FINANCIAL SUSTAINABILITY

Our financial sustainability focus for the year was on driving profitable revenue growth across the group while achieving cost and capital efficiencies.

In Altron TMT our focus was on leveraging the opportunities provided by the formation of Altron TMT to drive innovation and deliver converged solutions to customers. Altron Power’s focus for growth was on delivering turnkey solutions in selected African countries, while maintaining close management of costs and driving further efficiencies in Powertech.

THE MATERIAL FOCUS AREAS AND MATERIAL ISSUES THAT COULD AFFECT THE ALTRON GROUP’S FINANCIAL SUSTAINABILITY

The reporting period under review has been a particularly challenging year in terms of the economic environment in which our group was operating, both locally and globally. At Altron TMT, the recently launched Altech Node, has performed below expectations and the anticipated recovery in the performance of Altech Autopage did not materialise. Altron Power was also severely impacted by the financial challenges of our key customer, Eskom. As a result we have not met many of our financial targets.

The table below indicates the changes in the group’s material focus areas and material issues relevant to its financial sustainability. The review of our performance that follows provides details of the challenges we faced, what we have done to address these challenges and what our focus is for the year ahead.

Altron group Altron group
    rating rating
Material focus area Material issues 2014/15 2013/14
Profitable growth South African socio-economic climate
Growth into new markets
Competitiveness
Capital and cost efficiencies Portfolio optimisation and capital allocation
Customer concentration Not a material issue
Cash generation and working capital

Legend

Most material issue
Priority issue
Focus issue
Controlled issue
Bytes Systems Integration (BSI) successfully completed US$40 million biometric equipment contract for Tanzanian elections

ACHIEVEMENTS

  • Ongoing growth within Bytes operations, particularly in the UK
  • Progress on the Gauteng Broadband Network project and expansion of the project including the connection of 130 schools to the network as a result of Altech Radio Holdings’ successful roll out
  • Bytes Systems Integration (BSI) successfully completed a US$40 million biometric equipment contract for the Tanzanian elections
  • Progress made with regard to the implementation of shared services within Altron TMT
  • Much improved performance from Aberdare, despite the strike, though margins are still below acceptable levels
  • Achievement of profitability in both Iberian cable operations
  • Good performance from Powertech Systems Integration’s (PTSI) Powertech QuadPro in Africa
  • Purchase of minorities in Bytes South Africa and Altech NuPay
  • Completion of non-core asset disposals in Bytes

CHALLENGES

  • Ongoing sub-par performance of Powertech, particularly significant deterioration in Transformers
  • Lack of orders from Eskom and continued uncertainty over their funding challenges. Particularly acute issue at Powertech Transformers
  • Current labour relations environment is not conducive to globally competitive manufacturing
  • Ongoing margin erosion throughout the group
  • Commoditisation of IT products
  • Lack of orders for Altech UEC
  • Slow subscriber growth of the Altech Node
  • Churn at Altech Netstar and increasing evidence of consumer pressure which may impact bad debts
  • Impact of foreign holding companies on local subsidiary’s purchasing behaviour through global purchasing arrangements
  • Increasing corruption means that our adherence to ethical behaviour results in lost opportunities

IMPROVEMENTS

  • 10% improvement year-on-year in operating profit of Bytes Document Solutions (BDS)
  • Recovery in Aberdare Cables

DISAPPOINTMENTS

  • 19% decrease in Altron TMT headline earnings
  • Performance of Powertech Transformers
  • Underperformance of PTSI
  • Financial impact of National Union of Metalworkers of South Africa (NUMSA) strike on both our Altron Power and Altech UEC manufacturing facilities
  • Performance of Altech Autopage in the face of industry-wide issues
  • Results of Altech Multimedia following the drop-off in orders for African markets
  • Slow growth in subscribers at Altech Node

Operational performance of the Altron Group

Altron’s profitability was adversely affected by strike action in its manufacturing businesses, a marked decline in orders from Eskom and challenging market conditions in the telecommunications sector.

Besides the strike, the multimedia businesses were also affected by lower international orders as a result of a delay in African Digital Terrestrial Television Migration (DTT). Profitability was further impacted by the launch of and a lower than expected take up of the Altech Node entertainment and home automation system. The IT assets, however, continued to perform well, exceeding expectations.

From a total operations perspective, Altron’s revenue decreased by 1% to R27,6 billion and earnings before interest, tax, depreciation and amortisation (EBITDA) by 23% to R1,4 billion. Basic earnings per share (EPS) was 101% lower than the prior year, with the company posting a loss of three cents. Headline earnings per share (HEPS) declined by 50% to 94 cents.

Each of the material focus areas and material issues that impacted on the financial sustainability of the group is discussed in more detail later in this section. However, to contextualise the financial performance of both Altron TMT and Altron Power feedback is provided below on a total operations basis.

Altron TMT

During the year, the Altron TMT division (telecommunications, multimedia and IT) experienced a decline in profit levels, notwithstanding the pleasing performance of its IT businesses, which was insufficient to offset the deterioration in the telecommunications and multimedia businesses.

The integration process of Altech and Bytes continues, with good progress achieved on cost savings and cross selling during the financial year ended 28 February 2015. The integration project as currently defined is expected to be completed by the end of the 2016 financial year.

On a consolidated total operations level, Altron TMT’s revenue remained stable at R19,4 billion, however, EBITDA declined by 16% from R1,4 billion to R1,2 billion and the EBITDA margin declined from 7,3% to 6,1%. Headline earnings declined by 19% to R461 million.

Telecommunications

Altech Autopage experienced a decline in annual revenue per user (ARPU) as well as in profitability. This was as a result of continued industry and consumer deflationary pressures and the impact of the ongoing mobile termination rate reductions. This resulted in Altron taking the decision to dispose of Altech Autopage and negotiations are at an advanced stage in respect of its disposal.

Altech Netstar reported 4% revenue growth and a marginal decline in EBITDA. The business made good progress with the launch of a number of new products and achieved impressive growth in the fleet management business. Several small acquisitions were concluded during the year, which should enhance the results going forward.

Bytes Systems Integration saw limited revenue growth, but excellent EBITDA growth, with a shift towards more margin rich sales, particularly in the biometrics space. The international business, primarily located in Africa, improved significantly, assisted by the weakening of the rand.

Most of its businesses were affected by challenging macroeconomic conditions, namely the four-week NUMSA strike in July, weak economic growth and the various challenges created by Eskom’s current position.

Altech Radio Holdings performed well off the back of the Gauteng Broadband Network project, which is running on schedule. In addition to the scope of this project being enhanced there are some encouraging and significant projects in the pipeline.

Altron TMT is well advanced in terms of exploring alternative opportunities and routes to market for Altech Node, which was launched in September 2014 but has experienced a disappointing consumer uptake to date.

Multimedia

Altech Multimedia was significantly impacted by reduced order intake in its core set top box business in Africa as a result of delays in African DTT programmes, the loss of the Samsung TV assembly contract and the impact of the NUMSA strike in July 2014. The business, which has already undergone significant cost reductions, has seen its order book improve in recent months and has an encouraging pipeline of local and international prospects including the South African DTT programme where it has been appointed as a Tier 1 supplier.

Technology (IT)

Bytes UK had an exceptional year, growing revenue and improving margins. While its results were enhanced by the depreciation of the rand, the local currency results exceeded expectations as the business expanded its higher margin operations.

The core Xerox business of Bytes Document Solutions showed a good recovery in the second half as some of the effects of the weaker rand were mitigated and new business was won. Unfortunately, the related paper business experienced challenges and is being restructured. The LaserCom business was sold in December 2014.

Bytes Managed Solutions performed well despite a reduction in revenue and EBITDA as the business was affected by foreign exchange losses and the disposal of the retail ATM business in August 2014.

Bytes Secure Transaction Solutions saw a decline in revenue as a result of reduced sales of point of sale (POS) terminals out of Altech Card Solutions, but strong performances out of Bytes Healthcare Solutions and Altech NuPay resulted in a pleasing increase in EBITDA.

Bytes Universal Systems produced strong revenue growth during the year, although margins declined. This was driven by revenue gains from a large public sector contract, with a high proportion of lower margin product sales. This contract finished towards the end of the financial year.

Altron Power

Altron Power’s revenue remained flat at R8,3 billion, while EBITDA declined by 43% to R220 million. Headline earnings for Altron Power declined from R77 million in the prior year to a loss of R9 million.

Most of its businesses were affected by challenging macroeconomic conditions, namely the four-week NUMSA strike in July, weak economic growth and the various challenges created by Eskom’s current position.

The Powertech Cables group achieved a good recovery during the year (both locally and internationally) despite the effects of the strike and a lack of Eskom orders, significantly increasing its EBITDA, though margins remain at historically low levels. While its revenue declined slightly compared to the prior year, Powertech Cables entered new territories and gained local market share in the informal sector with improved margins. The turnaround of the international operations was particularly pleasing with signs of an increase in infrastructure spending throughout Europe.

The Powertech Transformers group experienced an extremely disappointing year. There was a notable decline in revenue and the business moved into an EBITDA loss position. This was caused by poor order inflows from its largest customer, Eskom, particularly in the larger high-voltage transformers. Other factors were the disruption caused by the NUMSA strike, by poor productivity levels as well as the non-recurring costs incurred to close its Johannesburg (Booysens) manufacturing facility. The imminent recognition of transformers as a designated product by the Department of Trade and Industry (the dti) should assist performance going forward, provided Eskom returns to more usual buying patterns.

Powertech Batteries performed satisfactorily given that margins were under pressure due to an increasing lead price as well as ongoing competition from imports, despite the weak rand.

Powertech System Integrators’ performance was disappointing as it struggled with delays in the start of various previously awarded projects and weak order inflow. However, Powertech QuadPro, the turnkey substation business, made good inroads into Africa, and in particular Zambia.

In the short term, conditions are expected to remain challenging for Altron Power as some of the macroeconomic factors that impacted the group in the previous financial year remain in place, namely low economic growth and limited purchasing from Eskom.

Profitable growth in the Altron Group

The Altron group experienced a decline in profit levels in the year under review as a result of a deterioration in the operating performance of both Altron TMT and Altron Power.

Altron TMT’s profitability was affected by the deterioration in its telecommunications and multimedia business, while the impact of macroeconomic conditions on most of Altron Power’s businesses resulted in it incurring a small loss at headline earnings level. Altron Corporate also recorded a marked decline in earnings, primarily as a result of the increased interest cost associated with the borrowings taken on to delist Altech in the previous financial year.

In terms of its future outlook, Altron Power stands to benefit from the eventual refurbishment of South Africa’s electrical infrastructure, the designated product status of transformers and cables and potential orders from phases 3 and 4 of the renewable energy independent power producers (REIPP) renewable energy projects. Continued focus will be placed on new markets, particularly sub-Saharan Africa.

The Altron group experienced a decline in profit levels in the year under review as a result of a deterioration in the operating performance of both Altron TMT and Altron Power.

The benefits from the integration of businesses in Altron TMT will be enhanced by the initiatives identified and discussed under the products and services section. The remaining businesses in the telecommunications division are expected to continue their good progress of the last year, while an improved performance from the multimedia business is expected, particularly if the South African DTT project commences this year. Demand in the IT sector is expected to remain stable.

South African socio-economic climate

During the year adverse socio-economic conditions in South Africa raised various challenges to our business.

Areas of concern include an increase in corruption in South Africa, with corruption in the tendering process being a specific concern to the group. As a group we have strict measures in place to ensure that we do not participate in corruption, but recognise that our commitment to ethical behaviour has a negative impact on our bottom line in terms of lost opportunities. Despite this negative impact, Altron remains steadfast in its ethical approach to business.

The impact strikes and poor labour relations are having on the South African economy and our business is also most concerning.

In addition, consumers have been adversely affected by the poor economic conditions and this has affected our consumer-facing businesses.

Growth into new markets

Altron’s revenue generation outside of South Africa was R6,7 billion, 24% of our total revenue.

Growth into new markets continues to represent a critical growth area for both Altron Power and Altron TMT, with a specific focus on growing our African footprint. For Altron TMT our close relationships with large key customers provide us with an opportunity to support these customers as they pursue their growth plans on the African continent, while for Altron Power it is key that we exploit the electrification of the continent.

During the year adverse socio-economic conditions in South Africa raised various challenges to our business.

Competitiveness

The current labour climate in South Africa, which is marked by excessive wage demands and poor productivity are having an adverse effect on the ability of South African manufacturing companies to be internationally competitive. The companies within Altron, which are most affected include Altech Multimedia and the majority of companies in the Altron Power group.

As mentioned in our previous integrated annual report low-priced imports from the East continue to impact on the group’s ability to be competitive. In some cases we are competing against companies that through government subsidies can offer products and services at very low prices sometimes below our material cost.

The combination of factors described above contributes to increased competition in many of the sectors in which we operate. Some relief was, however, achieved by the designation status of cables, transformers and set-top boxes as well as the duty imposed on imported auto-motive lead-acid batteries in the year under review.

Capital and cost efficiencies in the Altron Group

Capital and cost efficiencies have been a major focus for the group in the year under review, with a specific focus on shared services, which gained new impetus from the shift in Altron from an investment holding company to an operational entity.

Portfolio optimisation and capital allocation

Altron undertook a comprehensive portfolio review during the previous financial year, as part of its long-term strategy to focus attention on our core business, and divested itself of those lines of business that fall outside our core focus.

During the current financial year, the group continued to dispose of non-core operations as indicated in the company structure, enabling us to focus on growing and investing in our core operations.

Because Altron now wholly owns its three subsidiaries, it has been able to centralise the allocation of capital. The focus is on standardising the manner in which acquisitions are assessed and ensuring that capital is allocated in line with the group’s overall strategic objective of investing in its core business. Despite the poor performance of the group, we are still committed to investment in R&D, new acquisitions, special projects and other capital expenditure items. More information on capital allocation can be found in the chief financial officer's review.

Customer concentration

Customer concentration is a new material issue identified in the year under review which affects both Altron TMT and Altron Power. Although in the past we benefited from having a single large client, the opposite is currently true. Altron has identified the need to expand not only its growth into other markets but is also focusing on increasing its customer base and minimising the risk associated with a business being overly reliant on a key customer.

Cash generation and working capital

Cash generation and working capital management continues to be a critical focus in the group. Cash generated by operations of R1,7 billion was 16% down on the prior year, while R330 million was released from working capital, which was a significant improvement on the R513 million absorbed in the previous year. A reduction in tax paid was offset by last year’s increased dividend, while net finance charges increased due to higher average borrowings. The combined effect was a 53% increase in cash flows from operating activities.

Investing activities reduced to R1,0 billion. Capital expenditure relating to property, plant and equipment as well as intangible assets amounted to R650 million, which was down some 14% on the prior year.

Cash flows from financing activities of R453 million represents the raising of approximately R291 million from the issue of shares and R887 million of loan funding raised following the completion of the refinance in early March 2014 (R780 million of which was in overdrafts at the prior year-end). This was offset by R749 million utilised in the acquisition of the non-controlling interests in Bytes South Africa and Altech NuPay.

Cash generation and working capital is dealt with in more detail in the chief financial officer’s review.

THE MATERIAL FOCUS AREAS AND MATERIAL ISSUES THAT COULD AFFECT ALTRON TMT’S FINANCIAL SUSTAINABILITY

Altron TMT experienced a decline in profit levels, despite the strong performance of its IT businesses, which was insufficient to offset the deterioration in its telecommunications and multimedia businesses.

The material issues table below indicates that there have been major changes to the rating of our financial sustainability value drivers. Almost all of the material issues are now rated as most material and we also included a new material issue, customer concentration. For more detail on the year-on-year changes to Altron TMT’s material issue refer to the table below.

Altron TMT Altron TMT
    rating rating
Material focus area Material issues 2014/15 2013/14
Profitable growth South African socio-economic climate
Growth into new markets
Competitiveness
Capital and cost efficiencies Portfolio optimisation and capital allocation
Customer concentration Not a material issue
Cash generation and working capital

Legend

Most material issue
Priority issue
Focus issue
Controlled issue

This is the second year we have reported on the financial performance of Altron TMT, which consists of Altech and Bytes. Having consolidated the businesses and streamlined the portfolio Altron TMT is a less complex business and is much better positioned to compete in its highly competitive marketplace and take advantage of up-sell and cross-sell opportunities.

Profitable growth in Altron TMT

Overall, Altron TMT did not achieve profitable growth in the year under review and its EBITDA declined 16% from R1,4 billion to R1,2 billion. The performance of three operations, the Altech Node, Altech Multimedia (AMM) and Altech Autopage were responsible for this decline, while the balance of Altron TMT’s operations achieved profitable growth, despite the challenging market conditions. Consumer uptake of the Altech Node, which was launched in September 2014, was disappointing. To address this situation Altron TMT’s discussions regarding alternative opportunities and routes to market for the Altech Node are well advanced.

AMM was significantly impacted by the reduction in orders for its core set-top box business in Africa as a result of delays in African DTT programmes, the loss of the Samsung TV assembly contract and the impact of the NUMSA strike in July 2014. AMM’s order book has improved in recent months and it has an encouraging pipeline of local and international prospects, including the South African DTT programme, where it has been appointed as a Tier 1 supplier. It has also achieved significant cost reductions.

Altech Autopage had a difficult year during which its profitability declined as a result of continued financial pressures on consumers and the reduction in mobile termination rates. There were also cutbacks on discretionary incentives such as marketing assistance, incentive rebates for connections and discounts on airtime. Negotiations regarding the disposal of Altech Autopage are at an advanced stage.

South African socio-economic climate

The operating environment during the year under review was extremely challenging. These challenges included the R:US$ exchange rate, which affected the profitability of a number of Altron TMT’s operations that require imported components.

The South African socio-economic climate impacted Altron TMT both in terms of strike action and poor economic conditions, which not only affected the purchasing power of consumers, but also affected business customers, with some business customers going into liquidation.

Altech Netstar's business was also affected by the poor economic conditions. The consumer segment of its business showed a dramatic change in terms of the number of consumers that are under financial pressure, which resulted in increased debit order rejections due to insufficient funds.

Its commercial business was affected by the impact of the economy on some of its large clients such as Ellerines, where Altech Netstar lost the fleet management business for 1 400 vehicles. Another 55 clients were either liquidated or went into business rescue, as well as there being a considerable downsizing in the fleets of other clients.

AMM reduced the impact of the NUMSA strike on its operations by anticipating the strike and producing ahead so it could shut down during the period of the strike without affecting their customers. As a result, losses were mainly on unrecoverable fixed costs.

Growth into new markets

Biometrics is a relatively new market for Altron TMT. Bytes Systems Integration’s (BSI) identity management business unit is the leader in South Africa in the development of biometric solutions. Its recent development of a biometric voter registration solution for the Tanzanian government, which also has census capabilities, creates a number of exciting opportunities in Africa. The rapid growth in the use of biometrics bodes well for the future of this business unit.

Post-balance sheet Altech Netstar moved into the Australian market through its purchase of Pinpoint Communications, a provider of fleet and asset management solutions.

Our growth into new markets includes the development of the Altech Node, a new entertainment and home automation system, which has not as yet achieved a great deal of uptake. However, we believe the IP and technical capabilities are sound and are focused on finding a way to commercialise this product.

AMM is focusing on rebuilding the business for profitable growth and its efforts to use its manufacturing capabilities to undertake systems engineering work has already resulted in a small contract from Denel Land Systems. It has also been exploring promising new opportunities in the automotive industry.

Competitiveness

While Altron TMT operates in a very competitive market its ability to develop industry-leading IP, products and end-to-end solutions positions it well in the market.

Bytes People Solutions (BPS) increased its ability to compete in the business process outsourcing sector when its purchase of Interactive Technology received Competition Commission approval in March 2015. Following this acquisition business process outsourcing (BPO) now makes up 60% of its business. International companies who have offshore contact centres and other types of outsourcing have identified South Africa as the best destination for offshoring. BPS plans to consolidate its business process outsourcing (BPO) into a profitable cluster and make some more acquisitions in the new financial year that will provide it with additional growth.

Increasing competition from the East has affected AMM’s Australian operations where margins are very low. The Chinese continue to enter the African market aggressively which is impacting on AMM’s African business.

While initial sales of Altron TMT’s new product, Altech Node, were disappointing, the intellectual property it contains, which is a world first, has attracted the interest of both local and international companies.

Capital and cost efficiencies in Altron TMT

Capital allocation and cost efficiency is a most material issue for Altron TMT, with working capital, which is always a fundamental financial issue, having a particular focus.

The business case for Altron TMT’s shared services, which was officially launched in March 2014, centred around financial services, human resources, information technology, legal services, marketing, facilities and risk. To date the first year of this project has achieved savings through the consolidation of facilities and a reduction in headcount through early retirements. While Altron TMT has realised savings through its shared services initiative, it needs to continue finding ways to cut costs, which includes cutting out duplication in structures.

In line with group strategy Altron TMT continues to focus on investing in core operations and disposing of those that are non-core to the group.

Portfolio optimisation and capital allocation

In line with group strategy Altron TMT continues to focus on investing in core operations and disposing of those that are non-core to the group.

The portfolio optimisation that took place in Altron TMT included the Bytes UK disposal of its non-core asset, Bytes Document Solutions UK, to concentrate on software and software services, the retail ATM business in Bytes Managed Solutions, LaserCom and PaperGeni. Post year-end, Altron also announced that it is in the process of disposing of the GSM base of Altech Autopage.

Altron TMT made some significant investments in businesses it knows well, which include Bytes South Africa in which it invested R669 million and Altech NuPay in which it invested R80 million. These investments, which tie in with our strategy of focusing on our core business, have both proved to be successful acquisitions to date.

Altron TMT is maintaining close control over capital investment and acquisition opportunities. The acquisitions we have made this year have been small niche operations that easily fit into our existing operations that have enhanced and repositioned successful core operations.

Customer concentration

Customer concentration is a new material issue we identified in the year under review. In Altron TMT, the company that is most affected by its reliance on a key customer is AMM. This is reflected in the impact of the loss of significant orders from key customer Multichoice when its terrestrial television roll-out in Africa was delayed due to local regulatory issues.

Cash generation and working capital

While cash generation has been constrained by Altron TMT’s operational performance this year, it has made some substantial investments in the Altech Node (R107 million), our subscriber bases at Altech Autopage and Altech Netstar (R486 million) and we also invested R204 million in R&D with a specific focus on the development of intellectual property.

While the pressure from major customers for extended credit impacted Altron TMT’s capital management, it made good progress in terms of reducing debtor days from 74 to 63 and reducing inventory from 34 to 32 days. This resulted in around R500 million being released from working capital. However, when combined with the operational performance discussed earlier and the substantial investments, cash generation has not been as strong as we anticipated.

THE MATERIAL FOCUS AREAS AND MATERIAL ISSUES THAT COULD AFFECT ALTRON POWER’S FINANCIAL SUSTAINABILITY

Most of Altron Power’s businesses were affected by challenging macroeconomic conditions.

The diagram below indicates the changes in the material issues for Altron Power. Each material focus area and material issue is discussed in more detail in the section below.

Altron Power Altron Power
    rating rating
Material focus area Material issues 2014/15 2013/14
Profitable growth South African socio-economic climate
Growth into new markets
Competitiveness
Capital and cost efficiencies Portfolio optimisation and capital allocation
Customer concentration Not a material issue
Cash generation and working capital

Legend

Most material issue
Priority issue
Focus issue
Controlled issue

Profitable growth in Altron Power

Altron Power did not achieve profitable growth this year and its EBITDA declined 43% year-on-year. Most of its businesses were affected by challenging macroeconomic conditions, which included the four-week NUMSA strike in July, weak economic growth and a number of challenges created by Eskom’s current position.

Despite the lack of orders from Eskom, which is a key customer of Aberdare Cables, this operation produced a much-improved performance in terms of profitable growth during the year under review, significantly increasing its EBITDA.

Powertech QuadPro also increased its profitability as a result of its success in the rest of Africa.

South African socio-economic climate

Altron Power’s divisions have not only been severely impacted by the economic climate, but the lack of orders from Eskom and the municipalities affected most of its businesses, with Powertech Transformers being impacted in particular. As Powertech Transformers biggest client, Eskom has had a major impact on the business in terms of reduced orders for large transformers and the irregular payment for services and products delivered. While Powertech Transformers generated substantial revenue this was from sales of smaller transformers where margins are very tight.

Labour relations, which badly affected both the mining industry and those businesses affected by the NUMSA strike, remain a major challenge to business in South Africa. The NUMSA strike not only affected Altron Power’s operations, but it also affected its supply chain as local suppliers were unable to deliver products and services.

Altron Power’s manufacturing facilities were also impacted to some extent by the exchange rate, as the R:US$ exchange rate affected margins on products, such as transformers, using imported specialised components not available in South Africa.

Growth into new markets

Some of Altron Power’s operations have performed well despite poor economic conditions and have been able to exploit opportunities in Africa.

Powertech QuadPro achieved profitable growth through the increase in its business in the rest of Africa.

An area where there will be major opportunities for large and small transformers in the future is with the coal and gas independent power producers. This represents an opportunity for Powertech Transformers. The request for proposals for these was released in December 2014.

Some of Altron Power’s operations have performed well despite poor economic conditions and have been able to exploit opportunities in Africa.

Powertech Transformers made some progress with business in Namibia, Botswana, Zambia and Mozambique. Its new product line, shunt reactors, is selling well in these African countries. Powertech Transformers also provided the transformers for a power station in Ghana. Overall, it generated R140 million in revenues and achieved a small increase in sales into the rest of Africa.

Powertech Batteries is also looking to grow its share of the African automotive battery market and has appointed additional resources to achieve this.

The capital investment Aberdare Cables made in upgrading and improving its Spanish operations was money well spent as the business is doing well and exceeded its budget by a considerable margin in the year under review.

Powertech Transformers has both the design and manufacturing skills to supply the small and large transformers required for renewable energy projects and Aberdare Cables can also provide suitable cabling, which presents the group with a number of opportunities in this industry.

Competitiveness

Altron Power operates in an extremely competitive market where pressure on margins and the low price of Chinese products and services further reduces its ability to improve profitable growth. Powertech Batteries is one of the operations that has been adversely affected. Despite the level of lead-acid battery imports increasing 60% over the past three years, Powertech Batteries still managed to achieve 16% growth in sales year-on-year. During the year under review its cost base also increased resulting in margin squeeze. Post year-end the local battery manufacturing industry received some relief when the International Trade Administration Commission (ITAC) increased the import duty on automotive lead-acid batteries from 5% to 15%, effective 10 April 2015.

While Altron Power’s debtor days remained at 81, their inventory days decreased from 100 to 84 days.

Aberdare Cables focused on better production planning to achieve manufacturing efficiencies. Half of Aberdare Cables’ costs are people and 76% of its people are in manufacturing. To reduce these costs Aberdare Cables has benchmarked itself against international manufacturing standards and will be aligning its management structure with that of international companies, in an attempt to reduce costs and continue to improve efficiencies.

Aberdare Cables now has the advantage of its cabling being granted designated status, which means that all government departments and parastatals using cabling have to purchase cabling from local manufacturers. Powertech Transformers has also been given designated status but still awaits the gazetting of this status before it can be applied. If the infrastructure development that forms part of the National Development Plan (NDP), and the maintenance work that both Eskom and the municipalities need to undertake, were to take place, both Aberdare Cables and Powertech Transformers would be able to benefit from their products designated status.

Capital and cost efficiencies in Altron Power

Altron Power has been very frugal with its capital investment, limiting it to the replacement of plant and manufacturing equipment. The expectation is that capital investment will remain constrained until there is a turnaround in the performance of Altron Power.

Aberdare Cables’ focus on cost efficiencies resulted in it containing its total costs at the same level for the past three years despite substantial wage and utility increases.

Powertech is a labour-intensive business with high people costs. Labour planning in terms of cost and delivery is critical. Overcoming manufacturing inefficiencies in labour-intensive operations in the aftermath of a lengthy strike has been a challenge for this business during the year under review. It has managed to improve productivity in its Pretoria West Transformers operation through increased efficiencies, which are up from 50% to 62% with further improvements expected.

Portfolio optimisation and capital allocation

No portfolio optimisation took place in Altron Power during the year under review with the focus being on operational issues. Capital allocation was closely scrutinised as discussed earlier, with capital expenditure kept under tight control.

Customer concentration

Most of the businesses that make up Altron Power are vulnerable because of their reliance on their key customer, Eskom, which as a result of its current financial position has dramatically reduced its orders.

Powertech Transformers, which had an extremely challenging year posted a substantial loss, partly as a result of poor order inflow from its largest customer, Eskom.

Cash generation and working capital

The poor performance of Altron Power’s operations has had a significant impact on its cash flow with the business absorbing cash rather than generating cash. While there has been some improvement in working capital there is scope for further improvement and there has only been capital investment critical projects.

While Altron Power’s debtor days remained at 81, their inventory days decreased from 100 to 84 days.