Zambia Sugar 2017 Annual Review – Refocused and Sweetly Re-energized
Agriculture, Zambia Sugar Plc

Sugar production worldwide in 2014/2015, by region (in million metric tons), ranked Africa 6th globally behind the titans of Asia, South America, Europe, North and Central America and the EU. Producing 11.98 million metric tons, according to, it is clear that Africa which ranks second in global population by continent provides scale for sugar producers such as ZamSugar (part of the Illovo Group).

Reviewing their recently published 2017 annual report was special for TFHZPC. This is the third time, we have had an opportunity to review the performance of Fidelis Mukutha Banda’s board and management team ledby the astute Rebecca Katowa whose ambitious project we reported on in our 2016 AR review has seen their asset base increase by more than 37% over the last two financial years.

Chairman Fidelis admits that the challenging operating environment that his team had predicted and informed shareholders of came to fruition. Environmental and economic conditions were identified that would hurt the cane grower.However, despite the company being left with no choice but to borrow expensive(57.3% increase in long term debt between 2016 and 2017), they were able to increase operating profit by 25.4%. This is what led to their gearing rising from 85% to 138% over the last two financial years. Due to the industry in which the company is in, it is expected that capital intensive projects need to be pursued in order to ensure that the firm’s resources and capabilities are re-enforced in order to face competitive forces. Furthermore, according to AnalyseAfrica, in 2016 45.7% of Zambians were aged between 0 and 14 years (Population at 16.7 million according to ILO).These are the growth stages of childhood development and arguably the largest consumers of sugar based products. Hence, it is inevitable that ZamSugar must position itself well with changing global trends (First world markets have lost taste for sugar) and have capabilities that can allow it to have product scale and scope that can take advantage of changing consumer needs.

A closer look at the financials showed that Net Finance costs were the elephant on the Income Statement for 2017 as they were up by 111.7%.However, revenue increased by 23% with operating cash flows returning to a healthy positive level with gross margin being maintained in the 40 percentile range. This inspired the 25.4% increase in operating profit. Whilst we continued to analyze the figures, we noted the presence of restatements. Upon review of our prior year analysis of the company, we noted that the 2017 audited financials had to be restated to reflect the effect of the revised International Financial Reporting Standards relating to IAS 16 Property, plant and equipment and IAS 41 Agriculture. According to the AR, “the amendments define a bearer plant and require biological assets that meet the definition of a bearer plant to be accounted for as property,plant and equipment. Bearer plants are measured using either the cost model or the revaluation model and not at fair value as previously measured”. We were surprised that neither the board Chair or the MD made mention of this in their letters to shareholders. Restatements have to be handled with care as they may shake the confidence on an investor as they see value evaporating due to figures going up or going down.

Moving along the financial trail, cost of sales were up by 3.9%. This is on the back of a tough year on the working capital front. The working capital cycle increased by 6 days due to an increase in Inventory days.Inventory on the main was up by 17.2%. The Chairman indicates that reduction in disposable income and a change in the export mix of the product were contributors of this position. However, seeing new markets appears to be hot on the agenda list for Rebecca. Furthermore, there are shared value strategies that company is employing that are changing the face of corporate social responsibility in the sugar business (We have seen this with Airtel, and it works).

Liquidity tests indicate that the company is able to cover its short term liabilities despite the cash crunch of the period under review (Acid test 1.16). Overall, currently liabilities were down 14.1% due to the management decision to opt for longer term debt.

Shareholders will be pleased that the usage of capital has been well maintained with return on capital employed maintaining 18% year on year. Return on equity was negative owing to the negative earnings recorded. However, factor out the expensive money and you have a formidable sugar company. Conversely, leverage being high means they are credit rating is locked. Therefore, Rebecca and her team will be pushing an agenda that will ensure that Return on sales, return on non-current assets (the new machinery) and SGA expenses are kept in check. She hopes her team can achieve this through Project 400 whose theme is aptly titled “on the path to building a thriving business”. Project 400 will employ cost optimization, building resilience for growth and profitability and embedding a cost saving culture. She hopes that this cost base reset project alongside other actions and their continuous efforts to implement more stringent budget and resource allocation, will improve their profitability.


Apart from seeking new markets and cost control, a deeper understanding of the health and wellness mega trends will be important. Should consumers seek to opt for less sugar in their tea for health reasons, Rebecca and her team will need to ensure that they fashion a product mix that caters to needs of different consumers. A healthier lifestyle whilst still enjoying sugar will be an interesting paradox to crack.

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