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Message to our shareholders

Your directors are pleased to report that the Altron group has again posted good results for the financial half year ended 31 August 2005.

Business environment 

Business confidence levels remain positive in South Africa driven by a sound economic climate. Domestic growth is accelerating, the rand remains stable against  major currencies and interest rates and inflation have remained under control. This has created positive trading conditions for the Altron group. Strong consumer spending has stimulated growth within the Altech operations whereas an increase in public sector spending and a buoyant building and construction industry has driven demand for Powertech group products and services. The successful integration of the CS Holdings and DHS acquisitions, coupled with a recovering ICT market has resulted in strong growth at BTG.

Within the Telecommunications sector, the move to a more liberalised market is gaining momentum with the introduction of new products and services such as voice-over-internet-protocol. This liberalisation is expected to continue with the introduction of the Second Network Operator and the finalisation of the Convergence Bill. The Altron group, particularly through Altech, is well positioned to benefit from this situation. The mobile market, both in South Africa and in Africa, continues to grow above market expectations.

The Power Electronics and Multi-media sector is buoyant due to increasing capital expenditure spending in infrastructure projects by both the public and private sector. This is expected to continue as a result of, amongst others, the recently announced capex plans of Eskom and Transnet, World Cup 2010 and the Gautrain project. The Powertech operations are set to benefit from the above, and significant internal investment has taken place to increase capacity and improve efficiencies. This is essential to combat the threat of imported products.

The outlook for the Information Technology sector is improving with clear indications of a recovery in spending taking place in this market. The ongoing conversion of the financial sector to the Europay Mastercard Visa (“EMV”) standard has seen some delays but continues to offer good opportunities to the Altech and BTG groups in the medium term.  

Financial overview

In accordance with JSE Limited requirements the Altron group is operating in terms of International Financial Reporting Standards (IFRS) and has restated the prior year’s half year and full year results to comply with IFRS.   

The interim results for the Altron group for the six months ended 31 August 2005 have shown good growth with a 16% increase in headline earnings per share.   

Revenue increased by 17% from R6.0 billion for the prior period to R7.0 billion with operating income increasing by 14% from R442 million to R502 million which reflects a slight margin decrease from 7.4% to 7.2%. This was mainly attributable to the inclusion of losses from our telecom cable operations which were subsequently mothballed in early September 2005 as well as losses incurred in Econet Satellite Services.  Furthermore,  NamITech experienced a reduction in margins resulting from delays in the delivery of capital equipment which has now been commissioned. Taxation, including STC, has decreased marginally from 36.9% (before goodwill and capital items) to 36.1%. 

Altron’s annualised return on equity improved to 17.2% with return on net assets improving to 24.4% from 15.9% in the prior period. The balance sheet remains strong with cash at R875 million.

Altech delivered a sound set of results for the financial half year ended 31 August 2005, reporting improved headline earnings per share of 15.3% to 181 cents per share. This was driven by better than expected performances from most of its operating companies including Autopage Cellular, Netstar, Altech Card Solutions and Isis. Revenue increased by 11% percent to R2.9 billion from R2.6 billion for the prior period with operating income at R250 million. On 10 October 2005, a 5-year agreement with an option to renew for a further five years was signed between Autopage Cellular and Vodacom renewing their service provider and incentive agreement. Agreements with Cell C are already in place and discussions with MTN in this regard are at an advanced stage.

Altech’s balance sheet remains strong with a net asset value of 1528 cents per share and cash of R564 million.  Cash has been utilised in the current period in the funding of working capital. Return on shareholder’s equity is in excess of 23%.  On 1 September 2005, Altech disposed of its 50% plus 1 share in Econet Wireless Global Limited (EWG) for a cash consideration of US$87.5 million plus interest representing a R155 million profit on its investment. These funds were received in September and all relevant litigation and claims between the parties have been settled in full.    

BTG performed above expectations with revenues increasing 23% to R1.7 billion which reflects, for the first time, the inclusion of the businesses acquired from CS Holdings and the consolidation of 100% of Digital Healthcare Solutions. Operating income improved by 36% from R94 million to R128 million when compared to the prior period. 

Headline earnings improved by 31% to 46.5 cents over the IFRS restated earnings of 35.4 cents for the corresponding period of the prior year.  BTG moved from a net cash position of R61 million at financial year end to a net borrowing position of R171 million at 31 August 2005 due to acquisitions totaling R143 million, the payment of a dividend of R55 million, increased tax payments and an investment in working capital. 

Powertech reported a good increase in revenue of 22% to R2.3 billion despite the continuing strong rand, depressed conditions in the telecoms cabling industry and increased competition from foreign imports which impacted on margins. Operating income increased by 28% to R131.1 million from R102.7 million on the back of good results produced by ABB Powertech Transformers, Aberdare Power Cables, the Battery Group and the Industrial Group.  

The return to profitability of Aberdare Cable’s offshore operations has had a beneficial impact on headline earnings. This has also been enhanced by an improved performance from the power cables division when compared to the previous corresponding period which was impacted by the erratic supply of copper. The downturn in the telecoms sector has resulted in the mothballing by Aberdare Cables of its copper and fibre telecom cables manufacturing plant in Port Elizabeth during the month of September.  Copper and other base metal prices continue to remain high, placing additional pressure on working capital requirements. 

Fintech increased new business written for the first six months of the current financial year by 39% to R327.5 million from R235.6 million for the prior corresponding period. Discussions are being held with Fintech for a buy-back of the Altron shares in accordance with their call option in order to issue these to a BEE partner. If successful, Altron will divest from Fintech (Pty) Ltd, but will retain its investment in Fintech Receivables 1.

Black Economic Empowerment (“BEE”)

The Altron group’s associations with BEE partners are firmly in place and consist of three “anchor” partners namely Kagiso within BTG SA, Izingwe within Powertech, and Pamodzi within Altech. 

Following the launch of the Altron Transformation Vision 2010 document earlier this year, the last six months saw the commencement of the implementation phase of the Altron group’s internal scorecard with a pleasing and significant improvement registered in terms of most of the broad-based BEE indicators throughout the operations.

Corporate activity  

During the period under review the following significant transactions and developments took place:

• BTG’s purchase of Altron’s interest in the lease financing business relating to products marketed by BTG for a purchase consideration of R43 million, was effective on 1 March 2005.
• BTG SA acquired a further 61% interest in Digital Healthcare Solutions (“DHS”) for R85 million from Business Connexion, Netcare and USAP, and BTG sold its 39% interest in DHS to BTG SA, effective 1 March 2004.  Following the acquisition and restructure, BTG SA now holds a 100% interest in DHS.  
• Powertech acquired Calidus Von Roll Isola (Pty) Ltd, a leader in the electrical insulation business, effective 2 August 2005, for a purchase consideration of R32 million.
• In September, Altech disposed of its 50% plus 1 share in EWG to the remaining EWG shareholders for a purchase consideration of US$87.5 million, plus interest.
• NamITech’s West African pre-paid cellular voucher facility in Lagos, Nigeria was commissioned and will be operating to full production levels early in the second half of the year. Volumes are expected to increase to 30 million vouchers per month by year end.

Directorate 

On 10 October 2005, Buddy Hawton, an independent non-executive director of Altron resigned from the board of the Company.  The board wishes to record its appreciation to Buddy for his valuable contribution over the past 16 years and wishes him well for the future. 

Mark Lamberti, the Deputy Chairman and Chief Executive Officer of Massmart Holdings Limited, was appointed to the board of Altron as an independent non-executive director with effect from 10 October 2005.  

Norbert Claussen, the Chief Executive Officer of Power Technologies (Pty) Limited was appointed to the board of Altron as an executive director with effect from 12 October 2005.  

As announced on 21 July 2005, former executive director, Dali Mpofu, remains on the Altron board as a non-executive director following his recent appointment as chief executive officer of the SABC.  The board takes this opportunity of welcoming Messrs Lamberti and Claussen to the Altron board.

Outlook

The outlook for the sectors in which the Altron group operates remains positive, especially in terms of continued infrastructure spending, the increased activity in the building and construction industries, the opportunities available in a liberalised and deregulated telecoms market and recovering IT market conditions. These factors position the Altron group well to achieve acceptable growth in headline earnings and dividends for the financial year ending 28 February 2006.       

On behalf of the board

11 October 2005