Imperial Sugar's Turnaround Makes Slow Progress

After a very tough year, a glimmer of light at the end of the tunnel  is starting to glow for Imperial Sugar (IPSU), as a slew of positive developments have begun to materialize. The company is slowly, but surely, making progress in its rebuilding and turnaround process. If the company is able to build on this momentum, while in turn receiving a  little help from sugar prices, shareholders could once again be in store, for a "sugar high".

Gramercy, Louisiana proposed refinery:  IPSU has entered into a discussions towards a construction agreement with Cargill Inc. and Sugar Growers and Refiners Inc. to erect a new refinery adjacent to its existing refinery in Gramercy, Louisiana.  IPSU would own  33% of the venture, and the bulk of the financing would be obtained from low cost  "Katrina" government bonds.

 

Natural gas price collapse:  Energy is a large cost component of the refining process. In fiscal 2006, the company  acquired 2.5 million MMBTU's   (costing about $25 million)  of natural gas necessary in  its refining efforts. Natural gas prices have fallen sharply since their highs in July, losing almost one  half  their value,  from $13   to $6.78 per MMBTU. Today's current pricing could benefit earnings by as much as 50 cents per share if natural gas maintains its current levels. The company also utilizes coal and fuel oil to support its operations.

 

Port Wentworth Refinery update:  Three storage silos were delivered last month. They contain specialized vents to minimize the risk of dust explosions. The refinery is expected to begin the production of liquefied sugar by the end of the month and crystallized product no later than February. The company is expected to receive insurance proceeds as high as $250 million, necessary to rebuild the plant.

 

Fourth quarter estimates: The lone analyst who provides research coverage is BWS Financial.  Hamad Khorsand, the analyst, has been  historically  negative on IPSU and has forecasted a $9 target price. His fourth quarter forecast expects IPSU to deliver  a  63 cent loss on revenues of $107 million. The shares have nearly reached Khorsand's target, touching a new historic low of $9.69, but have since bounced back over  30%. I expect BWS to upgrade its opinion on IPSU in the near future. The stock has seen impressive relative strength lately, trading up nearly 8%, the same day the Dow hemorrhaged over 500 points. Earnings results are expected to be released on 12/10.  There is a possibility IPSU could beat those estimates , as insurance proceeds received in the fourth quarter could produce a gain, since the bulk of the refinery accident costs have already been charged off to second and third quarter's results.

 

Pricing fundamentals are improving: The price difference between raw sugar and the refined product has been expanding. In fact, refined sugar currently commands a price twice that of raw sugar, creating a  differential beneficial to the bottom line. The company is also progressing well  in its cost cutting endeavors ,as its latest quarter produced a 7% reduction in its Selling ,General, and Administrative costs, from $11.8 million to $11 million.

 

Ownership changes: Lehman Brother's chapter 11 filing caused its 28% share to be transferred to Barclays PLC. Funds have been on a buying spree lately, as  Schultz  Asset Management increased it position to 15%, while Royce and Associates and Dimensional Fund Advisors  have both bulked up on additional shares, as each of their ownership positions now exceeds 6%.

 

The uncertainty over potential lawsuits, OSHA fines and the state of the economy are keeping the shares down, and especially do not underestimate the potential  impact  of the  "all important" price of sugar to the bottom line.  Once some of this uncertainty is lifted, the shares should  swiftly gain upward traction.

 

Wholesome Sweetener's  purchase and Mexican Joint venture: In July,  IPSU purchased an additional 5% stake in Wholesome Sweeteners for $4 million. IPSU now owns 50% of the  organic sugar producer with a market value of $80 million. The company has  an option  to purchase the remaining half of Wholesome, from Edward Billignham & Son,  after 9/10/2010.  Wholesome Sweeteners   was formed in 2001 as the result of a joint venture between the two companies. The joint venture contributed about $300,000 or 3 cents of earnings to third quarter results. IPSU's joint venture, with its Mexican partner, Ingenious Santos, is  progressing well.  The joint venture allows IPSU to take advantage of the assistance of NAFTA, by giving it the ability to procure raw sugar from Mexico as well as marketing its refined products there. This joint venture  contributed $200,000 of earnings towards third quarter results.

 

Tax loss carry over and liquidity:  The company  has a $13.5 million tax loss carryover on its books. This can be used to offset future earnings, and in the process, eliminating future income tax liability. The company's liquidity position is outstanding; it has $89 million in short term liquid assets and zero debt. The company is also expecting insurance proceeds, from the business  interruption portion of its  insurance policy, to begin as early as the fourth quarter.

 

The shares are selling below break up value, taking into consideration solely  the company's cash, and its ownership stakes in Wholesome Sweeteners and it Mexican joint venture. This breakup value does not  include any of the assets associated with IPSU's two refineries. The pricing of IPSU is sheer lunacy at this juncture. If you go one step further and add the market value of IPSU's two refineries  (at about  $100 million each) to its cash position and equity holdings, it would amount to about $350 million or about triple IPSU's current market cap. This stock is a value investor's dream, plain and simple!

 

Disclosure: Long

Comments

[Craigla1:]

Mark: Hate to post this here, but concerning GAP, the security GAJ is NOT a senior note, but a preferred. Am I wrong here? Thanks.

2008 Nov 10 09:54 AM

[Timeline St...:]

I don't even know where to start. First, I don't know if I could ethically invest in a company that has this accident record. Second, its history of bankruptcy doesn't make me feel comfortable. I'm not a classic value investor by philosophy, but if I were I would stay far, far away from this stock. There's a good set of reasons for its current price.

Couldn't this company be sued into oblivion based upon the Savannah fire and the resulting legal action? What you state above regarding the specialized equipment to reduce dust almost sounds like an admission of inadequate safety standards in the previous plant.

In this market, when nearly every stock is beaten down, is it really necessary to invest in a stock like this? On a percentage basis it's down less than GE from its highs. Why would I risk my money or my conscience with this choice? It's madness.

2008 Nov 10 10:54 AM

[Mark Krieger:]

GAJ is not a preferred stock. It is a bond, therfore it has proirity over equity owners in a chapter 11 filing. it has


On Nov 10 09:54 AM Craigla1 wrote:

> Mark: Hate to post this here, but concerning GAP, the security GAJ
> is NOT a senior note, but a preferred. Am I wrong here? Thanks.

2008 Nov 10 12:03 PM

[Mark Krieger:]

I see where you are coming from in your hesitant approach. The fact is, GE has a ton of debt and exposure to bad mortgage loans. IPSU does not. The company has adequate insurance to cover lawsuits (that's why they purchase it) Buying safer equipment is a no brainer and it certainly by no means implies any type of guilt.


On Nov 10 10:54 AM TimboM wrote:

> I don't even know where to start. First, I don't know if I could
> ethically invest in a company that has this accident record. Second,
> its history of bankruptcy doesn't make me feel comfortable. I'm not
> a classic value investor by philosophy, but if I were I would stay
> far, far away from this stock. There's a good set of reasons for
> its current price.
>
> Couldn't this company be sued into oblivion based upon the Savannah
> fire and the resulting legal action? What you state above regarding
> the specialized equipment to reduce dust almost sounds like an admission
> of inadequate safety standards in the previous plant.
>
> In this market, when nearly every stock is beaten down, is it really
> necessary to invest in a stock like this? On a percentage basis it's
> down less than GE from its highs. Why would I risk my money or my
> conscience with this choice? It's madness.

2008 Nov 10 12:09 PM