I’m not going to lie, being an Imperial Sugar (IPSU) shareholder the last three months has been brutal, as shareholders have experienced a 75% dent to their wallets. It all started when third quarter earnings were missed badly, because of out of control raw sugar prices that couldn't be passed on, and cumulated on Nov. 3rd, with the news of its cash dividend suspension. Will the carnage ever end? At this stage in the game, I’ll have to give the “bears” the big advantage, as I submit my “mea culpa” to the remaining bulls.
To put it mildly, I have egg on my face for my constant promotion of a company caught in a spiraling downward plunge. I realize that my exuberance for the company’s prospects were way overdone, blinding me from the vision of being more objective and less emotional. In other words, I blew this one royally. Will I get redemption? I guess it is up to the stock market gods, but when you are relying on “hope and prayer” to rescue you from your losing predicament, optimism certainly wanes.
The latest news: The company announced it sold its 50% Imperial Santos Mexican joint venture to its previous partner for $5.5 million, primarily to free itself from its exclusive supply agreement. Its new non-exclusive agreement should enable it to pursue more profitable options with other sugar producers. Although I was disappointed on the sale price, the transaction was probably overdue.
IPSU also reported suspending its two cent quarterly cash dividend (amounting to $979,000 per year) due to liquidity issues and continued pressure on margins due to elevated raw costs and the inability to pass on those costs to the retail side. The suspension of the dividend prompted some head scratching, especially since it was so minor in the first place. All I can speculate is that they did it to send a philosophical message out to the market place or it was a lender requirement.
Now for some good news: The company pointed out that it had $44 million of undrawn funds on its $125 million revolving credit line, at the end of its fourth quarter, implying that it drew only $3 million on that line during the quarter (significantly less than the whopping $56 million drawn in the third quarter). If IPSU utilized $20 million in cap ex for the fourth quarter (the same as its third quarter) then it could be argued that it generated positive EBITDA of about $11.5 million ( assuming the Santos sale closed in the fourth quarter).
Imperial also stressed it is still in the process of reviewing alternatives for its 50% ownership in Wholesome Sweeteners, prompting speculation that its sale could be imminent. Wholesome’s Proceeds (estimated at $75-$100 million) can once and for all, end its liquidity worries.
The company can bounce back: An improvement in its Port Wentworth production is paramount in getting the company healthy again, but so far, improvements have been at an agonizing slow pace. Once these expectations are lowered, the efficiency of the plant might just start showing progress.
What to do now: The shares are only about 10% from their all time low of $5.35 recorded in March of 2009, so there is no shortage of extreme fear already priced in. I would postpone further purchases of the stock until it starts to show some strength (rising above $7.50). In the meantime, better than expected fourth quarter results or a sale of Wholesome could spark a nice rally, especially when considering that 15% of its outstanding shares have been sold short (a covering rally would likely ensue).
Although some investors have pronounced their lack of confidence in management, don’t expect any changes to occur in that arena, because if it was going to happen, it would of already been reality. It will be interesting to see, if these latest developments prompt any shareholder(s) to take on an activist role, in an effort to unlock shareholder value- as a good dose of this, is sorely what this equity needs.
