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Income statements | Balance sheets | Statement of changes in equity | Cash flow statement | Notes Segmental Analysis | Operational results | Supplementary information | Message to our shareholders |
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Message to shareholders Your directors are pleased to report that the Altron group has posted strong results for the six months ended 31 August 2008. Notwithstanding the high base established in the prior period, revenue increased by 19% to R13.2 billion and operating profit increased by 25% to R1.1 billion reflecting the results of both organic and acquisition related growth. Headline earnings per share grew by 12%, while adjusted headline earnings per share increased by 15% after removing the effect of the amortisation of intangibles arising from the group’s recent and prior acquisitions. Despite tightening economic conditions, the period has been characterised by good revenue and profit growth in our Altech and Powertech operations with Altech recording a pleasing increase in operating margin. The Bytes operations also achieved good revenue growth, but experienced margin pressure primarily in the Bytes Systems Integration business.
A key development in the
Telecommunications sector during the period under review was the
ruling of the Pretoria High Court in favour of Altech Autopage
Cellular permitting the company to convert its value added network
service licence (VANS) into an individual electronic communications
network service licence (I-ECNS). Subsequent to the end of the
reporting period, the Minister of Communications has brought an
application to appeal the ruling, which Altech will be opposing. The building and construction industry has, however, experienced a significant slow down in demand for electrical products, particularly in the residential housing sector and to a lesser extent in the commercial property sector. This became evident towards the end of the period under review and is attributed to rising interest rates, the reduction of available credit as well as delayed project approvals related to power shortages. It is expected that these conditions will impact on the low voltage cable and distribution transformer businesses in the second six months of this financial year. In the Multi-media sector, strong demand for set top boxes in the local market has continued and is expected to be sustained over the short to medium term, particularly with the launch of high definition programming and the Digital Migration Programme, scheduled to be launched in November 2008. A pilot project, facilitated by the SABC and in which Altech UEC is a participant, has been set up for a period of six months while commercial deployments are anticipated for mid 2009. Indian markets have responded well to Altech UEC’s establishment of a local presence. Chinese and Thai sub contract manufacturing facilities will support the large volumes that have been negotiated with Indian broadcasters such as Reliance Communications. The Information Technology market continues to operate in an environment where there is strong competition and pressure on margins. Customers within the financial services sector, in particular, are either deferring or cancelling IT spending in order to reduce costs. The situation is exacerbated by the skills shortage which is driving up personnel costs, a substantial element of the cost base. Bytes has recently concluded two strategic acquisitions, namely Intelleca, offering contact centre solutions and Nor Paper, a specialised paper supplier. Both businesses operate in niche areas attracting high operating margins.
The Altron group’s results for the six months ended 31 August 2008 have shown solid growth with a 12% increase in headline earnings per share. However, the growth has been significantly impacted by the amortisation of intangibles that have arisen on the various acquisitions that have been concluded in the last 12 - 18 months. Excluding the amortisation charge, the adjusted headline earnings per share growth was 15%, which presents a more meaningful picture of the underlying trading performance. Revenue increased by 19% from R11.0 billion in the prior six months to R13.2 billion, with operating profit increasing by 25% from R902 million to R1 123 million. The group has increased its operating margin to 8.5% from 8.2% despite subsidiary companies experiencing diverse operating margin movements. Altech significantly improved its operating margin, moving from 7.7% to 9.0%, Powertech maintained its margin at 10.1%, broadly in line with prior year levels, while Bytes experienced margin pressures, reducing its operating margin to 5.4% from 6.0%. There has been an increased investment in working capital in the first six months of the year, partly due to the growth in the business and the incorporation of acquisitions, but also due to an increase in inventory days due to strategic purchases and a lower demand in certain operations. Overall, there has been an outflow of some R1.6 billion of cash since the year end, R1.2 billion of which relates to the substantial acquisition investments made by the group in the past six months. Cash generated by operations grew strongly, but was offset by the investment in working capital, a significant increase in tax paid as well as higher dividends paid. The improved profitability has seen annualised return on equity improving from 24.7% at 29 February 2008 to 26.6% with return on net assets and return on capital employed improving to 32.6% and 32.3%, respectively. Subsidiary review Altech posted good results for the first six months, achieving revenue growth of 14% and significantly increasing operating profit by 34%. The majority of the operations are performing well, with particularly strong performances coming from Altech Autopage Cellular and Altech Netstar Fleet Management as well as the NamITech West Africa business. Altech NamITech’s SA operations continued to experience selling price and margin pressures in a highly commoditised market. Consequently, trading losses have been recorded at this operation albeit at lower levels compared to the prior period. Operating margins improved from 7.7% to 9.0%, largely driven by the performances of the aforementioned businesses and the inclusion of the higher margin Sameer ICT Group operations in Kenya.
Profit before tax rose by 40% to R413
million as the prior year included the impairment of goodwill, while
attributable profit increased by 51%, assisted by a lower effective
tax rate. Headline earnings per share increased by 19%, while
adjusted headline earnings per share grew by 23% which is considered
to be a better reflection of the underlying trading performance. Altech Netstar has seen limited revenue growth in the stolen vehicle recovery market due to declining new car sales, but the fleet management business has performed exceptionally well reaching an estimated 20% market share level.
Altech UEC continues to produce strong
revenue and volume growth. It has, however, seen a shift away from
its top end products towards more entry level products, particularly
due to demand from India, which has impacted on operating margins.
Despite significant investments in the last six months, Altech’s balance sheet remains strong with some R595 million of cash and a net asset value of 1 974 cents per share. Bytes has achieved revenue growth of 16% from R2.8 billion to R3.3 billion and operating profit growth of 4% from R170 million to R177 million compared to the prior period. The decline in the operating margin was impacted primarily by margin pressure in the South African businesses and a weak performance by our African operations. Headline earnings attributable to Altron are up 3%, notwithstanding the impact of our empowerment partner, Kagiso, which exercised its option to acquire a further 22% equity interest in Bytes SA with effect from 1 July 2008, taking their overall stake to 27%. On a diluted headline earnings per share basis, Bytes reported headline earnings growth of 10%. The South African operations have seen revenue increasing by 17% with the operating margin declining from 8.6% to 7.8%. Conditions have been challenging for most of the businesses, particularly in Bytes Systems Integration. A good performance was recorded by Bytes Document Solutions which secured new accounts and renewed existing large customer contracts. The acquisitions of Intelleca and Nor Paper, effective 1 April 2008 and 1 July 2008 respectively, both assisted revenue growth levels. The UK operations have seen good revenue growth with revenue increasing by 16% following last year’s exceptional growth. The Xerox businesses in the UK are performing below expectations due to the impact of tighter economic conditions resulting in lower demand. Remedial action plans have been implemented by management to improve operating performance. Powertech experienced a strong first half with revenue increasing by 27% to R5.4 billion compared to R4.2 billion. The operating margin which declined slightly from 10.2% to 10.1%, compared to the prior period, was impacted by the amortisation of intangibles arising from the Powertech Transformers and Powertech IST acquisitions. This resulted in a 26% increase in operating profit from R429 million to R542 million. Notwithstanding the higher amortisation charge, headline earnings have increased by 18%. Adjusted headline earnings have increased by 21% to R338 million. Aberdare Cables has grown its revenue and profits. This growth has been achieved off the very high base achieved during the prior comparative period. Aberdare Cables’ South African based business performed well despite increasing signs of a slow down in demand from the building and construction sector in the latter part of the period under review. Aberdare International experienced difficult trading conditions due to the Spanish economy having weakened dramatically. While revenue levels have increased slightly, margins have come under pressure and operating profit in the international operations is significantly down compared to the prior period. Powertech Transformers has been a major contributor to Powertech’s growth for the half year following the acquisition by Powertech of ABB’s 50% stake in the business with effect from 1 April 2008 which has boosted revenue and operating profit significantly. The company was also awarded a 5-year framework agreement valued at R1.4 billion to supply Eskom with a range of products. Powertech Batteries recorded an excellent first half, with both revenue and operating margins increasing significantly, resulting in a healthy increase in operating profit. This can be attributed to strong demand in the automotive market as the effects of the increased pool of cars start to make an impact on demand for replacement batteries, as well as in the industrial business where there has been rising demand from the mining industry. Powertech Industrial has, notwithstanding difficult trading conditions, improved its performance. Revenue growth has remained flat, but last year’s corrective actions have resulted in an improvement in operating margin. The Powertech Energy Services Group has generated satisfactory revenue and operating profit. The business has a good order book and is benefitting from projects related to the electricity supply crisis.
Powertech System Integrators which
includes the business of Powertech IST, performed in line with
expectations during the first six months. As anticipated, earnings
for these businesses will improve in the second half due to an
increased order book.
Corporate
The following significant transactions and corporate actions have taken place:
Altron’s Transformation Vision 2012, the Altron internal roadmap with guidelines on how the group’s companies will meet the targets set out in the dti’s Broad-based Black Economic Empowerment (BBBEE) Codes of Good Practice, was launched in August this year. After exercising its option to acquire a further 22% of Bytes SA, Kagiso now holds a 27% equity interest in Bytes SA, as stipulated in the shareholders’ agreement signed in 2004. Outlook The core infrastructural spend programme of the country which remains on track will continue to benefit the group. However, as a result of the recent slow down in the building and construction sector, particularly the residential segment of the market, certain key businesses within the Powertech group are being affected. This, combined with the global financial market turmoil, as well as potential pressures locally, has created further uncertainty around future trading conditions. Consequently, the group has in recent months shifted its focus to one of consolidation. The past 12 months has seen the group concluding substantial acquisitions and we will use the next six months to continue to extract the anticipated synergies and returns. With a focus on cost control and working capital management we will look to build on the solid foundation established over the prior years.
On behalf of the board
Board of directors Independent non-executive: Mr MJ Leeming, Dr PM Maduna, Mr JRD Modise, Mr PL Wilmot, Ms BJM Masekela Non-executive: Mr MC Berzack Executive: Dr WP Venter (Chairman), Mr RE Venter (Chief Executive), Mr N Claussen, Mr PMO Curle*, Mr AMR Smith*, Mr PD Redshaw*, Dr HA Serebro, Mr CG Venter * British Secretaries: Altron Management Services (Pty) Limited – AG Johnston (Group Company Secretary) Sponsor: Investec Bank
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