REVENUES at the Zimbabwe Stock Exchange-listed sugar producer, Hippo Valley Estates will charge by a hefty 641% during the year to March 31, 2021, spurred by rampaging inflation, according to researchers at IH Securities.
The report gives insights into how experts see a completely different inflation outlook compared to figures released by government in the 2021 national budget two weeks ago, as IH sees rocketing prices, which may further exert pressures on the economy and trigger a further erosion of the domestic currency.
In his 2021 national budget, Finance minister Mthuli Ncube projected a 336% year-end inflation and targeted a 135% figure for next year.
But Hippo’s projected 640% charge may point to sustained volatilities and rocketing prices during the first quarter of 2021, given that most consumer goods have sugar as a key raw material.
Analysts have already warned the markets to brace and prepare for a tougher first half of 2021 than projected by authorities.
IH confirmed this in its paper titled “Hippo Valley Estates Limited; 1H21 Earnings Update: Inflation Induced Pricing Drives Topline”, which tips the market for “high-priced domestic sugar sales”.
“We anticipate the sales mix for FY21 (financial year 2021) will be skewed in favour of higher-priced domestic sales,” IH said.
“We forecast a revenue increase from ZW$1,68 billion (US$,5 million) in FY20 to ZW$12,48 billion (US$152 million) in FY21, being a y/y increase of 641% driven by inflationary price increments in 1H21,” the report said.
The report projects Hippo’s Earnings Before Income, Tax, Depreciation and Amortisation (EBITDA) margins to soften to 70% during the year to March 2021 from 95% this year “as cost lags begin to narrow especially after the rise in utility costs”.
“We anticipate that thereafter EBITDA margins will begin to sharply correct towards historical norms providing downside risk to current levels of profitability. Work on Project Kilimanjaro has seen a total of 2 700 hectares of virgin land being bush cleared and ripped and 588 hectares planted to sugarcane,” IH said.
“We expect the project to gain traction as the local currency stabilises and the banking industry takes a less cautious approach to landing. In order to encourage consumption of locally produced sugar, the government excluded the commodity from importation under the Open General Import Licence.”
It, however, said the price of locally produced sugar was 50% above the landed price, which has rendered exports of products that have sugar as an input uncompetitive.
“To enhance exports of goods where sugar is a main ingredient, the government will issue import licences for affected manufacturers which may marginally weaken local demand for Hippo’s product,” IH said.
“SI 85 of 2020 allowing the use of free funds in the trading of local goods as well as a stable local currency following the introduction of the foreign currency auction system, will lead to less distortions in local and international pricing of the commodity.”
In its financial statements for the half year ended September 30, 2020, Hippo said adverse economic conditions had stalled progress at the Project Kilimanjaro, which was expected to be completed in 2025.
Zimbabwean banks have generally pursued a cautious lending strategy in the wake of steep inflationary hikes at the beginning of the year, as well as exchange volatilities.
“Project works have been slowed down on account of delays in obtaining the requisite funding from ﬁnancial institutions at the back of adverse economic conditions,” Hippo said.
On completion the Project Kilimanjaro is expected to contribute signiﬁcantly to the industry effort to fully utilise its installed milling capacity of 600 000 tonnes of sugar by 2024/25.
This was projected to position Zimbabwe as one of the most competitive sugar producers in the region.