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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 six month interim period ended 31 August 2006.
 

Business environment

Conditions in the South African economy remain buoyant and despite recent interest rate increases, business confidence remains positive and consumer demand strong. Government’s announced infrastructure spend, aimed at stimulating GDP growth, is creating an environment conducive to demand for group products, particularly within Powertech.   Recent exchange rate declines have assisted in alleviating to some degree the threat of import competition, although imports from India, China and Brazil remain competitively priced even with the weaker exchange rates.

The increased demand for power infrastructure products from local government and parastatals has been beneficial to Altron’s Powertech businesses in its Power Electronics and Multi-Media sector. Current indications are that these conditions will continue over the medium term. This increased spend, combined with good growth levels in the building and construction industry as well as accelerated infrastructure investment for the  Soccer World Cup 2010 and the Gautrain project, has created a positive growth environment within the power electronics sector. The international success of Altech UEC Multi-media Technologies’ recently launched Personal Video Recorder (PVR) has also enhanced the contribution to the group from this sector.

The landscape of the local Telecommunications sector is expected to change significantly as a result of the Electronic Communications Act, the ICASA Amendment Act and the implementation of number portability which is expected  during the latter part of this financial year. The establishment of the Second Network Operator as well as the convergence that is taking place throughout the entire telecommunications spectrum, will provide new business opportunities in this sector.  The continued expansion in the mobile arena, particularly in Africa, provides opportunities for our mobile infrastructure focused companies in the Powertech group as well as for the supply of SIM cards and vouchers in the Altech group. 

Local spend in the Information Technology sector has increased as current levels of company profitability provide funds for IT development.  The slower than expected adoption of the Europay/Mastercard/Visa (EMV) standard in the local banking environment has negatively impacted on the demand for secure cards, which should be implemented in the first half of 2007.   Internationally, significant progress has been made in building a meaningful operation within this sector through two acquisitions in the UK and the expansion of territorial rights for Xerox and Alcatel products in Africa.
 

Financial overview

The Altron group’s interim results for the six months ended 31 August 2006 have shown exceptional growth with a 52% increase in headline earnings per share.

Revenue increased by 20% from R7.0 billion for the prior period to R8.3 billion, with operating profit increasing by 42% from R502 million to R711 million, which reflects a substantial operating margin improvement to 8.5% from 7.2% in the prior period with Altech, BTG and Powertech all improving operating margins. This margin improvement was primarily led by the performance of the Powertech operations, which have benefited from the increase in infrastructure spend as well as the continued strength of the building and construction industry.  This improvement was assisted by operating efficiencies and cost reductions, which have been a focus over the last twelve months, combined with the closure of the Aberdare lossmaking telecoms cable operation in the prior period.. During the period under review, Altron spent R101 million in capacity expansion, mainly focused in the power electronics sector. Taxation, including STC, has decreased marginally from 36.0% to 34.9%.

Altron’s annualised return on equity improved to 23.5% with return on net assets and return on capital employed improving to 35.9% and 31.4% respectively. The balance sheet remains strong with cash at R1.5 billion.

Altech delivered a sound set of results for the financial half year ended 31 August 2006, reporting improved headline earnings per share of 197 cents, an increase of 9%.  This was driven by better than expected performances from most of its operating companies including Altech Arrow Altech Distribution, Altech Autopage Cellular, Altech Netstar, the Altech Alcom businesses, Altech UEC Multi-media Technologies and Altech Isis Information Systems.  Revenue increased by 13% to R3.3 billion from R2.9 billion in the prior corresponding period, with operating profit up 16% at R289 million.

The continuing low interest rate environment has positively impacted consumer demand which continues to stimulate growth at Altech Autopage Cellular. Increased consumer demand has also manifested itself in high motor vehicle sales benefiting our vehicle tracking business, Altech Netstar.

Altech UEC Multi-media Technologies completed its successful turnaround, increasing revenue by 64% and improving operating margin from break-even to 11% compared to the corresponding period in the prior year.  This is primarily as a result of the international success of the PVR product as well as expansion into export markets.  Altech NamITech continued to under perform with an operating loss being incurred by its South African operations.  This business has repositioned itself through a restructuring programme, the benefits of which should be realised in the second six months of this financial year. NamITech West Africa performed above expectations.

Altech’s balance sheet remains strong with a net asset value of 1708 cents per share and cash of R1.3 billion.  Altech declared a special dividend of R1.00 per Altech ordinary share payable to shareholders on Monday 6 November 2006. Cash has been utilised in the current period in the funding of working capital as well as the payment of dividends.  Return on shareholder’s equity is currently 22.7%.

BTG performed above expectations with revenue increasing 15% to
R2 billion.  Revenue growth was particularly strong from the international operations, helped to some extent by the weakening of the rand, but also by the impact of the newly acquired Xerox business in the UK, Xclusive Solutions which is performing above expectations.  Operating profit improved by 23% from R128 million to R157 million when compared to the prior period, with the operating margin improving from 7.5% to 8.0%.  This margin improvement was mainly driven through cost efficiencies achieved by the South African operations.  

Headline earnings per share improved by 25% to 58 cents per share.  BTG moved from a net cash position of R77 million at financial year end to a total net debt of R83 million at 31 August 2006 due to investing activities of R112 million, the payment of a dividend of R75 million, tax payments and an investment in working capital.

Powertech reported an excellent increase in revenue of 32% to R3 billion as a result of the significant increase in power infrastructure spend as well as bullish conditions in the building and construction industry.  Operating profit increased by 114% to R272 million from R127 million in the prior corresponding period, largely as a result of these factors combined with the benefits of restructuring exercises.  The buoyant trading conditions coupled with management’s stringent cost cutting exercises have allowed Powertech to increase operating margins from 5.5% to 8.9%.  The improvement in operating margins was partly due to the closure of the telecom cables manufacturing operation last September, which had incurred losses in the comparative period, but is predominantly due to improved trading conditions and cost efficiencies.

Altron’s finance operations continue to run down following the sale of Fintech (Pty) Limited in the prior financial year and the amortisation of Fintech Receivables 1, Altron’s securitised interest in the financing book.  Nevertheless, results have continued to exceed expectations as a result of sustained high levels of secondary rental income. The TAR warehouse owned by BTG continues to grow in line with expectations.
 

Black Economic Empowerment (“BEE”)

The Altron Transformation process is progressing well and a revised Altron Transformation Vision 2010 implementation guidelines document is currently being compiled under the direction of the newly appointed Group Executive: Corporate Affairs, Douglas Ramaphosa. The guidelines will be in accordance with the dti BEE Codes of Good Practice which are expected to be finalised during the second half of this financial year and will serve to assist the transformation process at operational level.

Through its anchor partnerships with leading empowerment firms Pamodzi, Kagiso and Izingwe Capital, Altron continues to meet its Transformation Vision 2010 targets on the broader BEE indicators as have been confirmed by the positive ratings received for many of our group companies from rating agency, Empowerdex.  Agreement in principle was reached during the period for black economic empowerment parties to acquire an aggregate 30% interest in Altech Netstar’s fleet management division. The black empowerment consortium will comprise a private empowerment company and a trust to be formed by Altech that will be for the planned benefit of previously disadvantaged Altech employees.

Motoma’s 20% stake in Rentech and 30% stake in Altech Alcom Matomo were acquired by Powertech and Altech respectively. These equity stakes have been reserved for the introduction of new empowerment partners in due course. Motoma also exited their 6% investment in Aberdare Cables of which 3% was effectively re-acquired by Powertech bringing their shareholding to 73%, with Izingwe purchasing the balance.


Corporate activity

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

• With effect from 1 March 2006 BTG acquired Xclusive Solutions, a leading provider of document and print solutions and Xerox partner in the United Kingdom, for an initial consideration of £3.2 million that could increase to a maximum of £4.4 million depending on future profit performance.
• Altron Finance concluded the repurchase of 3.4 million Altron participating preference shares at a cost of R77 million.
• Altron increased its investment in BTG by purchasing 787,243 shares at a cost of R8.6 million.
• Altech’s acquisition of MobiMaster in France has been fully implemented and is unconditional.
• BTG made a number of other acquisitions including:
  • Zenith Systems, an online e-learning software provider, for R7 million;  
  • TMS 2000, a telephone management system, for R2.6 million; and
  • Xerox distribution rights for Kenya, for R2 million.
• Subsequent to the half year, BTG acquired Vantage Business Systems in the UK, a Xerox dealer, for an effective amount of £1.5 million.
  
   

Outlook

Your directors remain positive about the group’s sustained growth during the second half of this financial year. This outlook is based primarily on continuing infrastructural spend and buoyancy in the building and construction industry which have translated into significant orders for the group’s Powertech businesses. The benefits of certain supply chain initiatives will further assist improved operational performances. The deregulation and growth opportunities in the local telecoms industry as well as improved business conditions in the ICT sector are expected to further position the group to achieve growth. Given a stable macro-economic environment, the board anticipates posting strong growth for the full financial year, although possibly not at the same rate as that reported for the first half.

Directorate

On 31 July 2006, Adv Dali Mpofu, a non-executive director of Altron resigned from the board of the company due to other commitments. The board wishes to record its appreciation to Dali for his valuable contribution over the past few years and wishes him well for the future.

On behalf of the board
 

On behalf of the board