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Message to our shareholders

Your directors are pleased to report that Altron has posted strong results for the financial year ended 28 February 2006.
 

Key market conditions

The South African economy remained buoyant during the year under review, characterised by the continuing strength of the rand, lower than expected inflation, stable interest rates and sharply higher equity markets. Government’s announcements concerning accelerated infrastructure spend has reinforced its commitment to reach the targeted GDP growth of 5%-6% per annum.

The draft Broad Based Black Economic Empowerment (BBBEE) Codes of Good Practice released by the Department of Trade and Industry in December 2005, provide more certainty as to how the BBBEE scorecards will be measured, but it is clear that in their present form the significant administrative and cost implications of these codes will need to be addressed.

Momentum towards a liberalised market within the Telecommunications sector accelerated during the period under review with the formal introduction of the second network operator, mobile number portability (expected in July 2006), the handset subsidies investigation, the Electronic Communications Bill and ICASA’s stated desire to licence additional operators in the satellite television broadcast market.  The Altron group, particularly through Altech and to a lesser degree BTG, is well positioned to benefit from this trend. The mobile telecommunications market, both in South Africa and in Africa, continues to demonstrate healthy growth.

The favourable conditions in the Power Electronics and Multi-media sector have continued due to increased capital expenditure on infrastructure projects. In addition, there has been accelerated spending on increasing power generation and distribution capacity and on improving the reliability of the country’s power transmission and distribution network. The building and construction industry has maintained good growth levels.  This has resulted in increased opportunities for group companies involved in infrastructure development, particularly Powertech. However, import competition, particularly from China and other emerging markets, remains a threat and requires focus on manufacturing efficiencies, innovative design and customer service. Within the multi-media environment, market demands are stimulating growth for higher functionality set-top boxes such as personal video recorders, which has had a beneficial impact on Altech’s results.  

The outlook for the Information Technology sector is improving with increased local spend on information technology evident as current levels of company profitability provide the capacity for investment. This is well demonstrated in the results of our BTG subsidiary. However, the slower than anticipated adoption of the global EMV (Eurocard/Mastercard/Visa) standard in the domestic banking environment has impacted demand for secure cards in the short term. Opportunities are evident for continued consolidation within the local information technology sector which will provide further potential for the Altron group to enhance critical mass and broaden product portfolios.
 

Financial overview

In accordance with JSE Limited Listings Requirements the Altron group is reporting under International Financial Reporting Standards (IFRS) and has restated the prior year’s results to comply with IFRS.   

Altron has shown pleasing growth for the year ended 28 February 2006 with revenue rising by 14% to R14.0 billion from R12.2 billion in the prior year and operating income exceeding R1 billion for the first time. Headline earnings per share, at 189c, increased by 17% on the prior year.  A deferred tax asset has been raised in the current year relating to the acquired CS Holdings businesses which have returned to profitability as well as tax losses incurred in some Altech subsidiaries which are anticipated to be utilised in the short term. The positive impact of this on Altron’s results has been partially offset by trading losses in the first six months of the year at Aberdare Telecoms which are non-recurring as the operation was subsequently closed, effective 31 August 2005.

The slight operating margin decrease from 7.9% to 7.4%, caused by declines in the overall operating margins at Altech and Powertech were mitigated to some extent by improved margins at BTG’s operations. On a continuing basis, adjusting for the closure of the Aberdare Telecoms business and the divestiture of Econet Wireless Global Ltd (EWG), operating margins are at 7.8%.

Profit before tax increased by some 15% to R1.1 billion partly due to profits from the disposal of Altech’s shareholding in EWG as well as the non-recurrence of the prior year’s goodwill write-down on BTG’s offshore operation, Plato. This increase was partially offset by a goodwill impairment of R82 million at Altech NamITech. These factors, together with a lower effective tax rate during the year, resulted in an increase in profit after tax of 26% to R751 million and a rise in attributable earnings of 10% to R494 million. Headline earnings grew by 19% to R529 million, reflecting the underlying and satisfactory trading performance.

Sound working capital management throughout the Altron group was reflected in improved year-end cash balances. The net investment in working capital improved from 22 days in the prior year to 15 days in the year under review.  Altron’s annualised return on equity has increased to 16.9%, return on capital employed has improved to 22.7% and return on operating assets reached 20.6%. The balance sheet remains strong with cash at R2.2 billion, compared to R1.5 billion in the prior year. Altron has remained committed to investing in capacity within its operations and incurred capital expenditure of R315 million during the year under review.

Altech results for the year ended 28 February 2006 reflected a growth in headline earnings per share of 12% to 379 cents per share. This was driven by better-than-expected performances from most of its operating companies including Altech Autopage Cellular, Altech Netstar, Altech Card Solutions and Altech Isis.  Altech NamITech experienced pricing pressures coupled with some management issues which adversely impacted the South African operations, in particular. As a result of this underperformance and the resultant closure of certain operations, a goodwill impairment of R82 million has been recorded in the current year. The necessary corrective actions have been taken at Altech NamITech in terms of management changes, a business realignment and a restructuring exercise in order to reposition Altech NamITech as a strong contributor to the group.

Revenue increased by 9% to R6.0 billion from R5.5 billion for the prior year with operating income at R485 million. Altech’s balance sheet remains strong with a net asset value of 1 721 cents per share and cash of R1.5 billion.  Return on shareholder’s equity is over 22%.  During the year under review a five-year service provider and incentive agreement, with an option to renew for a further five years, was signed between Altech Autopage Cellular and Vodacom. Agreements are also in place with Cell C and MTN, the latter having also been signed during the year under review.  Altech disposed of its 50% plus 1 share in EWG for a cash consideration of US$87.5 million plus interest, generating a consolidated profit of R129 million on the disposal of this investment.  

BTG reported a strong performance for the year under review with headline earnings per share growing by 48% to 127.7 cents from 86.4 cents. On an adjusted basis, when  excluding the once-off impact of raising a deferred tax asset, headline earnings per share increased by 27% to 109.4 cents. Revenue increased by 19% to R3.5 billion compared to R2.9 billion for the prior year, reflecting organic growth of 10%, the inclusion of the businesses acquired from CS Holdings for the full year, and the consolidation of 100% of Digital Healthcare Solutions revenues.  Operating income improved by 28% from R221 million to R282 million compared to the previous year as a result of margin improvements at all the BTG operations, as well as the return to profitability of the BTG UK operations.

All the South African operations performed commendably. Cash generated by these companies was strong at R329 million and resulted in a pleasing net funds position of R77 million as of 28 February 2006.

Powertech’s results for the year under review reflect positive performances from its operating business units, including ABB Powertech Transformers, Aberdare Cables, the Powertech Battery Group and the Powertech Industrial Group.  Revenue increased by 19% to R4.5 billion from R3.7 billion and operating income grew by 14% from R248 million to R280 million notwithstanding increased margin pressure from imports. For the most part, the rising price of copper was passed on to customers in accordance with supply agreements which resulted in some lower recorded margins. The Aberdare Cables power cable business delivered good results for the year but the continued downturn in the telecoms market required a restructure of the copper and fibre telecom cables operations resulting in the closure of the manufacturing plant in Port Elizabeth.

Our finance operations produced an improved contribution to the group’s results. This was mainly due to higher secondary rental income. During the year, Altron disposed of its 33% stake in Fintech (Pty) Limited to Fintech management and Sanlam Investment Management, in line with the group’s long-term objectives. Fintech Receivables 1 (FR1), Altron’s securitised interest in the financing book, is amortising in line with expectations. Moody’s recently re-rated the FR1 Class B Secured Floating Rate Notes to A3.za from Baa2.za. Future funding requirements for BTG products is being provided by the Technologies Acceptances Receivables warehouse now housed within BTG.
 

Black Economic Empowerment (BEE)

The Altron Transformation Vision 2010 document, which is essentially a group internal charter and scorecard, reflects Altron’s commitment to Black Economic Empowerment (BEE). Through its anchor partnerships with leading empowerment firms Pamodzi, Kagiso and Izingwe, significant value is being added in terms of commercial input and in meeting various Altron Transformation Vision 2010 targets on the broader BEE indicators, namely skills development, employment equity, affirmative procurement, enterprise development and corporate social investment. The Altron Transformation Vision 2010 is a dynamic document that will be aligned with the ICT charter and the Department of Trade and Industry’s Broad Based BEE Codes of Good Practice, once these are finalised.
 

Corporate activity

During the year, the following transactions and developments took place:

• Altech Autopage Cellular successfully concluded 5-year service provider and incentive agreements with Vodacom and MTN;
• Altron increased its holding in BTG to 57.6% with the acquisition of 11 million shares for a consideration of R118 million;
• BTG purchased Altron’s interest in the funding structure of BTG’s inter group lease financing business for R43 million;
• BTG SA increased its shareholding in Digital Healthcare Solutions from 39.3% to 100%;
• Powertech acquired Calidus Von Roll Isola (Pty) Ltd, a leader in the electrical insulation business for a consideration of R32 million; and
• Altech disposed of its 50% plus 1 share in EWG to the remaining EWG shareholders for a consideration of US$87.5 million, plus interest.

Subsequent to year end, the following transactions took place:

• Altech purchased MobiMaster, a specialist telecommunications real-time converged (pre- and post paid) billing system provider business from listed French company, Linedata Services; and
• BTG acquired Xclusive Solutions, a leading provider of document and print solutions and Xerox partner in the United Kingdom, for an initial consideration of £3.2 million that could increase to a maximum of £4.5 million depending on future profit performance.
   

Outlook

Your directors remain positive about the short to medium-term outlook for the Altron group’s businesses based on the following factors:

• the government’s commitment to increased investment in the country’s power generation, transmission and distribution capacity;  

• the forecast for infrastructure spend required to meet the needs of the Soccer World Cup 2010;

• the continuing strong conditions in the building and construction industries,

• the conversion of the financial industry to the EMV standard;

• the deregulation of and growth in the rapidly expanding South African telecoms industry; and

•  the improving business environment in the IT sector.

• As a result, your directors expect further real growth in earnings for the year ahead.
   

Acknowledgements

The board expresses its appreciation to all its stakeholders, customers, staff, business partners and shareholders, for their ongoing contributions and support which enabled our group to continue to grow as one of the leading ICT and power electronics groups in Africa.
 

Directorate

Shareholders are referred to the SENS announcement published on 3 May 2006 which advised that Mr Douglas Ramaphosa had been appointed to the Altron board as an alternate director to Dr H A Serebro. Douglas joined Altron as the Group Executive: Corporate Affairs effective 1 May 2006.
 

Dividends

The following dividends are hereby declared for the year ended 28 February 2006:

• ordinary dividend No. 58 of 78 cents per share (2005:63 cents);

• participating preference dividend No.12 of 78 cents per share (2005:63 cents).

The above dividends are payable as follows:

Last day of trading to qualify for and participate in the dividend (cum dividend): Friday, 23 June 2006

Dividend cheques in payment of these dividends to certificated shareholders will be posted to shareholders on or about Monday, 3 July 2006. Electronic payment to certificated shareholders will be undertaken simultaneously.

Shareholders who have dematerialised their share certificates will have their accounts at their central securities depository participant or broker credited on Monday, 3 July 2006.  

In the case of certificated shareholders, notice of any change of address of shareholders must reach the transfer secretaries, Computershare Investor Services 2004 (Pty) Limited, on or before Friday 23 June 2006. Share certificates may not be de-materialised or re- materialised from Monday, 26 June 2006 to Friday 30 June 2006, both days inclusive.        
    

Annual General Meeting

The company’s 60th annual general meeting will be held in the Boardroom, Altech Corporate Offices, 79 Central Street, Houghton, Johannesburg on Friday 14 July 2006 at 09:30. Further details on the company’s annual general meeting will be contained in Altron’s annual report to be posted to shareholders on or about 31 May 2006.

On behalf of the board