Sudzucker faces tough 2006, say analysts

By Anita Awbi

- Last updated on GMT

Related tags European union

Sugar giant Sudzucker must work hard to guard against falling
revenue this year despite internal restructuring programmes and
expansion into other food sectors, warn analysts.

Following recent European sugar reforms, the German manufacturers ratings have been downgraded by analyst firm Moodys. The move comes after a four month review to assess the future impact of the tariff changes.

Moody's recognised the manufacturers leading position in the EU sugar market, and pointed to remaining tariff barriers preventing imports from international producers into the bloc, as positive short-term factors.

But the ratings firm expressed concern that the staggered reform will bring difficult times for Sudzucker, even though the company remains optimistic.

"The rating outlook is negative as Moody's points out some potential challenges in Sdzucker improving its operating profit and reaching in the year ending February 2007,"​ Moody's said in a statement.

It cautions that if the manufacturers cash flow drops significantly in the current year, it will be under severe business pressure that will impact its rating even further.

And the analyst warns that disappointing operating performance through price pressures in the EU sugar market must be guarded against at all costs to prevent a downward spiral in revenue.

But Sudzucker has taken steps to strengthen its balance sheet through equity and bond issues in February, which are expected to enhance cash flow for the year-end financial statistics.

Moreover, the company will work to restructure its sugar operations to bring the cost savings needed to enhance operating profit.

Although the trade reforms will be tough on all European sugar processors, the Commission's reduction of the sugar reference price by a total of 36 per cent is less than had been put forward in the initial proposal, though volume restrictions will still apply.

Sudzucker has assumed that the planned price reductions will lead to far-reaching structural changes in the European sugar industry.

Producers in climatically less suitable beet-growing regions of the EU are likely to be worse hit, thus significantly reducing the EU's present production capacity.

But because Sudzucker's factories lie in the most efficient regions with the highest sugar yields in Europe, the firm believes it is in an excellent competitive position to ride out the difficult trading climate.

And it also operates in a number of businesses outside the sugar sector, including functional food, bioethanol, starch, fruit and consumer food.

But Moody's acknowledged some problems in these divisions, saying: "[We] believe that the company's presence and expansion in some non-sugar activities that either have shown volatility in the recent past or are in an early phase of development, increase to some extent the business risk."

In the year ended 28 February, Sudzucker reported consolidated revenues of € 4.8bn and operating profit of € 523m.

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