Income statements  |  Balance sheets  |  Statement of changes in equity  |  Cash flow statements  
Notes  |  Segmental analysis  |  Operational contribution  |  Supplementary information
Message to shareholders

Message to shareholders

Your directors are pleased to report that the Altron group has posted continuing strong results for the six months ended 31 August 2007 with revenue increasing by 32% and headline earnings per share by 38%.

Business environment

Demand from infrastructure development is continuing at the expected pace in both the public and private sectors.  The building and construction industry is maintaining good overall growth levels and infrastructure spend from state-owned enterprises  and local authorities is gaining momentum. The impact of interest rate increases on consumers is, however, becoming evident in a decline in the growth rate of residential housing plans passed, housing prices, motor vehicle sales and retail credit sales.
 

The continuing deregulation of the telecommunications sector in terms of broadband wireless services is expected to facilitate many new entrants into the telecoms market. Telkom’s capital expenditure programme, the launch of the second network operator, Neotel, government’s plans for Infraco as well as the decision made by mobile operators to “self provide” their own networks are stimulating demand for telecom products and services provided by our group.

Conditions in the power electronics sector remain buoyant on the back of recent announcements of further spend on infrastructure by both government and Eskom, the Gautrain project, preparations for the Soccer World Cup event, municipal tenders as well as significant commercial sector developments. Global competition continues to be of concern as our market becomes more globally attractive and the rand remains relatively strong. In the Multi-media sector the allocation of licences in satellite television broadcast is opening up the market and substantial investment in the broadcasting sector is expected to stimulate growth of the pay television market and provide consumers with more choice and diversity of content. We are well positioned to participate in this new challenge.

Margin pressures are pervasive in the information technology sector due to commoditisation and increased competition. IT broadband opportunities are, however, growing and the local market is benefiting from increased demand from the public sector as well as opportunities in the infrastructure management and software application hosting industry.
 

Financial overview

During the first six months ended 31 August 2007 the Altron group posted good results driven by exceptional growth in the Powertech businesses and satisfactory performances from Altech and Bytes, resulting in a 38% increase in headline earnings per share.

Revenue increased by 32% from R8.3 billion to R11.0 billion, with operating profit increasing by 27% from R711 million to R902 million, which reflects a slight operating margin decline to 8.2% from 8.5% in the prior year. This margin decline was caused by a reduction in margins at Altech and Bytes, while Powertech continued to increase its operating margin.  The margin decline at Bytes from 8.0% to 6.0% was as a result of the significant increase in the contribution from the lower margin UK businesses as well as some margin pressure in the competitive South African market.

The group’s investment in working capital has decreased but still remains high due to a combination of higher trading volumes and increased raw material prices. Altron’s annualised return on equity improved to 27.3% with return on net assets and return on capital employed improving to 35.6% and 34.9%, respectively. Cash generation has been positive with over R1 billion generated from operations and the balance sheet remains strong with cash of R1.8 billion.

Altech delivered a satisfactory set of results for the six months ended 31 August 2007, with headline earnings per share growth of 11% to 220 cents. Revenue increased by 20% to R4.0 billion from R3.3 billion in the prior period, with operating profit up 6% at R306 million.  The operating margin declined from 8.7% to 7.7% primarily due to the slower than expected turnaround of Altech NamITech’s South African operations.

Given the slower turnaround, R47 million of the remaining goodwill arising on the Altech NamITech South Africa operation was impaired.

Altech’s balance sheet remains strong with a net asset value of 1,734 cents per share and cash of R1.2 billion.  Strong operating cash flows have been utilised in the repurchase by Altech of Altech ordinary shares as well as the payment of increased dividends. Annualised return on shareholder’s equity is currently 26%.

Bytes increased headline earnings per share by 12% to 65 cents per share off a high base following an exceptionally strong first six months in the previous financial year.  Bytes reported an increase in revenue of 44% to R2.8 billion predominantly due to growth from the international operations where a significant 3-year Microsoft licencing contract was obtained from National Health Services (NHS).   Bytes’ operating profit increased but at a reduced operating margin of 6% as compared to 8% in the prior period.  However, when adjusting this figure for the NHS contract obtained in the UK, the Bytes margin percentage rises to 7.6%.   

Bytes saw a slight decline in its net cash position from R149 million at the previous year end to R137 million at 31 August 2007 due to the payment of increased dividends and the conclusion of a number of small acquisitions. New product financing is facilitated through the Technologies Acceptances Receivables warehouse structure owned by Bytes which continues to grow in line with expectations. Return on equity was a healthy 31%.

Powertech’s robust growth has continued with a substantial increase in revenue of 38% to R4.2 billion primarily as a result of  increased orders coming through from government’s power infrastructure spend as well as the continuing demand from the building and construction industry during the first six months.  Operating profit increased by 58% from R272 million in the prior year to R429 million, with operating margin increasing from 8.9% to 10.2%.  This improvement in the operating margin is predominantly due to improved trading conditions, operating leverage, a favourable currency and commodity environment as well as a focus on the reduction of expenses.  

Aberdare Cables’ local operations benefited from the current conditions, with revenue growth of 47% and further improvements in their operating margin being augmented by a successful first six months experienced by the telecoms joint venture, CBi Electric Aberdare ATC Telecom Cables.  Aberdare Cables’  international operations, based in the Iberian Peninsula, produced very pleasing results, increasing revenue by 35% and doubling operating profit in rand terms.  ABB Powertech Transformers reported a strong performance with increasing demand from infrastructure projects, although its operating margin was depressed by industrial relations issues that affected the first few months of the period under review.

The Battery group produced good results, increasing revenue in real terms and improving its operating margin in a tough competitive environment.  The Industrial group experienced difficult trading conditions during the first six months as low cost imports continued to exert pressure on its margin.  A rationalisation exercise has been implemented to ensure that the business can continue to produce acceptable returns and certain of the manufacturing operations have been relocated to Lesotho, thereby providing a lower cost base.

Notwithstanding good working capital management, Powertech’s balance sheet reflects a substantial investment in working capital over the past 18 months primarily as a result of an increase in trading levels.  Nevertheless, Powertech is generating sufficient cash flows to fund most of the significant capital expenditure programmes planned to take advantage of the current high market demand.

Corporate activity

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

• Approval from the Competition Tribunal for Altron to purchase the electrical engineering operations of the IST group for R550 million, with an effective date of 1 September 2007.

• The purchase of the remaining 25% issued share capital of Aberdare Cables’ Spanish subsidiary Cables de Comunicaciones for €8.6 million (R81 million), with an effective date of 1 August 2007.

• The acquisition by Powertech of Swanib Cables, the largest cable distributor in Namibia for R40 million, effective 1 March 2007.

• Agreements have been signed for Powertech to acquire the 50% shareholding owned by ABB in the transformer joint venture, ABB Powertech Transformers, for a consideration totalling R320 million. This was to facilitate the introduction of a 25% empowerment shareholder into the business. A long-term technology agreement and exclusive marketing arrangement has been signed with ABB thereby securing leading edge transformer technology. This transaction is subject to approval by the Competition authorities.

• Altech signed an agreement to purchase ComTech (Pty) Limited, a vehicle fleet management services company for a maximum amount of R90 million, payable in cash. This transaction is expected to be completed in the second half of the current financial year and is subject to approval from the Competition authorities.

• Altech has signed heads of agreement with the Sameer ICT group of Kenya to acquire a 51% controlling interest in Kenya Data Networks Limited (KDN), Swift Global (Kenya) Limited and Infocom Limited, subject to the fulfilment of various conditions precedent.

• Altech has also signed heads of agreement for the proposed acquisition of a 50% joint controlling interest in a new company which will hold 60% of Netstar Advanced Systems Sdn Bhd (Netstar Malaysia), Altech Netstar’s franchisee in Malaysia.  

• Altech acquired the Altech Netstar franchisee in North-West province (Netstar Rustenburg), involving a cash outlay of R10.96 million. 

• The repurchase by Altech of 1 635 094 Altech ordinary shares, equivalent to 1.54% of its current issued share capital for an aggregate outlay of R103 million.

• Bytes concluded various smaller acquisitions totalling R22 million.
   

Outlook

The outlook for Altech, Bytes and Powertech during the second half of the financial year remains favourable although it is unlikely that the group’s growth rate for the full year will be maintained at the current high levels. This is primarily due to the high base of earnings which the group has achieved in the first half of the year, particularly at Powertech.

Acknowledgements

The board would like to express its appreciation to all of its stakeholders, customers, staff, business partners and shareholders, for their contributions and continued support towards the growth of our group as one of the leading ICT and power electronics groups in Africa.
 

On behalf of the board