|GROUP||ALTRON TMT||ALTRON POWER|
|Revenue (Rm)||19 717||26 592||27 623||15 605||19 728||19 512||4 601||7 185||8 288|
|EBITDA (Rm)||840||376||1 383||1 018||725||1 358||(67)||(156)||220|
|EBITDA margin (%)||4,3||1,4||5,0||6,5||3,7||7,0||(1,5)||(2,2)||2,7|
|Return on capital employed (%)||14,5||(1,2)||10,9||–||–||–||–||–||–|
|Net borrowings (Rm)||1 932||3 435||3 534||–||–||–||–||–||–|
|Net asset value of group held for sale (Rm)||620||2 938||n/a||–||–||–||–||–||–|
The group continues to identify two core material issues related to financial sustainability, namely profitable growth, and capital and cost-efficiencies. In 2017, as in 2016, we have also managed and dealt with a third material issue: rationalising and refocusing the business, as creating a leaner operation will create both efficiencies and drive profitable growth.
While much progress has been made in rationalising and refocusing the business over the last year, this remains a critical priority as this process will continue to distract the group from addressing the two primary issues until it is resolved. However, we continue to view this third material issue as temporary in nature and likely to fall away once the strategic repositioning of the group has been achieved.
Altron has been relatively short-term focused over the last 18 months, implementing our strategy of refocusing the group into the ICT sector. Our priorities have been to find incremental organic growth opportunities and maintain stability in our core operations. In the non-core operations the focus has been on running disposal processes while trying to improve the performance of these businesses – many of which were in very difficult positions.
Given the uncomfortably high borrowings on the group’s balance sheet at the end of the 2016 financial year, during 2017 we also continued to emphasise cash flow management in order to reassure all of our stakeholders that appropriate progress was being made on reducing the borrowings to sustainable levels in the shortest possible period of time.
|RISKS||KEY MITIGATION STEPS|
Profitable growth is critical for long-term financial sustainability. Over the last year there has been improvement in the group’s overall performance and a return to profitability at a headline earnings level.
We have continued to split the group’s income statement between continuing (core) and discontinued (non-core) operations, which shows that the core operations have delivered some, albeit muted, profitable growth at an operational level, while the non-core operations have seen a significant reduction in losses.
We have previously indicated that, until the non-core operations are disposed of and the balance sheet returns to sustainable debt levels, acquisitive growth will not be possible. In addition, given the challenges currently facing the local economy, there is limited opportunity for meaningful growth. However, the recent equity injection of R400 million from Value Capital Partners (VCP) post year-end could see an acceleration of Altron’s growth opportunities. We anticipate a particular focus on offshore opportunities to diversify the portfolio away from its significant South African exposure.
Given the disparity between the core and non-core businesses within the group, this section will focus on the performance of the core operations. Non-core operations will be addressed under the rationalisation issue, below.
Revenue from Altron’s core operations has reduced by 3% on the face of the income statement. However, two factors mask the underlying performance of the group: the closure of NOR Paper within the Bytes Document Solutions (BDS) business and the loss of an airtime distribution contract within Altech Autopage. If these two factors are excluded, revenue grew by 6,5% to R13,3 billion.
At an EBITDA level the performance has not been as positive, but remains relatively robust. The improvement in EBITDA is largely attributable to significant central cost reductions (excluding the two factors referred to above). There has been some divergence between the IT business units, which showed a decrease in EBITDA, and the telecommunications businesses, which generally saw an improvement in profitability.
In the IT businesses the decline was largely caused by the loss of long-standing contracts in BDS and Bytes Managed Solutions (BMS) at the end of the previous year. Bytes Secure Transaction Solutions (BSTS) continued its good track record of growth, as did BTG UK, though the effect of this was reduced by the rand being on average 7% stronger against the British pound (GBP) during the last financial year. The UK operations currently account for 47% of the IT business’s revenue and 27% of its EBITDA, and 32% and 18% of the core operations’ revenue and EBITDA, respectively.
The improvement in performance of the telecommunications and multimedia businesses was due to the recovery of Altech Netstar after a disappointing prior year; good growth from Altech Radio Holdings (ARH); and an exceptional performance from Arrow Altech Distribution (AAD). Altech Netstar’s improved performance was the result of better retentions in the subscriber base and good performance from Pinpoint Communications in Australia. ARH’s commencement of its City of Tshwane project improved that division’s results, while AAD significantly increased its market share and expanded into new lines of business. In contrast, Bytes System Integration (BSI) was an area of disappointment, given the high expectations of the business at the beginning of the financial year.
At a headline earnings per share level the core operations recorded a 10% reduction, though this was due to higher interest costs. This was caused by a combination of an increase in the cost of borrowings, as well as the reduced expectations around disposal proceeds from the non-core operations, which increased the interest allocated into the core operations.
Many of the issues faced by Altron in recent years are attributable to poor capital allocation decisions. The importance of improving the controls around capital allocations has therefore been identified as a key issue for the group. Furthermore, as we look to reinvest in the core businesses it is critical that capital is allocated carefully and appropriately.
Cost-efficiencies are critical in any business, but particularly in the current operating climate where the group is facing a highly competitive environment, rapid commoditisation of goods and services, and low economic growth. In addition, the transition of the group to a much smaller, though more profitable, business will require a lower running cost base.
While we have not progressed to the extent we had hoped with our capital cost and efficiency initiatives, we have seen a significant improvement in both these metrics in the current year, albeit off a low base. Nevertheless, there remains work to be done to complete the initiatives we started in these areas during FY2016, and this remains a key focus.
In respect of capital, the main progress of the last year has been the realisation of capital from various disposals, most notably those of Altech Autopage and Aberdare Cables. These disposal proceeds were all applied to reduce debt and, along with tight working capital management, have enabled the group to return to sustainable debt levels. There remains approximately R600 million of capital tied up in the non-core operations, and releasing that capital remains a high priority.
The success of the disposal processes to date enabled the group to complete a refinancing of the entire group’s debt. This was completed in February 2017. We maintain good and transparent relations with all of our funders and the relationships that have been developed through the last few years enabled this process to run smoothly. We have reduced our term funding to R2 billion with R1 billion of this positioned as a three-year bullet loan and the balance as a five-year amortising loan. The proceeds from the remaining disposals are expected to be sufficient to repay much of the bullet loan, while the amortising loan can be comfortably serviced out of expected operating cash flows. This position represents almost a 50% reduction from our peak borrowing levels.
Given the tough operating context and the pressures of the restructuring process, no acquisitions were concluded during the last financial year. We have also kept a tight rein on capital expenditure, which is notably down on prior year levels, although assisted by the various disposals. Working capital management has been very well controlled by the business units, though this is not apparent in our reported cash flow. All capital expenditure over R1 million is now controlled centrally, which has improved the group’s capital control and focused attention on this aspect of capital allocation.
The reduced losses in the non-core operations have also decreased the capital required to keep these operations going while we run the disposal processes. In most instances losses have been funded through the release of working capital. The Powertech Transformers management team has managed their cash flows particularly well – to the extent that Altron was not required to inject any additional funding into that business during FY2017.
The disposal of Altech Autopage at the end of FY2016 led to an unwinding of that company’s substantial negative working capital position, which resulted in material outflows from the group as the necessary creditors were settled. The result was a working capital cash outflow of approximately R600 million.
There was also deterioration in our debtors ageing in 2017, which we attributed mostly to local economic conditions. To date we have not seen an increase in bad debts; rather there appears to be a problem of timing of payments.
Most of the group’s expected cost decreases materialised in FY2017 following the extensive restructuring actions undertaken in the prior year. Most significant of these were the corporate cost reductions, which were broadly in line with the expected R120 million, despite a number of once-off costs. In the non-core businesses the improved performance of Altech Multimedia and Powertech Transformers reflected those divisions’ cost reduction efforts in the prior year.
We continue to drive cost-efficiencies throughout all operations as this is critical to preserving profitability levels in the current economic climate. However, these efforts are largely incremental, rather than larger “step” changes. The one exception to this is a new cost reduction effort in the Altron head office following the recent simplification of the corporate structures by our new chief executive, post year-end. This will be completed during the first half of the new financial year. The process entails once-off costs and so the benefits are expected to be felt only in the 2019 financial year.
Going into 2018 we expect to renew our strategy of implementing shared services across the core operations. There was further reduction in this cost base in 2017 – which was in line with expectations in what has been a year of consolidation. Going forward, and following the appointment of a dedicated executive, we will drive this initiative throughout the group.
The combination of the group’s various cost and efficiency efforts has resulted in a lower cost base for the group and a significantly improved net debt position,year-on-year, of just over R1,9 billion. Provided that the proceeds from the remaining non-core businesses materialise as expected, we anticipate a further material reduction in debt levels in the year ahead.
As we highlighted last year, it is critical for the group to complete the process of refocusing on the ICT businesses and releasing capital from the remaining non-core operations in order to deleverage to sustainable levels, thereby freeing up capital for investment into the core operations.
When that process is completed, it will also release significant management time and resources from the restructuring process, enabling concentrated focus on delivering profitable growth.
The performance of the non-core operations was much improved in FY2017. Although most continued to perform at a loss, there was an overall reduction of close to 80% in EBITDA losses.
Powertech in particular saw a significant reduction in its EBITDA losses, primarily as a result of lower losses in the Powertech Transformers business. This business benefited during the year from increased activity levels, albeit at poor margins, as well as from the cost reduction initiatives instituted the previous year. Powertech Batteries had a good year, increasing its EBITDA by approximately 3% in a tough market. Its improved margins were driven by lower input costs.
The performance of both Powertech Switchgear and Swanib Cables, on the other hand, deteriorated. The former suffered from delays in tender awards and the latter was affected by economic conditions in Namibia. Powertech System Integrators (PTSI) also continued to endure large declines in revenue. This operation was also subject to a right-sizing exercise ahead of its disposal, which is anticipated to occur in the early part of FY2018.
Generally, the Powertech operations experienced many of the same challenges of previous years, although there has been some encouraging movement in recent months, such as increased Eskom activity. Overall, despite performance improvements, the losses generated in the non-core operations – together with a number of substantial impairments – once again resulted in a drag on the results generated from the continuing operations.
The Altech non-core operations improved year-on-year, although the EBITDA losses in Altech Autopage were higher than expected. Operationally, Altech Autopage’s losses have reduced to expected levels, which are linked to the collection of its remaining debtors, but these collections have been lower than anticipated and we have had to increase the level of provisions. These losses should be significantly lower in the coming year with the bulk of remaining debtors collected in the next 12 months.
Altech Multimedia delivered a much-improved performance, returning to EBITDA profits after the right-sizing process of the business in 2016. Factory volumes were slightly higher than expected as the operation moved into adjacencies such as television sets, and the company’s relationship with its main customer, MultiChoice, remains strong. The volumes anticipated from the digital terrestrial television (DTT) initiative failed to materialise, but were made up in other areas of the business.
This last financial year saw the conclusion of the disposal of Aberdare Cables and its international operations, as well as the disposals of Strike Technologies, Technology Integrated Solutions (TIS) and the group’s Menlyn property. There are two further transactions currently in competition approval process: the disposal of Powertech Batteries and Powertech System Integrators (PTSI). We hope to conclude these sales soon. Unfortunately, neither of these two disposals has realised the quantum originally anticipated.
The group now remains with seven non-core businesses to dispose of to complete its rationalisation process. The most significant of these are Altech Multimedia and Powertech Transformers. Both of these operations have been engaged in extended negotiations for many months. The recent increase in orders from Eskom for Powertech Transformers' products, has renewed interest in that company.
As in 2016, Altron was required to write down the carrying value of the non-core operations to the latest estimates. Various delays in disposals have compounded the difficulties inherent in this.
The group’s core operations have shown a solid track record of delivering either stable or growing profits over the last few years, despite various challenges. Given their critical mass and strong market position, we believe that the core business remains well placed to grow organically.
The introduction of R400 million of equity capital by Value Capital Partners (VCP) will significantly improve the strength of the balance sheet and should enable the group to recommence acquisitions during the 2018 financial year. We also expect that the experience and input of VCP management will assist in refining and directing Altron’s investment processes.
In addition, post year-end, the group’s new chief executive initiated a full review of the core business and a streamlining of the group’s executive structure. These processes will introduce new thinking and identify new areas of growth.
We therefore expect to be able to report some encouraging growth in the year ahead as we are able to focus more on the core operations. However, it will be important to remain cognisant of renewed levels of uncertainty in the local economy, where the majority of Altron’s business is based, which may temper some of our efforts in returning the group to profitable growth. We will need to make an increased effort to cross-sell the group’s goods and services into our customer base, both locally and into the UK operations.
Going forward the group will maintain the capital and cost disciplines that have been established in past years and complete the process of rationalising and refocusing the group through the disposal of the non-core operations. If all the disposal processes can be successfully concluded within the 2018 financial year, which we believe is a reasonable expectation, we will be able to remove that temporary material issue from the next integrated annual report.