FINANCIAL OVERVIEW

During the year under review the group’s operations were impacted by adverse climatic events, with production in the cane, banana and grain divisions well below the levels of the previous year. Realised value in the market was also affected by the stronger Rand. The result was that group revenue declined to R298,3 million from the previous year’s R305,9 million with operating profit reducing to R25,8 million (2010: R36,4 million).

Headline earnings, however, at R25,3 million, showed a significant improvement from the previous year’s low base figure of R11,1 million, which was severely affected by the operating loss on the citrus operation, since discontinued.

The difference between the headline earnings figure of R25,3 million (204 cents per share) and the total earnings figure of R112,8 million (911 cents per share) is due to the profit recorded on the sale of the Komati Estate to the state in settlement of a land claim. The receipt of the proceeds of this sale increased cash flow with a consequent decrease in funding requirements of R57,8 million. The resultant reduction in finance costs, together with dividend income generated by the preference share investments acquired with the residual funds, have contributed significantly to this year’s earnings. The group is now substantially ungeared with a significant capacity for expansion and acquisition.

STRATEGIC DEVELOPMENTS

Undoubtedly the major event in the year was the eventual conclusion of the sale of the group’s Komati Estate to the government under land claim regulations in July 2010, with the concurrent payment of the R200 million purchase price. These funds have been temporarily invested in blue-chip preference share products with major banks pending the identification and implementation of appropriate investment opportunities in line with group strategy. The state is contesting the payment of approximately R25 million in interest due in terms of our agreement arising from payment delays as departmental funding was secured. This matter came before the Court on 16 May 2011 and judgement is expected mid-July 2011.

Several other development objectives were achieved during the year:

• The group’s recently acquired farm at Mazabuka in Zambia enjoyed a successful first year of operation, although the region in general experienced below average yields;
  
  
• The expansion of the Mthayiza joint venture farm at Malelane to the full extent of 720 ha was completed and excellent results are expected from this operation in the future;
  
  
• State funds were approved for the expansion of the KwaCele joint venture from 1 620 ha to 1 950 ha, 120 ha of which was initiated during the course of the year; and
  
  
• Preparations were completed for the planting of the first phase (40 ha) of the 100 ha deciduous fruit expansion at Vyeboom.

A strategic decision was made to relocate 90 ha of bananas to higher ground and better soils on the nowleased Komati estate following several years of severe cold damage, which has negatively impacted yields and quality. The banana plantings will replace cane in the new location and vice versa. It is expected that this will result in major improvements in yields and quality, with the cane also benefiting from the crop rotation.

During the year the decision was made to terminate the crocodile farming operation due to extremely weak market conditions, with no expectations of relief in the medium term. The operation was too small to have a significant impact on group results and absorbed a disproportionate amount of management time. The Crocworld tourism operation remains open, largely because of its contribution to the Scottburgh area, pending the finalisation and implementation of development plans for the Renishaw property.

The evaluation of the Renishaw property for commercial, industrial and residential development is ongoing, with the Environmental Management Framework approved by the relevant authorities and the final phase of the Environmental Impact Assessment and Project Development Application in progress. If no significant objections are received, rezoning should be achieved by March 2012. While expressions of interest have been received from several potential tenants, it must be emphasised that this is a long-term project which will only be implemented over the next 20 years or more. The land claim on part of the Renishaw property will also need to be resolved before the full benefit of any development plan can be realised.

A great deal of senior management time and effort is devoted to identifying and implementing new development projects, consistent with the group’s mission to build on its position as a major player in the southern Africa agricultural industry. Many options have been evaluated, most of which were discarded due to marginal viability or poor fit with the group’s values and structures. Although there is strong competition for quality farm assets and demanding risk-return parameters are applied in evaluating new investments, we are confident that we will be able to invest the financial resources at our disposal to significantly enhance shareholder returns in the medium term.

OPERATIONS

Cane
The results from the group’s cane operations were disappointing in the 2010/11 financial year, with total production of 563 113 tons, 9% down on the previous year. The exclusion of Riversbend offset by the inclusion of Hagiar Kim farm in Mazabuka, Zambia contributed some 3% of this decline. Operating profit from cane decreased by 15% from R54,4 million in the previous year to R46,3 million.

Production and quality on the Swaziland Estate were also well below the high standards of recent years with cane production declining by 12% to 154 841 tons and sucrose declining by 3% to 13,5%, although it is noteworthy that Crookes Brothers achieved the best result in terms of sucrose yield per ha in the mill group. The whole region experienced an exceptionally poor year. Returns were further impacted by the very weak sucrose price, which was 4% lower than the previous year and 27% below the SA RV price, in a year in which the world price was buoyant. As noted, the Swaziland Sugar Association structures and processes are under review, which will hopefully lead to better prices.

Renishaw experienced a disastrous year due to the prolonged drought, during which only 245 mm of rain was measured from January to October compared with a long term annual average of 772 mm over this period. As a result cane production declined by 32%. Furthermore, nearly 290 ha were destroyed by the drought and will be selectively replanted in the next three years. Unfortunately the impact of the drought will be carried forward to the next season due to the high level of root mortality and poor growth during the year.

The KwaCele joint venture near Stanger was affected to a much lesser extent, production declining by 10%, with very limited root mortality. Again though, next season’s production will be affected by slow growth due to the drought.

The prognosis for the forthcoming season is much better, with firmer prices and generally better yields expected, especially from the Swazi Estate. Unfortunately the results will still be dragged down by the knock-on effects of the drought on the coastal estates.

Deciduous
Fruit production in the 2010/11 financial year of 13 933 tons was 25% below that of the previous year. Part of the decline was due to significant replanting undertaken on the farms purchased in the past two years, but a major reduction in yields was experienced throughout the Elgin-Grabouw- Villiersdorp region.

Prices firmed during the year, particularly in the local market, resulting in a R0,6 million loss in this division, compared with the R10,2 million loss of the previous year following the price collapse in major markets. Foreign currency prices in the group’s major overseas markets also firmed towards the end of the year due to supply disruptions in major producing countries. This is expected to have a positive impact in the 2011/12 financial year. Unfortunately the full impact of this firming is not evident at farm level due to the concurrent strengthening of the Rand.

It should be emphasised that, with substantial replanting and expansion in progress on the recently acquired farms Dennebos and Vyeboom, returns from this division will be depressed until the new orchards come into production approximately five years hence, when it will start to make a significant contribution to group profits. Any weakening of the Rand against any or all of the US Dollar, Euro or British Pound, would have a positive impact.

Bananas
For the second year in a row banana production was impacted by frost, this time aggravated by severe wind damage. Production slumped from the already low level of 15 132 tons to 14 602 tons, with quality also adversely affected. As a result a decision was made to replant 90 ha on higher ground less prone to cold. This will take place over two years so the full benefit will only be realised in the 2013/14 financial year. Average prices were also 3% weaker than the previous year, which contributed to the poor results from this division, with operating profit dropping from R9,5 million to R2,6 million.

A concerted effort is being made to turn around the banana division, which has performed below top industry standards in terms of both quality and yield in recent years. Actions taken include restructuring of management, removing plantations on weaker soils, upgrading irrigation standards, more active pest and disease management and a refocus on quality. We expect a significant improvement in the 2011/12 financial year, although the full effect of the replanting will only be realised in the 2014 financial year.

Grain and sheep
Grain production declined from 5 227 tons in the previous year to 4 055 tons due to extremely dry conditions experienced in the Southern Cape during the growing period, with total rainfall in the growing season from April to October of 146 mm nearly 50% lower than the long-term average. Although prices remained somewhat depressed, they were better than the previous year, which assisted in containing the decline in profit from R3,3 million to R2,3 million. The projections for the forthcoming season are positive, with good early rains and prices substantially higher than in the previous two years due to generally low global grain stocks.

The sheep operation experienced an excellent year, with good lambing rates, low mortalities and exceptional prices, resulting in an increase in profit from R1,1 million to R2,3 million.

FUTURE PROSPECTS
Early indications for the forthcoming year are positive and we expect production and prices to return to more normal levels. We also expect that projects currently being implemented will provide a platform for strong future growth. Despite the poor operating results of the past year, the board is confident that we have the right farming assets, management team, systems and partnerships in place to optimise sustainable returns over the long term.

With substantial cash resources available, the group is well positioned to undertake an expansion into southern Africa in line with its strategic mandate, which will take the scope of its operations to a new level. The board is well aware, however, of the need to exercise patience in identifying and evaluating new investments which meet the group’s risk criteria to achieve optimum benefit for the group and its shareholders.