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Statement of comprehensive income | Abridged balance sheet | Statement of changes in equity | Notes Segment analysis | Supplementary information | Message to shareholders | Home |
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Message to shareholders Following a challenging six months, Altron reported interim financial results for the half year ended 31 August 2009 which reflect a decline in revenue of 8% from R13.2 billion to R12.1 billion compared to the prior period. EBITDA declined by 28% with EBITDA margins declining from 10.0% to 7.9%. As a result of lower finance income and greater earnings attributable to minorities due to the increased contribution from Altech East Africa as well as the Powertech Transformers BBBEE transaction – adjusted diluted headline earnings per share declined by 44%. This level of decline represents the comparison between what Altron believes is the bottom of the cycle and the peak that we saw in the first half of last year. Business environment During the first calendar quarter of 2009, the South African economy moved into an official recession for the first time since the early 1990s. While the easing of monetary policy has seen progressive interest rate cuts since December 2008, the impact of the interest rate cycle’s lag effect of between twelve and eighteen months has meant that property prices remained subdued, building and construction activity continued to decrease while consumer demand was weak. The slowdown in demand in the building and construction industry has been particularly evident in the residential sector and to a lesser degree in the commercial sector. The increase in the US$ copper price since March has been offset to a degree by the appreciation of the rand, while supply in the local power cables market currently exceeds demand, creating substantial pricing pressures in that market. The traditional infrastructure market has continued to generate good sales, and while this market is expected to remain robust in the medium term, certain parastatal customers are facing funding constraints and this may well have a detrimental effect on either the timing or quantum of capital expenditure programmes. There has also been a marked reduction in demand from the mining sector following lower commodity prices and funding constraints, resulting in mining capital expenditure being curtailed. As has been mentioned previously, our focus in operating in these challenging market sectors has been on internally driven programmes of cost reduction, working capital management and a cautious approach to further capital expenditure and acquisitions. Significant progress has been made vis a vis these initiatives which will strongly position Powertech when markets recover. Local financial and retail institutions continue to trade under difficult conditions. Consequently the information technology market is operating in an environment where there is strong competition and heightened pressure on margins which is reflected in the Bytes results. Notwithstanding the above, certain markets that we serve, particularly through Altech, remain robust and provide good opportunity for those companies with a competitive strategic position. It is anticipated that the further development of broadband technologies will open up new opportunities for the Altron group. The landing of the submarine cable along the East African coast and Altech’s recently announced strategic alliance with Seacom and investment in TEAMS has opened up exciting opportunities for Altech’s East African investments and should facilitate a significant increase in internet penetration in that region. Financial overview The Altron group’s results for the half year ended 31 August 2009 reflect the slowdown in the markets served by Powertech and the margin pressure at Bytes, partially offset by a strong performance from Altech. Revenue decreased by 8% to R12.1 billion from R13.2 billion following a 26% decline in Powertech’s revenue, offset by small increases in both Bytes’ and Altech’s revenues. The decline in EBITDA of 28% from R1 317 million to R951 million and the EBITDA margin decrease from 10.0% in the prior year to 7.9%, reflects divergent performances in the three underlying groups. Altech achieved a significant improvement in its EBITDA on the back of a strong annuity income base and the higher profitability levels achieved from recent acquisitions. Bytes’ EBITDA was down 25% due to margin pressure in its markets and Powertech’s EBITDA fell by 65% as a result of substantially lower demand levels and severe pricing pressure. All operations were negatively affected by the appreciation of the rand, resulting in a R96 million foreign exchange loss for the group compared to a gain of R36 million in the comparable prior period. Powertech was particularly impacted as R55 million of this loss was applicable to its operations. The decline in EBITDA margins combined with the change in net finance expenses and an increased profit attributable to minorities resulted in headline earnings per share declining by 51% to 93c, while adjusted diluted headline earnings per share, regarded by management as the most meaningful assessment of the underlying performance, decreased by 44% to 100c. Following disappointing performances in the first half of the year by Powertech Calidus and the Bytes UK Xerox operations, goodwill balances have been impaired by R21 million and R30 million respectively. This impairment led to earnings per share declining by 63% to 77c. Focus on working capital management continued during the review period, particularly at Powertech where the cables operation released approximately R250 million from its investment in working capital. The group’s overall net working capital days decreased to 19 days from 21 days at the end of the prior year, releasing R127 million on a consolidated basis. The cash position at the half year was R971 million with a net debt position of R504 million. The group’s return on equity for the six months was 13.0% and return on capital employed was 19.9%. Subsidiary reviews Altech reported good results for the first six months of the year despite a recessionary economy. Revenue increased by 4% to R4.7 billion. Operating margins increased from 9.0% to 10.1%, reflecting good profitability levels at most of its operations, a higher profit margin achieved by its recent acquisitions, and the elimination of the Altech NamITech South Africa losses following its disposal on 1 April 2009. Operating profit and EBITDA rose by 17% and 19%, respectively. Headline earnings per share increased by 12% and adjusted headline earnings per share increased by 13%. Altech Autopage Cellular performed well showing increases in both revenue and operating profit. Operating margins have been maintained due to careful cost controls and a well controlled debtors’ book. Altech Netstar achieved pleasing revenue growth and further improved its operating margin despite the decline in new car sales associated with the economic recession. The fleet has also seen an improvement in operating margins following the consolidation of the Altech Netstar and ComTech fleet management businesses. Altech UEC produced somewhat disappointing results largely as a result of ongoing pressures on revenue and profits due to the slower than expected deployment of decoders in the Indian market, as well as the strengthening of the rand. Revenue decreased by 14% compared to the prior period, but prospects for the second half of the year remain positive. Altech East Africa continues to perform in line with expectations and is a key focus area for management. During the review period Altech increased its stake in Kenya Data Networks (KDN) from 51% to 61% as a result of providing a greater proportion of funding required for capital expenditure than its partner, Sameer ICT as well as the acquisition of certain additional shares in KDN from a minority shareholder. After the balance sheet date, Altech has also entered into a strategic alliance with Seacom for the acquisition of bandwidth capacity on each other’s cable systems. The agreement has resulted in Altech purchasing two STM-16s from Seacom (equivalent to 5Gbps), which in turn has purchased $20 million capacity s on the terrestrial fibre backbone network owned by KDN, a subsidiary of Altech. Altech’s recent acquisitions of Technology Concepts, NuPay and Fleetcall are providing better than expected returns, based not only on performance, but also on the fact that these acquisitions were completed at reduced valuations reflecting the current challenging economic times. The Bytes group achieved revenue growth of some 3%, despite the negative impact the stronger rand had on the translation of results from its international operations. Continuing margin pressures in this highly competitive market as well as a poor performance at Bytes Specialised Solutions did, however, reduce profitability. The operating margin has reduced from 5.4% to 3.5% resulting in a 32% decline in operating profit and a decrease in EBITDA of 25%. Adjusted diluted headline earnings reduced by 38% due to increased net financing costs and a higher percentage effective tax rate. The South African operations have seen revenue increase by 8% to nearly R2 billion, while operating profit reduced by 30%. Bytes Document Solutions (BDS), the largest operation within the Bytes group achieved good results during the review period despite some market pressure. BDS’s performance was assisted by the recently acquired NOR Paper which contributed meaningfully to BDS’s revenue and profits. There were also good performances from Bytes Managed Services and Bytes Healthcare Solutions as well as improved performances from Intelleca and Bytes Systems Integration. Bytes Specialised Solutions’ performance was disappointing, and management is currently reviewing its Retail ATM business model. The strengthening of the rand impacted the Bytes UK operations in terms of revenue and profits. The Software Services business continues to perform extremely well in a difficult economic environment, but the UK Xerox businesses came under pressure as access to funding required to lease equipment in the UK remains tight. Extensive remedial action has been taken in these businesses, which includes the rationalisation of the back-office functions to improve cost efficiencies as well as a substantial headcount reduction. Powertech experienced a disappointing six months, primarily due to lower market demand and pricing pressures on its cables operation. The recession has also impacted the other operational performances when compared to the high base in the prior period which represented the peak of the economic cycle. Since the fourth quarter of the prior financial year, there has been a fundamental shift in demand levels in the main industries that Powertech serves, necessitating ongoing efforts to rightsize the businesses to much reduced demand levels. The impact of the contraction in volumes and the reduction in the copper price is evident in the 26% reduction in revenue and more dramatically in the operating profit line, which has declined by 75%, with the operating margin reducing from 10.1% to 3.4% which includes the forex loss referred to above of R55 million. Adjusted diluted headline earnings have declined by 79% to R60 million against a prior year’s peak performance of R292 million. The Powertech Cables Group has seen a 46% reduction in revenue through a combination of the lower copper price and much reduced demand. Volumes in the local cable market have been in line with expectations (albeit at significantly lower levels), but profitability has been impacted by pricing pressures due to excess capacity to supply the market. Substantial cost reduction exercises have been implemented to address the situation, the benefits of which will be seen during the second half of the year. The telecom cable joint venture and the international cables operations performed satisfactorily. The Powertech Transformers group achieved good revenue growth, but operating profit declined due to margin pressures in both businesses, as well as the strengthening of the rand. The Power Transformers business has been the main driver of the revenue growth, while the Distribution Transformers business experienced greater margin pressure from increased competition and the slowdown in the building and construction industry. Within the Powertech Battery Group the automotive side of the business has held up well while the industrial battery side has been significantly impacted by reduced activity from the mining sector. Battery Technologies also experienced a slow start to the year, although it has some interesting prospects in the mobile telecommunications sector in Africa. The Powertech Services Group (which is made up of IST and TIS) continues to be affected by public/private sector project delays and cancellations. There are, however, signs of improvement with good prospects going forward, particularly at IST. Corporate activity The following significant transactions and corporate developments have taken place during the review period:
Outlook Recent economic data indicates that the bottom of the economic cycle may have been reached and there are tentative signs of recovery. This is consistent with the trends we have seen in our businesses, many of which have reported improved results over the last couple of months. Nevertheless, demand levels in the economy remain weak compared to those seen at the peak of the cycle and any recovery is expected to be gradual. Visibility going forward continues to be limited and the strength of the rand is of serious concern given the impact this has on the translation of results of foreign operations, export markets and competition from foreign imports. Compared to the first half, it is expected that the second six months should provide an improved performance reflecting better trading conditions and realising the benefits of the rationalisation programmes undertaken during the period under review. Directorate Shareholders are referred to the SENS announcements published by Altron on 3 March 2009 and 5 August 2009, advising that with effect from 1 March 2009 Altron Chairman, Dr WP Venter had assumed the role of non-executive chairman of the company and that Mr MJ Leeming had been appointed as lead independent director of Altron with effect from 3 August 2009, respectively. Furthermore, shareholders are referred to the SENS announcement published by Altron on 3 August 2009, advising that Dr HA Serebro had retired from the Altron board as an executive director with effect from 1 August 2009. The board expresses its appreciation to Dr Serebro for his significant contribution over the years. Acknowledgements In these difficult times management and the board would like to thank their loyal customers, and business partners, staff, shareholders and other stakeholders for their ongoing support of the group and its operational companies.
On behalf of the board
5 October 2009
Corporate information Board of directors Independent non-executive: Mr NJ Adami, Mr MJ Leeming, Dr PM Maduna, Ms BJM Masekela, Mr JRD Modise, Ms DNM Mokhobo, Mr PL Wilmot Non-executive: Dr WP Venter (Chairman), Mr MC Berzack Executives: Mr RE Venter (Chief Executive), Mr N Claussen, Mr PMO Curle*, Mr PD Redshaw*, Mr AMR Smith*, Mr CG Venter *British Sponsor: Investec Bank
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