Message to our shareholders

• Revenue up by 13%
• Operating profit up by 34%
• Headline earnings per share up by 19%
• Return on equity up by 26%
• Strong balance sheet

The directors of Allied Technologies Limited (Altech) are pleased to report that the group has recorded a successful half-year for the six months ended 31 August 2008, with headline earnings per share up 19% to 261 cents, revenue 13% higher at R4.5 billion, and operating profit up 34% to R409 million. A strong balance sheet and a net asset value of 1 974 cents per share underpins the group’s expansion strategy, with notable progress in several areas during the half-year, particularly in Africa as detailed under group highlights. 

Without doubt, the key highlight of the period was the ruling by the Pretoria High Court in favour of Altech Autopage Cellular permitting the company to have its existing value-added network services (VANS) licence converted into an individual electronic communications network service (I-ECNS) licence. The Minister of Communications has subsequently brought an application for leave to appeal the decision, which Altech will be opposing.

GROUP HIGHLIGHTS:

CORPORATE FINANCE 

Salient transactions and arrangements involving the Altech group during the six month period are as follows: 

• The conclusion, with effect from 1 March 2008, of the acquisition of 51% controlling interests in certain East African digital network operations – Kenya Data Networks Limited (KDN), Swift Global (Kenya) Limited (Swift) and Infocom Limited (Infocom). These transactions involved a maximum purchase consideration of US$ 75 million. 

• Detailed agreements relating to the acquisition of the entire issued share capital of Fleetcall (Pty) Limited (Fleetcall), a national trunked radio network operator, licensed by ICASA, have been signed.  Fleetcall’s end-users are primarily involved in the road transportation industry.
  
  This transaction involves a maximum potential purchase consideration of R85 million, of which R50 million will be paid shortly after the fulfilment of the remaining conditions precedent relating to the transaction.  The balance of R35 million will be payable over two years, subject to Fleetcall achieving certain specified profit levels.  

• Signature of a term sheet relating to the proposed acquisition of 51% of the share capital of Verstay (Pty) Limited (Verstay), for R7.5million.  Verstay is the distributor in southern Africa of the Vertex Standard range of two-way radio products, which is complementary to the product range of Altech Alcom Radio Distributors.

• The acquisitions by Altech Netstar of the businesses of its franchisees as going concerns, in Bloemfontein and Witbank for an aggregate maximum purchase consideration of approximately R18 million. 

• Signature of term sheets relating to the acquisitions by Altech Netstar, of the businesses of its franchisees in Nelspruit and Pietersburg, as going concerns by way of separate transactions.

TELECOMMUNICATIONS  

Altech Autopage Cellular remains the largest independent service provider in South Africa in a telecommunications market that continues to evolve. During the period, the company performed well ahead of expectations, exceeding both profitability and cash flow targets. 

During the period under review, Altech Autopage Cellular signed five year extension agreements with both MTN and Vodacom. At the end of the interim period, the company signed a long term distribution agreement with South Africa’s new telecommunications network operator, Neotel, which offers consumers a viable alternative to Telkom’s existing products and services. This anchor partnership, effective 01 October 2008, extends Altech Autopage Cellular’s range of products and services, allowing customers to purchase off-the-shelf fixed line, voice and data products. In turn, Neotel has immediate access to a nationwide retail distribution network.  

The partnership will provide  Altech Autopage Cellular’s customers, many of whom do not have a fixed-line telephone or data service, with an affordable solution to enhance and complement their existing mobile services.   

Altech Autopage Cellular connected approximately 80 000 new contract subscribers during the first six months of the year, taking its total subscriber base to over 941 000 for post-paid and pre-paid connections combined. The pre-paid subscriber base continues to grow steadily.
ARPU (average revenue per user) declined slightly on the previous year due to depressed economic conditions. This is being addressed by increasing high-end corporate and fixed cellular connections and sales of value-added services. Sales of electronic pre-paid vouchers showed continued good growth.  

Sales of mobile data services through add-on data bundles and cellular data connections are providing a growing stream of revenue and enhanced ARPU for the company. The broadband and data subscriber base exceeds 57 000. 

Altech Autopage Cellular’s existing channels to market – 150 franchise stores, the corporate sales force (supported by branches in Durban, Cape Town, Port Elizabeth, Bloemfontein) and premium service provider Altech Supercall – have been supplemented by third-party call centres and distributors of data products. 

Altech Autopage Cellular teamed up with Kulula to launch a mobile Internet service that offers 3G packages over 24-month contracts available on the Kulula website. The six month pilot phase has been concluded and over 1 000 subscribers have been filtered through the airline’s “Get Connected for Less” product offering. 

Mobile number portability continues to generate a steady migration of ‘port customers’ for the company. This removal of a long-standing barrier to open competition for subscribers in the cellular market has resulted in a net gain of around 10 000 subscribers for Altech Autopage Cellular. 

Altech Netstar delivered strong trading results and maintained its market share lead, despite tough trading conditions, caused by the sharp decline in motor vehicle sales and the highly competitive nature of the stolen vehicle recovery (SVR) industry.  

The company now manages a SVR subscriber base of 461 000 vehicles, with the value of vehicles protected exceeding R53 billion. 

The merger of Altech Netstar Fleet Management Services and ComTech into Altech Netstar Fleet Solutions has delivered the expected savings as well as the most comprehensive range of products available in the fleet management market, to a consolidated subscriber base of over 48 000 vehicles. Altech Netstar Fleet Solutions is now a formidable competitor in the fleet management sector with approximately 20% market share. 

Altech Netstar signed an agreement with London Stock Exchange listed ITIS Investments of the United Kingdom to provide traffic information.  A joint venture, Altech Netstar Traffic, has been formed to manage this opportunity. 

Altech Netstar continued to invest in technological development, launching a number of innovative products over the period, including the Guardian – a personal GPS tracking device that can pinpoint an individual’s location to within three metres.  

Altech Alcom Matomo, a leading radio and telemetry service provider, had an excellent first half, ahead of both budget and prior-year performance. Following the completion of the South African Police Services Gauteng Tetra network, a bid was submitted for the SAPS Eastern Cape Tetra system, which is expected to be announced in the fourth quarter of 2008. The company’s healthy order book underpins an expected solid performance in the second half. 

Altech Alcom Radio Distributors is the dominant Motorola distributor of two-way radio products for South and southern Africa through a network of authorised dealers and sub-distributors. Results for the first half reflect focused efforts in servicing this strong dealer base, increased sales of broadband link products and a solid export performance. Application software has been procured to enable users of the new Motorola digital radios to fully utilise the GPS function in personal and vehicle tracking.

Altech Stream successfully completed its mobile WiMax trial in Gauteng in May 2008 and demonstrated the network’s capabilities to ICASA, including the wireless delivery of triple-play services (video streaming, internet access and voice over internet protocol or VoIP), using equipment provided by Samsung Electronics of Korea. This network has since been dismantled, in line with the provisions of the trial licence.  Resources that have gained experience from this trial have been re-deployed to East Africa to assist with new and continuing WiMax rollouts in that region.  

Altech Stream East Africa

As part of the acquisition of 51% of KDN, Swift and Infocom, Altech and Sameer ICT Limited (Sameer) have injected fresh capital of US$20 million into the acquired companies to expand their capacity and revenue-generating capabilities. KDN, Swift and Infocom have deployed the bulk of this capital, resulting in notable expansions of their network diversity, capacity and reliability. The additional customers already attracted are expected to underpin forecast growth in revenues and profits. The group has met its earn out profit targets for the six month period under review. 

Together with Altech Stream Rwanda, these companies are grouped functionally into Altech Stream East Africa, with headquarters in Nairobi. Altech Stream Rwanda has commissioned its network in Kigali, comprising its own satellite teleport and an optimal blend of wireless access technologies (i.e both WiMax and WiFi).  

Altech Stream East Africa is the largest data network operator group in the region. It is uniquely positioned to capitalise on the substantial capacity in international connectivity via submarine optical fibre, which should become available next year. The inter-country fibre optic cable networks of the companies in Altech Stream East Africa will be used to connect customers in landlocked countries to international communications networks, relieving their dependence on slow and expensive satellite connectivity.

MULTI-MEDIA AND ELECTRONICS  

Altech UEC recorded satisfactory results in the review period, reflecting continued demand for the advanced set-top box products and associated software it develops, manufactures and deploys. Acknowledged as a global participant in decoder technology, the company has continued to expand into the international marketplace, particularly India, where it has secured significant orders. Growing demand is being met by significantly increased production from the Durban-based factory and additional production facilities in south-east Asia.  

After having invested substantially in research and development, to maintain its competitive edge in new-generation systems, Altech UEC has been able to release a host of new products into the market, including products in the medium to high-end PVR market, and low-end MPEG4 products for Asia.  These products have generated considerable interest with new contracts negotiated in India, and advance sales activities in many other countries. 

The Media-kiosk, developed by Altech UEC, the intellectual property rights of which are exclusively owned by Altech, is a revolutionary new approach to IPTV for emerging markets. The retail kiosk allows the download of a video from a hard drive in the kiosk onto a portable flash memory drive, for later replay via a low cost set-top box. The intellectual property contained in this program concerns Digital Rights Management and Content Management which previously prevented development of this retail proposition, because of the security concerns of the content owners. International television operators and media distribution companies have expressed enthusiasm for the new market enabled by this home-grown product. 

Altech Global Decoder Logistics, the support and logistics operating units in Australia and South Africa, performed well during the period.  

Arrow Altech Distribution maintained its market leadership position with earnings ahead of the prior year. Good growth was recorded in key technology groups and, specifically, significant strides have been made in lighting and energy products. The company’s focus on customised solutions has kept the order book at acceptable levels for a comprehensive market range – from automatic utility meters to domestic and automotive security systems, vehicle tracking and fleet management products and electronic contract manufacturing services.

INFORMATION TECHNOLOGY  

Altech Information Technologies

As of the 1^st of January 2008, all the South African information technology businesses within the Altech group were consolidated under one company, namely Altech Information Technologies.  This company comprises the following trading divisions: Altech Isis; Altech NamITech and Altech Card Solutions. 

Altech Isis’ trading for the period has been satisfactory.  The company is experiencing a significant increase in the supply of systems integration services to the telecommunications market. Managing customer demand with a highly skilled workforce in an environment experiencing severe skill shortages has been challenging and is expected to continue for the foreseeable future. The addition of KDN as a customer during the trading period has contributed positively and will continue to do so in the following trading period.  The company is making good new in-roads with its real-time converged ‘’Customer Care and Billing’’ product supported by its systems integration and 24x7 support services.

Altech NamITech South Africa is one of Africa’s leading providers of cellular SIM cards, pre-paid vouchers, magnetic stripe and EMV bank cards. Fierce competition is presently being experienced from international suppliers in tough trading conditions. Also contributing to this difficult situation is the substantial consolidation that has taken place in the African cellular landscape which has  led to the industry being dominated by a few large companies with central purchasing controls.  Selling Price and margin pressure in this highly commoditised market has been experienced during the trading period and is expected to continue. Consequently trading losses have been recorded, albeit at lower levels compared to the prior year. A steady growth in the roll-out of EMV products was experienced with these growth rates expected to be maintained.  Due to the reported high level of debit card fraud experienced by the financial institutions in South Africa the conversion from magnetic stripe to EMV debit cards will be accelerated by the financial institutions which will have a positive impact in the following trading period.   

Altech Card Solutions recorded a solid performance for the half-year. The resale of EFTPOS terminals to financial institutions has been better than budgeted and compared to the previous trading period. The transaction switch has experienced steady growth with the addition of new customers during the trading period.  The switching division is working on strategic projects that should make a substantial contribution in the following trading period. The new e-security business division performed  better than expected and ahead of budget. 

Altech NamITech West Africa’s pre-paid cellular voucher manufacturing facility in Lagos, Nigeria continues to experience growth hence an increase in production output, from 60 million vouchers per month being produced in the previous trading period to over 100 million vouchers per month in the present trading period. These are supplied to the five major telecommunications operators in the region. This operation experienced strong revenue and profit growth, exceeding expectations. 

Business Combinations 

As mentioned above, on 1 March 2008, the group acquired from Sameer 51% of the issued share capital of KDN, Swift and Infocom Limited.The purchase price of US$75 million was allocated as follows: 

• US$68 million for the shares in KDN.
• US$5 million for the shares in Swift.
• US$2 million for the shares in Infocom.

Of the total purchase price of US$75 million, an amount of US$10 million is being held in escrow, to be released to the vendors of the shares concerned, against the achievement of an aggregated combined profit after taxation of at least US$11.7 million for the 12 months ending 28 February 2009. The escrow amount and interest thereon will be reduced proportionately to any shortfall on the warranted profit after taxation stated above. 

In addition, the company and Sameer injected new capital of US$20 million into the three companies acquired, of which 51% was provided by Altech and the remaining 49% was provided by Sameer. Therefore, Altech’s maximum total investment was US$85.2 million, comprising the purchase price of US$75 million and the cash injection of US$10.2 million. 

KDN is a full service data communications carrier and its portfolio of services include Metro fibre Trunk backhaul, Gateway and Metro wireless. Swift is an internet service provider in Kenya, utilising gateway and network capacity provided by KDN.  Infocom provides internet and Information Technology services, including the design and implementation of virtual private networks. 

The acquired businesses contributed revenue of R173 million and profit after tax of R27 million for the six months ended 31 August 2008. 

The above acquisitions had the following effect on the group's assets and liabilities:

Acquisition of the Altech Netstar franchisees in Witbank and Bloemfontein

During the period under review the group acquired 100% of the Altech Netstar franchisees in Witbank and Bloemfontein. 

The acquirees' combined balance sheets at the date of acquisition were as follows:

Revenue and profit after tax attributable to these acquisitions are not material.

DIRECTORATE

Mr. Alex Smith was appointed to the Altech board as a non-executive director as well as being appointed a member of the Altech business risk committee, with effect from 1 September 2008.  

BLACK ECONOMIC EMPOWERMENT

Building on progress made in recent years, Altech released its updated Transformation Vision 2012 initiative during the period under review. This sets out enhanced broad based black economic empowerment targets for each group company, which have been integrated into management performance assessments as measurable indicators and will underpin the competitiveness and continued success of our group. 

PROSPECTS 

Continued innovation and strategic restructuring have positioned Altech well to meet the challenges of the prevailing economic climate in South Africa. Equally, the broader group is appropriately structured to manage the predicted convergence in the fields of voice, video and data in domestic and international markets.  

With a strong order book and growing annuity revenue (which now represents 77% of group turnover),, the liberalisation and deregulation of the telecommunications sector, Altech is well positioned for continued real growth during the second half of the financial year.  

By order of the board

Directors

Dr HK Davies (Non-executive Chairman) #, CG Venter (Chief Executive Officer), Dr JEW Carstens (Chief Financial Officer), PMO Curle *, ML Leoka #, R Naidoo #, Dr HA Serebro #, M Sindane #, ZJ Sithole#, AMR Smith #, RE Venter #, Dr WP Venter#.

# Non-executive

* British

Secretaries

Altech Management Services (Pty) Limited

R Wolmarans

Sponsor

Investec Bank Limited

Altech

Registration number: 1946/020415/06

Share code: ALT

ISIN:ZAE000015251