The decline in commodity prices also had a dramatic effect on the mining industry in South Africa which forms an important component of our customer base. The lower prices have reduced the number of feasible projects in this sector, and consequently the projected capital expenditure into the future.
The liquidity crisis has also meant that financial institutions, which are served by various Bytes companies, are facing much more challenging times than they have experienced in the last few years. This has resulted in margin pressure on suppliers into that sector, as well as the deferral of significant investments, particularly in the information technology arena.
The revenue growth achieved was pleasing given market challenges. From a group perspective, approximately half of Altron’s revenue growth came from acquisitions concluded during the year and half from organic revenue growth, with a similar trend demonstrated in each of the subholding groups. Powertech’s organic growth of 9.5% was largely driven by an exceptional first-half performance – the second half actually saw a contraction, largely as a result of lower revenue out of Aberdare Cables.
The EBITDA margin at Powertech saw a significant decline from 12.8% in the prior year to 7.7% in the current year. This included once-off expenses that occurred in the second half of the year, comprising three elements, namely:

The balance of the decline is attributed to the lower levels of demand in the energy cables market and its impact on the operational leverage of the business. In analysing the results, it is important to look at the first half/second half split for Powertech since the turning-point broadly coincided with our interim reporting and the once-off costs highlighted above, occurred exclusively in the second half of the year.
The other key feature in the results for the current year was the change from net investment income of R93 million to a net financing cost of R108 million. This R201 million swing accounts for 46 cents of the reduction in Altron’s headline earnings per share. This movement was caused primarily by the large investment in acquisitions that the group made in the past 18 months. These included the R550 million Powertech IST acquisition in September 2007, which was fully funded by debt; as well as the US$75 million Altech East Africa acquisition, the R320 million Powertech Transformers acquisition and the R252 million of Bytes acquisitions that were all funded out of cash resources. Furthermore, we saw investment into working capital caused by the high activity in the first half of the financial year, which was only normalised in January and February this year.
Capital items were down on the last financial year, as a result of two goodwill impairments taken by the group. Intelleca had a disappointing year due to project delays, resulting in a R50 million goodwill writedown, though the magnitude of the writedown was amplified by the change in market conditions between a year ago and the current environment. Despite the writedown, we believe in the future value of the business based on its intellectual property and a sound management team.
Powertech incurred a R40 million writedown of goodwill in the IST Telecoms division for similar reasons. However, the group assessed the IST business as a whole in looking at the investment case, and if the goodwill impairment test had been done at that level, then there would have been no impairment, since other areas of the business have outperformed expectations. After the goodwill impairment there is still approximately R400 million of goodwill on the balance sheet in respect of IST. These two impairments were offset by a R58 million profit on the disposal of Yelland Control by Powertech in April 2007, as well as a R28 million gain on the disposal of two properties in the Aberdare group.
The trading factors outlined above resulted in a decline in diluted adjusted headline earnings per share of 18% to 277 cents. This parameter adjusts for the dilutive effect of the various B-BBEE transactions that have yet to fully vest in the group, as well as the amortisation of intangibles arising on acquisitions – an amount that has become material in light of the significant acquisitions concluded during the past 18 months.

The Powertech Transformers’ and Altech’s East African operations that were recently acquired, are both relatively capital-intensive and this has significantly increased our investment in non-current assets. In total, our acquisitions during the year added R1.5 billion to non-current assets, while there was a further R1 billion invested in capital expenditure. This level of capital expenditure is significantly higher than the group has incurred previously and can be attributed to the extensive investment into the fibre optic network in East Africa, as well as substantial investments into the cables business to rationalise and improve the efficiencies of the manufacturing facilities.
These events were the primary causes of the reduction of R913 million in the net cash position and the increase in the borrowings position, resulting in a net borrowed position of some R392 million. Gearing has been introduced in a conservative manner and despite the change in the availability of funding, does not present any material risk to the group.
Net cash and cash equivalents of R1.2 billion is after offsetting overdrafts of approximately R928 million at the current year-end. Altech centrally manages its cash position, while the cash position of Bytes and Powertech are actively managed through Altron’s centralised treasury in order to minimise leakage arising from cash and overdraft balances in different areas of the group.
The additional investment in working capital of some R232 million for the year represented a net investment of 21 days, compared to the 17 days achieved in the previous year. There were pleasing reductions in inventory days and debtor days, but these were offset by the reduction in creditor days, chiefly as a result of virtually no copper purchases in January and February as inventories were reduced in the cables business. The reduction in inventory and debtor days was slightly less than expected due to some payment delays on a couple of large debtors, as well as higher inventories in the Bytes group as the Document Solutions business unit took advantage of some favourable pricing on hardware from Xerox. Working capital continues to be a major focus area in all operations and Altron’s target will be to return to the net 17 days position achieved at 29 February 2008.

In the course of a financial year we often require some form of short-term working capital funding and this is made available to us through various uncommitted facilities with several local and international banks. Due to our financial strength and good credit standing we have been able to access these facilities, even through the height of the liquidity crisis. However, should there be any significant deterioration in the global liquidity position, this could present a risk to the group, and consideration is being given to securing committed facilities from our bankers. This situation is regularly and closely monitored by Altron’s finance and treasury department.

In order to manage this risk as effectively as possible, we have tightened our credit lending criteria, particularly in those areas where we are exposed to consumers. As a result, Altech Autopage Cellular is now rejecting around 45% of applications. Powertech makes use of credit guarantee insurance in respect of sales to non-blue-chip and non-governmental debtors.
Credit sales and debtor balances will continue to be closely monitored and managed going forward, both from the perspective of minimising the risk of bad debts and maximising collections.
The second half of the last financial year was an extremely challenging one and we do not anticipate any relief in this regard in the short term. However, we are a well-diversified group of companies, with a strong balance sheet and a culture of stringent financial control.
I would like to thank all of the financial and administrative staff around the group for their sterling efforts in the last year and, in particular, for all their hard work in delivering these financial results and this annual report.
Alex Smith – Chief Financial Officer
View the full Altron 2009 Annual report
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