CSR's prospects hit
June 19, 2006 http://thecouriermail.news.com.au/st...2-3122,00.html
LEADING sugar company CSR could be hit by a 10.6 per cent slump in net profit in the new financial year after a Queensland canegrowing region suffered an outbreak of fungal disease this month.
The sugarcane "smut" can slash yields by more than 30 per cent but, worse yet, may also lead to mill contamination and lost time of 12 to 18 months in re-planting crops, says brokerage company ABN Amro Morgans.
Sugar farmers could face losses in the hundreds of millions of dollars from the airborne disease, which is common overseas but had never before struck on Australia's east coast.
However, the discovery of the fungus in a small and remote farm area near Bundaberg means that CSR's primary growing catchments in the Herbert and Burdekin regions might escape unscathed, the broker's client note said.
Queensland's Department of Primary Industries quickly quarantined the 100ha farm in Childers when the fungus was discovered but it might still travel north and could have "a material impact on raw sugar yields in the 2006 and 2007 cropping seasons", the report said.
"While we continue to see strength from CSR's diversified earning streams, we remain watchful of any further spread of smut disease and its potential to impact future earnings, given sugar represents 42 per cent of fiscal year 2007 EBIT (earnings before interest and tax)."
The Childers' region annual sugar cane crush, planned to start today, has been halted while investigations continue.
The fungus, which stunts infected plants and prevents the possibility of regrowth, could lead to a decrease in CSR's cane tonnage from 15 million tonnes to 10 millions tonnes.
As a result, sugar EBIT would tumble 22 per cent, from $196.6 million to $153.3 million.
Despite the dangers facing the $2 billion industry, ABN Amro Morgans said it remained "cautiously optimistic" about the chances of containing the disease and maintained its "buy" recommendation for the stock.
"Any reaction of global sugar prices to this outbreak may in fact lead to a rally in the CSR share price given its historical correlation with the NY No 11 raw sugar future, irrespective of the potential impact on CSR's cane yield," the report said.
Record high prices for sugar and aluminium helped CSR boost earnings last year despite a housing downturn which hit the firm's building products division.
Even with an increase in sugar diverted for ethanol production, CSR in May reported a 4.4 per cent fall in net profit to $305 million for the year to March 31 because of a series of costly one-off expenses.
Pre-tax earnings jumped 16.2 per cent to $416.8 million, with revenue from sugar shooting up 42.4 per cent to $1.36 billion.
CSR forecast pre-tax earnings growth of about 10 per cent for the current year, with sugar prices tipped to exceed $400 per tonne, up from $316 per tonne. That should compensate for a likely earnings slowdown in building products, aluminium and property returns.