Results Summary

Despite fighting to r e-establish cane supply and milling capacity utilization, Hippo

released an impressive set of results, posting an EBITDA of $16,6m and pretax profit

of $17,2m from a turnover of $58,9m. They incurred a normal tax charge $302,000

and a deferred tax of $4,1m while a deferred tax adjustment (from change in tax

laws) of $8,7m made them enjoy an effective tax credit of $4m, which took their

earnings to $21,2m. Their balance sheet firmed by 10% from $225m to $248m, while

their profits took NAV up 15% to $164,4m. They closed the 12 month period cash

positive at $4,6m with long term debt of $2,2m.

Operational Review

Hippo produced 88,122 tons of sugar, 25% lower than last year’s 117,348 tons. This

was 34% of the national output of 258,713 tons, which was 13% lower than 297,865

tons recorded last year. Cane yield was at 91,5ton/Hectare. National domestic sales

were 153,000 tons in which they enjoyed an average price of $680/ton that was in

line with regional sugar prices. The remainder was exported to the European Union

and the USA. The reason for the lower output last year was the poor harvest from

2008 farming season which was embarked in the depth of the economic depression.

As such, fertilizer and herbicide applications were delayed, thereby bringing the yield

down. In addition, milling equipment was not well furbished to crush the harvested

crop efficiently.

Outlook

They have positive sentiments regarding the oncoming financial year. Being under

the broader Tongaat umbrella, Hippo should find any new plans easier to implement.

They have adequate water supply for the upcoming season and are in the process of

refurbishing their mill for the 2010 crushing season. They intend to assist the nation

reintroduce/revamp the outgrower cane lands that had been disturbed by the land

conflicts and subsequent economic dip the country is currently fighting to get out of.

Hippo’s target is to take national sugar production to 600,000 tons with them

controlling 50% of the market share.

Value and Recommendation

To value Hippo we assume they produce their 2008 volumes of 117,348tons and

enjoy average sugar prices of $650/ton (3% lower than their 2009 average of

$668/ton). This should make them turn over $76,3m and if they enjoy an EBITDA

margin of 28% they should make an EBITDA of $21,5m. If associate companies make

similar contributions to the pretax profits of $1,1m, Hippo should make a PBT and

PAT of $22,1m and $16,6m respectively. Applying an EV/EBITDA of 10,4x (peer

average) we get an EV of $222,4m and market cap of $224,8m (116c per share). With

the potential Hippo is sitting on now that they have a strong “big brother” in

Tongaat, the 116c is but a starting point on their value. Once more information is

shed on capex forecasts and how long it will take before they reach the 300k

ton/annum output, we are very sure their share price will soar above 150c. Hippo is a