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Message to shareholders

Message to shareholders

Your directors are pleased to report that the Altron group has posted excellent results for the year ended 28 February 2007.
 

Business environment

The increased pace of infrastructural development by both the public and private sectors coupled with a deregulating telecommunications market and a recovery in IT spending augurs well for the Altron group. Recent interest rate increases have slowed residential property price growth and building plans passed, but this has been largely offset by the increased focus on commercial property development and infrastructure spending. Consumer spending remains relatively buoyant. The decline in the rand exchange rate has had a dual effect on Altron companies. For some it resulted in improved earnings from foreign operations and lower import competition and for others it increased costs and reduced margins which required diligent management.
 

Sector review

In the telecommunications sector, continued liberalisation has seen the introduction of mobile number portability, the promulgation of the Electronic Communications Act and competition for potential licences in satellite television broadcast and broadband wireless markets. Infrastructure spending has increased as a result of Telkom’s R30 billion capital expenditure programme and the launch of the second network operator, Neotel, and the establishment of the new state-owned telecoms infrastructure entity, InfraCo. In addition, the accelerating development and adoption of broadband technologies is presenting new opportunities for the group, particularly for our Altech subsidiary.  

Increased capital expenditure on infrastructure projects underscores the favourable market conditions evident in the power electronics and multi-media sectors. The recently announced upward revision of its  five year rolling forecast for capital expansion by South African power utility, Eskom, to R150 billion will increasingly benefit Aberdare Power Cables and ABB Powertech Transformers. This coupled with overall strength in the building and construction industry is driving demand for all Powertech products. Similarly, strong international demand for resources led to increased capacity expansion in the various sectors of the mining industry, which benefited Powertech. The focus on infrastructure development is expected to continue in the medium term. Increased demand from both local and international satellite television operators for set top boxes is being driven by the introduction of new products such as the Personal Video Recorder (PVR) by Altech UEC Multi-media.

Local spending within the information technology sector has risen as current levels of corporate profitability generate funds for additional technology development, thereby increasing the demand for Bytes’ value added solutions. However, the sector is characterised by higher levels of competition and resultant margin pressure requiring an emphasis on internal efficiencies. Bytes continues to pursue niche acquisitions which will enhance existing service offerings.
 

Financial overview

The Altron group’s results for the year ended 28 February 2007 have shown exceptional growth with a 51% increase in headline earnings per share.

Revenue increased by 23% from R13.9 billion in the prior year to R17.1 billion, with operating profit increasing by 47% from R1.04 billion to R1.53 billion, reflecting an operating margin improvement to 8.9% from 7.5% in the prior year. This margin improvement has been driven by Powertech and Altech, with Bytes maintaining margins at approximately the same level as recorded in the prior year. Powertech showed a significant margin increase benefiting from the effect of internal cost reductions, which has been a focus over the past few years, as well as from the operational leverage obtained due to substantial volume increases across its product range.  During the year under review, Altron invested R240 million in replacement as well as capacity expansion, mainly focused on the power electronics sector.
 

The group’s investment in working capital has increased significantly due to a combination of higher trading volumes and increased raw material prices. Altron’s return on equity improved to 23.2% with return on net assets and return on capital employed improving to 30.5% and 29.8% respectively. The balance sheet remains strong with cash at R1.6 billion.
 

Subsidiary review

Altech delivered a solid set of results for the financial year ended 28 February 2007, with headline earnings per share growing 10% to 418 cents. Revenue increased by 12% to R6.8 billion from R6.0 billion in the prior year. Operating profit increased by 18% at R573 million reflecting an improvement in operating margin from 8.0% to 8.5%, mainly as a result of an improved contribution from Altech UEC Multi-media.

The interest rate increases seen in the second half of the 2006/7 financial year have had minimal impact on consumer demand resulting in both Altech Autopage Cellular and Altech Netstar maintaining double digit revenue growth rates.  The subscriber bases at Altech Autopage Cellular and Altech Netstar have increased to over 800 000 and 400 000 respectively.

Altech UEC Multi-media produced excellent results, increasing revenue by 60% and improving operating margin from 1.9% in the prior year to 9.9%.  This is primarily as a result of the international success of the PVR product as well as expansion into export markets.  Importantly, these results were achieved notwithstanding a substantial increase in investment in research and development, again reflecting our strategic goal of investing for the long term.

Altech NamITech experienced difficult trading conditions with an operating loss being incurred by its South African operations, offset to some degree by a strong performance out of the Altech NamITech West Africa operations.  The South African business has been restructured and significantly rationalised over the past 12 to 18 months and is expected to return to profitability during the new financial year.

Altech’s balance sheet remains strong with a net asset value of 1,863 cents per share and cash of R1.2 billion.  Cash has been utilised in the funding of working capital at Altech UEC and Altech Autopage Cellular as well as the payment of dividends. Acquisition opportunities related to the internationalisation of Altech Netstar are under review. Return on shareholder’s equity is currently 22.7% and the dividend declared by Altech increased by 15%.

Bytes performed above expectations with adjusted headline earnings per share improving by 18% to 130 cents per share.  Bytes reported an increase in revenue of 18% to R4.1 billion with particularly strong revenue growth coming from the international operations which were further expanded in the 2006/7 financial year. This was assisted to some extent by the weakening of the rand, but also by solid performances from the newly acquired Xerox businesses, Xclusive Solutions and Vantage, in the UK. Those companies are performing well in line with expectations.  Revenue in the South African operations grew by 12% despite challenging market conditions.  

Operating profit improved by 16% from R281 million to R325 million compared to the prior year, with the operating margin declining slightly from 8.1% to 8.0% mainly due to the increasing contribution of the lower margin UK businesses to overall revenue. 

A decision has been taken to dispose of the UK based Plato operation as a result of its continued under-performance and the carrying value of this operation has been impaired by R56 million with the sale  process at an advanced stage.

Bytes improved its net cash position from R77 million at the previous year end to R149 million at 28 February 2007 due to strong control of working capital and operating income growth. Dividends have been increased by 24% to 56 cents per share.

Powertech reported a substantial increase in revenue of 43% to R6.3 billion as a result of the significant increase in government power infrastructure spend as well as bullish conditions in the building and construction industry, primarily in respect of commercial property development. A more buoyant mining industry and higher commodity prices also contributed to this increase in revenue.  Operating profit increased by 128% from R280 million in the prior year to R638 million, with the operating margin increasing from 6.3% to 10.1%.  This improvement in operating margin is predominantly due to improved trading conditions which drove volume efficiencies, a favourable currency and commodity environment as well as stringent cost controls. 

Both Aberdare Cables and ABB Powertech Transformers reported strong performances with increasing demand from infrastructure projects.  The Battery and Industrial groups produced less stellar growth, but contributed strongly to the overall result.  It was also pleasing to note good growth and profitability improvements at Aberdare’s Iberian Peninsula cable operations. 

The recently announced telecom cables joint venture with Reunert will contribute positively to our 2008 financial results with a strong increase in demand from telecom operators being evident. The year-end results reflect one month of trading from this operation.

 Altron’s finance operations at the corporate level continue to run down with the amortisation of Fintech Receivables 1, Altron’s securitised interest in the financing book.  Despite their diminishing contribution to group results, the Altron finance operations have continued to exceed expectations as a result of sustained high levels of secondary rental income. The bulk of new product financing is now conducted through the TAR warehouse owned by Bytes which continues to grow in line with expectations. 

Broad-based Black Economic Empowerment (“BBBEE”)

Guided by the recently gazetted Department of Trade and Industry’s Codes of Good Practice for BBBEE, the Altron group embarked on an extensive programme to educate and train both its management and transformation practitioners in terms of the Codes. At the same time a full set of implementation guidelines has been completed to assist the group operations in meeting the targets in the scorecards for the different Codes.

Our anchor partnerships with Pamodzi within Altech, Kagiso within Bytes and Izingwe within Powertech continue to add significant value through the commercial input of our empowerment shareholders.

During the 2006/7 financial year, Altech enhanced its black economic empowerment credentials by finalising transactions with Platina Venture Holdings – led by Dr Penuell Maduna – for an effective 25% equity interest in Altech Alcom Matomo; whilst Nariku (Pty) Ltd, led by Dr Enos Banda, acquired an effective 25% equity interest in Altech Netstar Fleet Management.

Particularly noteworthy was the achievement by Bytes being ranked in the Financial Mail/Empowerdex Top 200 Listed Companies Empowerment rankings as number eight overall and as the number one empowerment company in the ICT sector.
 

Corporate activity

During the year under review, and in addition to those disclosed in our 2006/7 interim results, the following transactions and developments took place:

• The establishment of a 50/50 joint venture between Altron and Reunert in the telecommunications cable field intending to capitalise on expected demand for copper and fibre optic cable. This was effective 1 February 2007

• The purchase by Altron of 1.3 million Bytes shares at a cost of R16.7 million taking purchases for the full year to 2.1 million shares at a cost of R25.2 million

• Altech’s purchase of an effective 11% share in Altech NamITech held by German smart-card company, Giesecke & Devrient (G&D), effective 31 January 2007.  Altech NamITech will continue to represent G&D’s products and services in sub-Saharan Africa for up to two years.

Post year end:

• The acquisition by Powertech of Swanib Cables, the largest cable distributor in Namibia, for approximately R40 million, effective 1 March 2007

• Bytes Digital Healthcare Solutions acquiring Mastermed for R13 million.
   

Outlook

The financial year under review has been an exceptional one for the Altron group. This was driven by substantial growth in the Powertech businesses and steady double digit growth from Altech and Bytes.   The outlook for Altech, Bytes and Powertech continues to be favourable, but it is unlikely that group growth will be maintained at these high levels.  Notwithstanding this, our growth prospects are underpinned by the following key drivers:

• Continued strength in infrastructure – both in power and telecoms

• Ongoing buoyant conditions in the building and construction industries

• Deregulating telecoms industry providing opportunities in the provision of broadband services

• Acquisition opportunities

• Strong order books across the group.

As a result of the above, your directors anticipate a further year of real growth.

Acknowledgements

The board would like to express its appreciation to all of its stakeholders, customers, staff, business partners and shareholders, for their contributions and continued support towards the growth of our group as one of the leading ICT and power electronics groups in Africa.
 

Directorate

Shareholders are referred to the SENS announcement published on 5 February 2007 advising that Mr Douglas Ramaphosa had resigned from the Altron board as an alternate director to Dr H A Serebro. Douglas has assumed the position of Managing Director – Bytes Specialised Solutions which is a division of Bytes Technology Group South Africa (Pty) Limited, a member of the Altron group.
 

Dividend

The following dividends are hereby declared for the year ended 28 February 2007:

-    ordinary dividend No. 59 of 118 cents per share (2006 : 78 cents)

-    participating preference dividend No. 13 of 118 cents per share (2006: 78 cents).

The above dividends are payable as follows:

Last day of trading to qualify for and participate in the dividend

Dividend cheques in payment of these dividends to certificated shareholders will be posted to shareholders on or about Monday, 2 July 2007. 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, 2 July 2007.

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 22 June 2007.  Share certificates may not be de-materialised or re-materialised from Monday, 25 June 2007 to Friday 29 June 2007, both days inclusive.
 

Annual General Meeting

Altron’s 61st annual general meeting will be held in the Boardroom, Altech Corporate Offices, 79 Central Street, Houghton, Johannesburg on Friday 13 July 2007 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 2007.
 

On behalf of the board