained that the inflation-adjusted revenue for the period ended March 31, 2023, saw an increase of 37% from $101,9 billion in the comparative 2022 period.

The increase was on the back of price adjustments in response to increasing cost pressures, amplified by currency dynamics embedded in the consumer price index.

In a statement analysing HVEL’s financial results released yesterday, IH Securities said that on the demand side, government’s re-instatement of import duty exemption on basic commodities would dent the sugar miller’s sales into the domestic market.

“For forecasts to remain relevant in the present inflationary environment, we have shifted to a US dollar-based valuation of the business. We believe that US dollar revenue will register at US$141m to FY24 supported by firmer prices on the international market and a 0,62% marginal increase in sugar production emanating from increasing area under hectare as well as carryover cane,” IH Securities said.

“Key changes to the cost structure for companies includes accelerated dollarisation of rates and inputs thereby putting margins under pressure. In our view, EBITDA [earnings before interest, taxes, depreciation and amortisation] margins will start moderating going forward initially slowing to 25% in FY24, then down to 16% by year five.

“Our forecasts did not take into account adjusted EBITDA as we cannot build a constructive view on fair value adjustments going forward, however on that basis we have placed a significant 25% discount on earnings to maintain a conservative view on quality of earnings.”

Despite the lower revenues, IH Securities predicted that net income will come in at US$20 million in the current earnings cycle, nearly 8% of what the company earned in its 2023 financial year.

At the end of March, HVEL recorded a profit after tax of $17,22 billion which translated to US$18,52 million which was an increase from the comparative 2022 period owing to $3,22 billion in finance income.

“However, as margins correct to historical averages, we expect normalisation of profits thereafter,” IH Securities added.

The downgrade of HVEL revenue by IH Securities comes as the sugar miller warned that its biggest threat remained the duty-free sugar.

“The operating environment is anticipated to remain volatile and hyperinflationary in the short to medium term,” HVEL said in a statement attached to its financial results for year ended March 31, 2023.

“With the recently introduced Statutory Instrument 80 of 2023 allowing duty free importation of several commodities including sugar, the sugar industry faces huge pressure to compete against imports coming from competitors operating in stable and subsidised environments.”

HVEL added that additionally, the ongoing rolling power outages were set to compound recovery challenges across the economy.

“The company continues to monitor and navigate these complexities and implement appropriate value preservation measures,” HVEL said.

Both millers and private farmers are currently working to finalise the implementation of an arbitration decision, which was reached at the start of the 2023/24 milling season.

This will see a sugar milling agreement and a cane purchase agreement being entered into with private farmers because of its execution.

Both agreements will see improved deliveries to HVEL which may keep it profitable.

HVEL was in a highly liquid position by the end of its financial year ended March 31, 2023, with the firm having $2,68 to every dollar of debt which will limit the effects of its short-term liabilities and overall profitability.

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