ANALYSIS: Debt is not necessarily a dirty word – but it may be By Ruan Jooste
Drugmaker Aspen has lost almost half of its value since announcing the $829-million sale of its infant-formula business to French dairy giant Lactalis International in September 2018, which experts say has all the characteristics of a fire sale.
Sugar producer Tongaat is in a similar position and its share price has been on a downward trajectory since it warned in February that it expected a full-year loss due to local sugar taxes and higher sugar imports. The firm is currently reviewing its strategic and financial position to stabilise debt levels and stabilise the business. The firm, whose net debt stood at R7.754-billion as of 30 September 2018, said in February it had entered discussions with its lenders.
And although debt levels should not be viewed in isolation when determining the quality of a company, it can make or break a company in the end. However, the number is high, and as Ashburton holds a stake in Aspen, “we are paying attention”, says Forssman.Financial strength is vital. We like companies with sustainable debt levels capable of withstanding economic shocks.”
Meanwhile, the lag in finalising the baby formula deal and increasing inventory levels and lower cash conversion rates has Aspen sitting on around R53.5-billion of debt if interest rates were to go up. Construction companies have also fallen victim to circumstance. The industry has become so competitive with tight margins that when a contract or project goes wrong and payment is not apparent to service the debt taken on to finalise that project, the foundations start to crumble.
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