Chief Financial Officer’s review


This report is intended to provide additional insight into the financial performance of the Altron group. The report addresses two of Altron’s material focus areas as identified in accordance with the recommendations of King III on integrated reporting, namely profitable growth and capital and cost efficiencies as well as some of the key financial risks of the Altron group. The report needs to be read in conjunction with the consolidated annual financial statements and the financial sustainability section.

The financial year ended 28 February 2015 has been a very difficult one for the Altron group. Unfortunately we saw several of our major operations face significant challenges which resulted in a material deterioration in their financial performance, with the good performance of the remaining operations unable to offset these effects to any significant degree. This, combined with the increase in our finance costs following the additional debt taken on in August 2013, resulted in headline earnings per share dropping by 50%. The focus going forward is to address the under-performing operations and we feel we are well advanced in that process, though such projects often take longer than anticipated.

Key developments

Acquisition of minorities

The focus of the group in the last couple of years has been to improve capital allocation. Given that our track record in respect of larger acquisitions is not good, the focus has been on smaller complementary acquisitions, but where we know a business well we are prepared to invest significant capital. Last year this was reflected in the acquisition of the Altech minorities, while in the current year we have bought back the minorities in Bytes South Africa from Kagiso Tiso Holdings for R669 million. With a similar rationale, we also acquired the minorities in Altech NuPay for R80 million. We believe these are good investments into businesses we know well and create additional benefits in terms of allowing us to simplify our structures once these operations become wholly owned.

Non-core asset disposals

In last year’s report I commented on the additional gearing taken on by the group. In taking on the additional borrowings, the board indicated that the priority was on reducing the gearing through operational cash flows and non-core asset disposals. In the year under review we have concluded the sale of three operations within the technology cluster (Bytes) that had been identified as non-core, namely Bytes Document Solutions UK, LaserCom and our Retail ATM business, realising R198 million of cash. The decision was also taken to dispose of the Altech Autopage business, though this is only expected to be completed during the financial year ending 29 February 2016. As a result of the decision to dispose of Altech Autopage it has been classified as a discontinued operation and its assets and liabilities have been classified as ‘held-for-sale’.

Financial performance

The key features of the financial performance of the group have been covered in some detail in the chief executive’s review and the financial sustainability section. As a result, I will focus on some of the more detailed financial aspects of the performance reflected in the statement of comprehensive income.

In a group such as ours, operating numerous and diverse businesses, the quality and sustainability of earnings is difficult to analyse succinctly. Clearly each business routinely has once-off type successes and challenges and those can be regarded as part of the normal business cycle. In the current year we have again provided normalised earnings disclosure to clearly identify significant items that are either non-operational in nature or represent a cost incurred in the current period, which will generate cost savings in future periods. This is intended to give an indication of underlying, sustainable operating performance. An analysis of these items is included in the table below. One other item to draw attention to is the significant foreign exchange losses of R64 million during the year compared to a small profit in the prior year – while foreign exchange movements are a fact of doing business in South Africa, the losses incurred last year were particularly severe. From a review of the group’s performance over the last year I do not believe that there are any other material once-off type items that need to be highlighted in these results as affecting the sustainability of the reported earnings.

Normalised headline earnings adjustments
R millions FY15 FY14
Forex loss on East Africa loan 40
Break costs on East Africa loan  – 5
Reorganisation costs 33 39
Tax effects of adjustments (8) (8)
Non-controlling interests in adjustments (5) (19)
  20 57
Altech 7 66
Bytes 0 8
Powertech 13
Corporate 0 (17)
  20 57

Continuing operations

The continuing operations’ results exclude the results of the Altech Autopage Global System for Mobile (GSM) business from both periods so that they are comparable. A small component of the Altech Autopage results as previously disclosed will remain in the group, namely the internet service provider (ISP) business, and their results are included in continuing operations.

Revenue reduced slightly in the current year from R22,3 billion to R22,1 billion with similar movements experienced in the Altron TMT and Altron Power divisions. Both segments were impacted by significantly reduced demand from key customers – Eskom in respect of Altron Power and Multichoice Africa in respect of Altron TMT – as well as the effects of the disposals completed in the year. However, both EBITDA and operating profit saw a more marked decline as a result of ongoing margin pressure and the lack of volume in several of our major manufacturing operations, most notably Powertech Transformers and Altech UEC. As a result EBITDA declined by 19% and operating profit by 34% with the larger decline in operating profit due to increased depreciation and amortisation charges following some of the investments made in recent years. Operating profit margins have reduced from 5,1% to 3,4% which is the lowest in many years.

Capital items for the year increased significantly to R400 million from R38 million in the prior year. Unfortunately our assessment of the value of the goodwill in a number of operations across the group fell well short of the carrying value and resulted in R343 million of write offs. Each of these operations failed to deliver on budgeted results and their prospects going forward were assessed as more muted, resulting in the write offs. The other significant impairment was R100 million in respect of intangible assets. Of this, R51 million related to the Altech Node business, while R44 million was in respect of the Altech Multimedia operation. These write offs were partly offset by R61 million of profit from the disposal of the non-core assets referred to earlier.

Net finance costs increased to R271 million from R212 million in the prior year. This increase was as a result of carrying the additional R1,6 billion of borrowings that were taken out in August 2013 for the full financial year. This combined with the slightly higher interest rates, added R72 million to the interest cost for the year, indicating that average borrowings through the year were slightly lower.

This year we saw some of the benefits of the divisionalisation process that was initiated following the purchase of the Altech minorities flow through the tax line. This resulted in the effective tax rate, after adjusting for the effects of capital items, dropping to 23,5% from 30,5%. This level is not regarded as sustainable and we expect to see it move back into line with the underlying statutory tax rates.

Discontinued operations

As referred to earlier the discontinued operations represent the results of the Autopage GSM business for the last two reporting periods. While the business has maintained its revenue levels, it has seen further margin erosion as a result of deflation in the industry, further interconnect rate cuts and the deterioration in consumer confidence. This time last year we believed Altech Autopage had a future, but various strategic initiatives did not materialise as expected during the year and with further pressure on the distribution channel expected, the decision was made to dispose of the subscriber base. The reported results were further affected by significantly higher finance costs due to the factoring costs associated with the handset receivables which have been funded off balance sheet since April 2014.


The group has elected to pay a dividend to shareholders of 31 cents for the current financial year. The board decided to lift the dividend cover from 2,35 times that was applied in the prior year to approximately three times for the current financial year. This level of cover strikes a balance between providing some return to shareholders and acknowledging the fact that the balance sheet has not de-geared as we had anticipated following the poor operational performance. At current share price levels, this provides a dividend yield of approximately 2,2%.

Financial position

The group’s balance sheet has declined in net asset value for a second year, again primarily as a result of the premium arising on the acquisition of minorities recognised in equity in accordance with the group’s accounting policies. This year’s R654 million impact arose from the acquisition of the Bytes South Africa and Altech NuPay minorities, as well as the full recognition of the B-BBEE minorities in the Powertech Cables operation. This is reflected in an 18% decline in net asset value per share.

I am pleased to be able to report an improvement in working capital over the last year, with some R330 million of cash released compared to the R513 million that was absorbed last year

While the group’s non-current assets appear to have declined markedly, much of this is due to the reclassification of Altech Autopage’s long-term receivables into assets classified as held-for-sale and thus into current assets. Property, plant and equipment have declined by around 7% as depreciation exceeded capital expenditure, with the Altron Power operations being particularly measured in their investments. Intangible assets saw a more significant 19% reduction, primarily driven by the impairments discussed earlier. Offsetting this was some R366 million of additions on continued investment into intellectual property within the group. Included within this was R107 million of development costs capitalised into the Altech Node, R55 million of which was impaired at the end of the financial year. As highlighted above, the significant movement in non-current receivables, which represents investments into our subscriber bases, was due to the reclassification of the Altech Autopage assets into current assets. This balance now represents primarily the Altech Netstar subscriber base.

I am pleased to be able to report an improvement in working capital over the last year, with some R330 million of cash released compared to the R513 million that was absorbed last year. Much focus has gone into achieving this improvement across the group and we have seen meaningful reductions in both inventory days and debtor days, for which our operations are to be congratulated. Some of the cash generated was used to reduce creditor days as we felt that the levels at the last year-end were not sustainable. Within the group Altron TMT generated around R500 million from working capital, with most of this due to debtor days reducing from 74 days to 63 days. Altron Power did absorb about R150 million into working capital as they moved to a more normal level of creditors at year-end. Within this was a very pleasing improvement in inventory days to 84 from 100 in the prior year, following real focus on better managing this significant investment. Overall, the group’s net working capital position improved from 19 days to 14 days and now the challenge is to ensure that these levels are sustainable. Looking back over the last seven years, there has been a stepped change in our debtor days. We believe this is likely to remain as we have increased our revenue into the local public sector as well as into African markets and these customers typically take longer to pay than local private sector customers. Despite the achievements this year, working capital management will remain high on the agenda within the group for the coming year.

Following the refinance that was concluded in early March 2014 and which I commented on extensively in last year’s report, the balance sheet structure has a more appropriate maturity profile with R3,2 billion of non-current loans and R634 million of current loans. Furthermore our net cash position has improved to R291 million from a net overdraft of R366 million in the prior year. Nevertheless we have to acknowledge that we were unable to start the process of reducing our debt levels this year as a result of the poor operational performance and it was disappointing to see total net debt increase slightly to R3,5 billion.

At the balance sheet date, the group had capital commitments amounting to R71 million, some 35% lower than the prior year, and no contingent liabilities. Capital expenditure did significantly reduce in the current year in line with our expectations and we will continue to closely examine all investments. However, from a sustainability perspective we will need to closely monitor the manufacturing operations to ensure they do not fall behind from a technology perspective.

I can confirm that the information provided in last year’s report has not been restated, though there have been some reclassifications. The most significant of these was the move of the results of Altech Autopage into a discontinued operation on the face of the statement of comprehensive income. The cash flows associated with the acquisition of the Altech minorities in the prior year were reclassified into financing activities from investing activities.

Key internal initiatives

Working capital

The movements in working capital were discussed earlier in respect of our current financial position. As was highlighted last year, this represents a permanent focus area in terms of optimising our deployment of capital. Due to the focus at Altron TMT, they actually reduced their net investment in working capital to virtually nil and all of the group’s working capital investment at year-end related to Altron Power. While Altron Power increased their net investment in working capital, they held their debtor days at 81 days and achieved a very commendable 16 days improvement in inventory days. Unfortunately this was more than offset by a 24-day reduction in creditor days. Work continues on optimising this position through better sales and production planning to reduce inventories as well as the constant chasing up of debtors. We have seen a substantial decrease in long-outstanding debtors, principally Eskom, though unfortunately this is primarily influenced by a lack of sales to that customer as opposed to any dramatic improvement in their processes.

The significant reductions in working capital of Altron TMT was pleasing, but could have been better but for a significant excess inventory holding at Altech Multimedia, which will take some time to resolve. The improvements in debtor days from 74 days to 63 days is extremely gratifying and a reflection of much hard work at an operational level, as well as the benefits of the shared services organisation, that is slowly increasing its influence in the group as it takes on more operations. The challenge for Altron TMT is now to maintain debtors at these improved levels and not allow any deterioration. As you would expect, working capital is high on the agenda of all operational review meetings.

Reduction of debt

A key focus for the allocation of capital over the next 12 months is on reducing the level of debt in the organisation. As I indicated last year, the board is keen to see gearing levels reduced and has targeted to reduce this to about R2 billion over the next couple of years. To achieve this we will require an improvement in operational free cash flows and are also likely to utilise any proceeds from non-core asset disposals.

All of our term borrowings are governed by a common terms agreement which sets two loan covenants, namely that net debt to EBITDA should not exceed three times and the EBITDA interest cover ratio should not drop below three. While the covenant ratios deteriorated during this last financial year, we remain comfortably within the ratios at 28 February 2015 with 2,3 times net debt to EBITDA and an interest cover ratio of 3,7 times. The covenants are measured at 31 August and 28 February and based on our projections we do not anticipate any issues with meeting these covenants during the next 12 months.

While the main effect of last year’s refinance was to move into longer-term debt, we are keeping an eye on the R1,8 billion of term debt that is repayable in March 2017 in the form of a bullet repayment. Towards the end of this financial year, by which time we expect to have concluded the Altech Autopage disposal, we will relook at our maturity profile and reassess our requirements going forward.

We continue to work on our centralised treasury project and during the last financial year we moved all the working capital facilities to Altron Finance. While we have made good progress in these areas, we believe there are further efficiencies that can be extracted over the coming year.

Cost efficiencies

This remains a key theme of the group and a focus of the management teams in order to protect our competitiveness and manage the bottom line. Unfortunately, the severity of the operational downturn has masked some good achievements in this area.

The integration team at Altron TMT has made good progress with the various workstreams that were identified and we are running broadly in line with our project plans that envisage a three-year window ending 29 February 2016. The R87 million of cost savings that I identified in last year’s report have been realised as these were primarily from head count reductions driven from business unit consolidation. The Shared Services initiative has also made good progress with benefits realised from the consolidation of premises and the resulting renegotiation of leases. However, the major portion of savings from Shared Services are only expected to be realised at the end of the process as various upfront investments are required in this area. The procurement area is one where we have not made good progress to date and this will be re-examined in the coming months to review the potential in this area and how best to access it. We will continue to drive this integration process over the next year, and indeed look at the potential of expanding its reach into Altron Power where this makes sense.

Of some concern at the moment is the overdue debtors within the Altech Multimedia business, but these have been provided against where necessary.

As indicated in our outlook statement, we believe the group is ready to transition to the next phase of the process that we originally conceptualised prior to the acquisition of the Altech minorities. That next phase is to consolidate the corporate offices which will facilitate further steps in the transition of Altron from an investment holding company to an operational holding company. The consolidation of the corporate structure will be the primary initiative in respect of cost management over the next financial year as we believe that most of our operations are already running with lean cost structures.

Adequacy of the finance function

Our group performs a formal review of the adequacy of the finance function each year and we are confident that the finance function is adequately staffed with an appropriate level of experience and expertise.

Key financial risks

Commodity price movements/foreign exchange movements

Commodity prices and currency risks remain two of the largest financial risks faced by the group. Little has changed in the way we have been managing these risks over the past few years, which I have covered in some detail in previous reports. These risks continue to be managed conservatively by the group.

Credit risk on debtors

Movements in our debtor balances were discussed earlier in the report and we do not believe we have seen any noticeable increase in credit risk in our customer base. However, we have experienced a deterioration in our ageing profile and this is being closely monitored to mitigate any risks. Debtor collections are a priority area at all operations and individual significant overdue balances are discussed at review meetings. Of some concern at the moment is the overdue debtors within the Altech Multimedia business, but these have been provided against where necessary. This will continue to be a key and closely managed risk.

Of some concern at the moment is the overdue debtors within the Altech Multimedia business, but these have been provided against where necessary. This will continue to be a key and closely managed risk.

Liquidity risk

As discussed earlier, we have reviewed our compliance with covenants over the next 12 months and believe we will operate inside those parameters. Last year I indicated that we were heavily utilising our short-term funding facilities and we would look to lessen this dependency. Given the operational performance of the group we were not able to reduce these utilisation levels and these are closely monitored by the central finance teams. Our focus remains on reducing these utilisation levels and thereby limiting the liquidity risks.

Key focus

The last financial year has been one of the most challenging for the group. Nevertheless, with challenges come opportunities and we need to focus on some of those opportunities to move the momentum of the group back towards higher levels of profitability.

The strategic review carried out by the board and some of the non-core disposals give us the opportunity to relook at the structures within the group and challenge the status quo. In this regard I am hopeful that we will be able to refresh the finance function and derive greater benefits from the many highly competent finance people within the group.


This has been a very difficult year for everyone in the business, but particularly the finance teams who have to report such disappointing results. We are all passionate about our businesses and take such disappointing results personally. Furthermore, the last two years have involved significant change in the group and there is no doubt that trend is likely to continue. I would like to take this opportunity to thank, in particular, all the finance staff around the group for their hard work, diligence and support over the last year. I am sure the next year will contain new challenges and opportunities and I am confident that if we stick to the fundamentals we will be able to turn around this year’s disappointments.

AMR (Alex) Smith

Chief financial officer