Unaudited Interim Financial Report and Cash Dividend Declaration for the 6 months ended 31 March 2016

Commentary

OVERVIEW

Reunert experienced challenging trading conditions in the six months ended 31 March 2020 (H1FY20).

Despite these conditions, the Information, Communication and Technology (ICT) segment delivered real growth in operating profit while the Applied Electronics (AE) segment performed in line with expectations. However, the Electrical Engineering (EE) segment suffered material underperformance primarily as a result of a seven-week labour disruption at African Cables, significant foreign exchange losses at Zamefa in Zambia, and weak cable infrastructure investment demand across our key Southern African markets. The EE segment’s performance over-shadowed and negatively affected the overall performance of the Group.

The Group’s financial results were also adversely affected by impairments, arising from the predicted impact of the COVID-19 pandemic and the resulting highly uncertain future economic conditions. These impairments were raised in terms of the forward-looking requirements encapsulated in International Financial Reporting Standards (IFRS). The Group also suffered an abnormal item in the form of an external fraud.

Pleasingly, the generation of free cash flow during the period under review was in line with the Group’s historic conversion ratios and R355 million was generated notwithstanding the difficult trading environment.

The National State of Disaster and the accompanying national lockdown, that commenced on 27 March, resulted in lost sales and adversely affected the interim operating profit. The rapid depreciation in the Rand as investors moved to the US$ and other safe-haven assets, also caused mark-to-market losses.

Before the COVID-19 impairments made in response to the forward-looking requirements of IFRS and the impact of the abnormal item (incurred credit loss) (see below and note 7), adjusted basic earnings per share (EPS) of 161 cents were 94 cents (37%) lower than the comparable six months of the previous financial year and adjusted headline earnings per share (HEPS) of 161 cents were 92 cents (36%) lower (see table below).

    Six months to
31 March
2020
Six months to
31 March
2019
% Change
Extract from statement of profit or loss
Rm  
(Loss)/profit attributable to equity holders of Reunert        
as reported   (277) 366 (176)
Add: Expected credit losses1   529
Add: Impairment of goodwill and property, plant and      
equipment   79
Add: Loss on remeasurement of subsidiary held for sale   22
Add: Impairment of joint venture property, plant      
and equipment2   68
Add: Loss on disposal of subsidiary   44
Taxation impact of adjustments   (161)  
Adjusted profit attributable to equity holders of Reunert
  260 410 (37)
Adjusted basic earnings per share (cents)   161 255 (37)
Adjusted headline earnings per share (cents)   160 253 (37)
1 Includes abnormal item – incurred credit loss of R298 million (see note 7).
2 Included in share of joint ventures’ and associate’s (loss)/profit.

This pro forma financial information in the table above is provided for illustrative purposes to show the intrinsic performance of the Group prior to including the COVID-19 related items and the impact of an abnormal item. Because of its illustrative nature, this information is not intended to comply with the requirements of IFRS although it has been prepared in accordance with the Group’s established accounting principles. The directors are responsible for compiling the pro forma financial information on the basis of the applicable criteria specified in the JSE Listings Requirements.

In compliance with the forward-looking requirements of IFRS, Reunert has considered the potential impact of the COVID-19 pandemic on its businesses. Our assumptions were developed after referring to the views of leading economists and other expert opinions and also incorporate our views of markets served by our reporting segments. We believe our forecasts are realistic based on these assumptions, and perhaps are conservative in some instances.

Any forecast financial information is the responsibility of the directors and has not been reviewed or reported on by the Group's auditors.

Economic predictions indicate that debt defaults are expected to materially increase as the economic impact of the lockdown weakens growth prospects. In addition, the forecast of Gross Domestic Fixed Investment growth has reduced.

The economic conditions outlined in these predictions are expected to have a direct impact, notably on the future collection of rentals in the Quince Capital finance book and on the future operating performance of our cable businesses. As a result, a significant increase in the impairment allowance for expected credit loss at Quince Capital and impairments at the cable businesses, are required. The increase in the impairment allowance for expected credit losses amounted to R231 million before taxation (R166 million after taxation) and impairments to property, plant, equipment and goodwill amounted to R147 million before taxation (R134 million after taxation) of which R68 million before taxation and R55 million after taxation relate to the equity accounted joint venture company.

The abnormal item, being an incurred credit loss (see note 7), arose from an external whistle blower’s report on alleged fraudulent activity perpetrated against Quince Capital. This caused Reunert to immediately initiate an investigation into an external, independent customer (which is unrelated to the Reunert Group of companies) of Quince Capital. However, due to the lockdown and the prohibition on cross-provincial border travel, the investigation was stalled and resumed in early May. Thus far, the investigation has revealed prima facie evidence that the external party has defrauded Quince Capital. A comprehensive external forensic audit is in process. However, from the evidence extracted to date, an incurred credit loss impairment of R298 million before taxation (R215 million after taxation) has been raised.

FINANCIAL RESULTS

  Six months to
31 March
2020
Six months to
31 March
2019
% Change
Financial performance group results and key earnings metrics
Units  
Revenue                 Rm   4 144 5 288 (22)
Operating profit     374 615 (39)
Less:        
Net interest expense     (19) (4) 375
Expected credit losses1     (529)
Impairment of goodwill and property, plant and        
equipment     (79)
Loss on remeasurement of subsidiary held for sale     (22)
Loss on disposal of subsidiary     (44)  
(Loss)/profit before taxation     (275) 567 (149)
Taxation     31 (195) (116)
(Loss)/profit after taxation     (244) 372 (166)
Share of joint ventures’ and associate’s        
(loss)/profit2     (82) 5 (1 740)
(Loss)/profit for the period     (326) 377 (186)
Non-controlling interests     49 (11) 545
(Loss)/profit attributable to equity holders of Reunert
    (277) 366 (176)
Operating margin   %   9 12 (25)
Basic (loss)/earnings per share Cents   (172) 227 (176)
Headline (loss)/earnings per share Cents   (76) 253 (130)
1 Includes the abnormal item – incurred credit loss of R298 million.
2 March 2020 includes an impairment loss on property, plant and equipment of R55 million (after a tax credit of R13 million)
(March and September 2019: Rnil) in respect of CBI-Electric Telecom Cables (Pty) Ltd, a joint venture.

SEGMENTAL RESULTS

Electrical Engineering

The segment faced significant challenges during the reporting period as cable infrastructure demand remained weak across the region, the liquidity challenges in Zambia continued, and our South African power cable company experienced a seven-week labour disruption. This resulted in the segment’s revenue decreasing by 37% to R1 738 million (H1FY19: R2 775 million) and an operating loss of R42 million (H1FY19: profit of R225 million).

In Zambia the liquidity position remained constrained. The Government removed input value added tax (VAT) on copper cathode with effect from 1 January 2020, resulting in Government receivables no longer increasing. The repayment of the outstanding Zambian Government receivables to Zamefa remained slow and only ZMW34 million was received during the period. This resulted in the external, hard currency, borrowings of the company remaining at inflated levels and the company suffered material foreign exchange losses as the exchange rate weakened from ZMW13:1US$ to ZMW18:1US$, over the reporting period. These foreign exchange losses reduced the segment’s operating results by R82 million.

The weak infrastructure cable demand in South Africa negatively impacted both the power and telecoms cable plants as production volumes decreased to below the levels required to fully recover fixed costs.

The circuit breaker factory continued its positive performance as export volumes continued to grow despite weaker volumes in the local market. The performance in Australia was excellent and the export development efforts over the past few years have yielded sustainable growth opportunities. On a like-for-like trading weeks basis, the company exceeded the performance of the prior reporting period.

ICT segment

The ICT segment’s strong operational performance continued in H1FY20, despite the challenging macro-economic environment in South Africa. The segment’s operating profit rose by 6% to R371 million (H1FY19: R351 million) despite revenue decreasing by 13% to R1 494 million (H1FY19: R1 722 million).

The Office Automation cluster secured strong hardware sales as the company improved its market share. The Total Workspace Provider strategy continues to accelerate with the addition of Energy Solutions and PC-a-a-S revenues for the first time, which augmented existing revenue streams and resulted in an increase of 22% in complementary revenues over the corresponding period.

The Communications Cluster delivered a positive performance. New fixed line voice sales continued to grow strongly with record new sales concluded in H1FY20. ECN’s diversified revenue streams of the cloud based Virtual PBX (VBX) and last mile broadband connectivity sales both continued to accelerate and augment the company’s core fixed-line voice income. Skywire’s last mile broadband connectivity sales continued to grow strongly as the investment into the network extended to 19 new urban geographies.

The finance cluster’s rental book grew to R3 062 million (H1FY19: R2 766 million) on the back of the improved hardware and complementary product sales in the Office Automation channel but was impacted by the abnormal item being the incurred credit loss of R298 million and the increased impairment allowance for expected credit losses of R219 million.

The segment has decided to sell PanSolutions, our legacy consumer electronics business. This business no longer meets the strategic requirements of the segment and has made an immaterial financial contribution to the segment for several years. A remeasurement loss of R22 million has resulted from this decision.

Applied Electronics segment

The AE segment performed in line with expectations as revenue increased by 4% to R1 038 million (H1FY19: R999 million) while profit decreased by 9% to R77 million (H1FY19: R85 million).

The segment was negatively impacted due to large export orders being unable to be delivered from both Reutech Communications and Reutech Radar Systems before the reporting date as a result of the lockdown. In addition, the rapid weakening of the Rand negatively impacted the foreign exchange hedges we applied to protect the cash flows of our export contracts and resulted in other foreign exchange losses. These two items resulted in a reduction of R26 million in the segment’s operating profit.

Reutech Communications and Reutech Radar Systems both delivered an excellent year-on-year improvement in their financial performances, despite being impacted by the lockdown, as they continue to execute their strong export order books. Fuchs performance reduced, as expected, due to the large export order that did not repeat in the period under review. Terra Firma had a slower than anticipated first half as the expected awards of solar projects only materialised too late to be completed during the reporting period.

Further post-COVID-19 commentary

The potential effect of COVID-19 on the future of the financial performance of the Group directly impacted the interim results in two key aspects:

1)

the increase in the impairment allowance for expected credit losses on the Quince Capital book, due to the predicted weakness in the economic activity of our customer base; and

 
2)

the impairments raised in the cable businesses in the Electrical Engineering segment. The joint venture telecoms business impaired the full value of its property, plant and equipment (R68 million before tax; R55 million after tax) due to the expected structural decline in investment into the country’s copper telecoms infrastructure. The power cable business impaired R61 million of goodwill due to the predicted weakening of power cable infrastructure investment caused by the reallocation of state budgets, the constrained Government balance sheet, and weak private business confidence.

 

The full impact of COVID-19 on the South African economy and our key international export geographies remains uncertain but Reunert recognises that long term socio-economic shifts to economies are likely. Reunert has pro-actively strengthened its resilience in the post COVID-19 economy by increasing its committed debt facilities to R1,0 billion and total debt capacity to R2,1 billion. This has been coupled with a comprehensive review of our operations and cost structures across the Group to ensure that our response to these uncertain market conditions is sustainable.

Reunert’s businesses resumed operations on 1 May 2020, in strict compliance with the South African Government (Government) regulations, and significant effort has been expended to ensure the health and safety of our employees. Our operations are steadily returning to full capacity. Pleasingly, key stakeholders (banks, customers, employees and unions) have all responded positively to our efforts and we remain aligned on the actions required in the present uncertainty.

Post COVID-19, the Group’s infrastructure companies are likely to continue to face volume pressures as:

The rest of the Group’s businesses have robust business models and are serving markets that are anticipated to offer good structural growth and opportunities. They include:

The Group will continue to focus on, and fund, the execution of our strategic initiatives, specifically targeting the businesses with the greatest potential to emerge strongly from the current COVID-19 crisis.

CASH DIVIDEND

While cognisant of the economic uncertainty going forward, the Group’s free cash flow generating capacity remains intact. The actions taken by the Company to increase its resilience enabled Reunert to declare an interim dividend, albeit at a reduced level.

Therefore, notice is hereby given that a gross interim cash dividend No. 188 of 65,0 cents per ordinary share (2019: 130,0 cents per ordinary share) has been declared by the directors for the period ended 31 March 2020.

The dividend has been declared from retained earnings.

A dividend withholding tax of 20% will be applicable to all shareholders who are not exempt from, or who do not qualify for, a reduced rate of withholding tax.

Accordingly, for those shareholders subject to withholding tax, the net dividend amounts to 52,0 cents per ordinary share (March 2019: 104,0 cents per ordinary share).

The issued share capital at the declaration date is 184 969 196 ordinary shares.

In compliance with the requirements of Strate Proprietary Limited and the Listings Requirements of the JSE Limited, the following dates are applicable:

Last date to trade (cum dividend)
Tuesday, 7 July 2020
First date of trading (ex dividend) Wednesday, 8 July 2020
Record date Friday, 10 July 2020
Payment date Monday, 13 July 2020

Shareholders may not dematerialise or rematerialise their shares between Wednesday, 8 July 2020 and Friday, 10 July 2020, both days inclusive.

On behalf of the Board

Trevor Munday
Chair
Alan Dickson
Chief Executive Officer
Nick Thomson
Chief Financial Officer

Sandton
17 June 2020