Imperial Sugar: Insurance Windfall Will Propel Share Price

Imperial Sugar (IPSU) reported fourth quarter results, with sales of $125 million, generating a net loss of 46 cents per share. The report soundly beat IPSU's sole analyst estimate of a 63 cent loss on a top line of $107 million. Although the company's SG&A costs were trimmed by 10% from $13 million to $11.7 million, as a percentage of sales, this component rose considerably due to the absence of its Port Wentworth's refinery during the period. Nevertheless, Wall Street was impressed, rewarding the stock with a 5% gain despite a sour overall day in the market.

CEO optimistic: John Sheptor, IPSU's CEO, sounded an optimistic tone regarding Fiscal 2009 prospects. He said he was encouraged by the recent improvement in sugar prices and feels the compnay's stellar liquidity position will strengthen its ability to effectively manage its operations through upcoming business cycles. Sheptor stressed the company's rebuild of its Port Wentworth facility (the plant's planned "state of the art" packaging facility will operate more efficiently and reliably) and various business initiatives should bring improved future results.

Business initiatives: (1) IPSU's 50% ownership position in Wholesome Sweeteners is paying dividends. Wholesome has been growing at an annual 30% rate, and just finished its best fiscal year in Aug 2008. Wholesome's strong sales gains continued in Sept and October, with October being its best month in the company's history. Imperial and Wholesome are now working together to expand the distribution of Wholesome products into mainline grocery channels.

(2) IPSU's joint venture with CSI (a Mexican based sugar producer) generated 400,000 tons of refined sugar, distributed through 110 customers in 2008. CSI is also working on plans to construct a bulk bag transfer station to improve cross border logistics.

(3) IPSU has seen its discussions advance nicely in its plans to build a new one million ton capacity refinery in partnership with Cargill and the Louisiana Sugar Grower's Cooperative. The new refinery would create substantial cost savings for all three participants due to operational synergies.

OSHA fines and potential lawsuits: The company expects to incur OSHA fines in the range of $3.5 million to $8.8 million, and has already recorded a $3.5 million charge to its balance sheet to reflect this. IPSU is also a party to 19 lawsuits for losses incurred stemming from the Port Wentworth refinery explosion. The company believes its workers compensation and liability insurance coverage is adequate to provide for damages arising from such claims. IPSU's charges related to the explosion have been calculated at $63 million before insurance proceeds of $36 million, leaving a $27 million impairment charge. The company expects additional insurance proceeds ranging from $8-11 million to further reduce this charge.

Estimated proceeds to rebuild Port Wentworth: The company now anticipates the cost of rebuilding its refinery to be between $200 million and $220 million. IPSU's property, plant and equipment impairment charge was $13 million, so IPSU has the potential to reap up to a $207 million gain from these insurance proceeds. The good news is, the proceeds will not be subject to federal income tax according to the 'involuntary conversion rules" of the Internal revenue code. The code states that insurance proceeds reinvested in replacement property within a specific period of time are not recognized as gains for tax purposes.

Business interruption proceeds: The company expects to recover between $30- 37 million due to "loss of business" claims. IPSU has not yet received business interruption proceeds because claims can not be reported until settled and negotiations are still in process.

The Bottom Line: If you do the math and add up IPSU's total estimated maximum insurance proceeds of $244 million less charges of $20 million, divided by its shares outstanding of 11.8 million, you end up with a mind boggling gain of $19 per share. This figure represents a value 150% greater than today's share price.

It's time to exploit this condition before the market ultimately recognizes how undervalued this situation really is.

Disclosure: Long IPSU.

Comments

[Socialism c...:]

Sugar tariff remains in place to boost use of corn syrup in U.S. foods as a gift to midwest farmers. Companies like Coke also moving to a new all-natural sweetener from a South American plant. Oil will likely not remain below $50/barrel given "peak oil" and the absence of large-scale replacement fuels -- shipping costs are a big component of costs for IPSU. Where are the improved fundamentals, given these remaining headwinds?

2008 Dec 16 12:44 PM

[E Nuff Sed:]

I like the story. Downside is very limited as stock is trading at close to book value (I assume cost of destroyed plant has been written down??).
The cash from the insurance settlement will go into building a new plant - so book value will go up.

2008 Dec 20 08:40 PM

[whatswrong:]

With Shultze continuing to dump IPSU, I am curious as to your thoughts on any upside potential in the stock, given the fact that Sultze still has a lot of shares and is a consistent seller.

Jan 06 01:54 PM

[Mark Krieger:]

Its a good thing Schulz is dumping..the fund is selling because it is probably forced to because of high redemption requests. Schultz is essentially weak hands at this point and has sold so far about 300K shares of their total 1.5 million shares of holdings or about 20%. The smart money is quietly buying from Schultz, and when Schultz completes its selling, the shares should skyrocket, since the lack of a major seller will cause selling pressure to quickly abate.

Jan 06 05:09 PM