Chief financial officer’s report

David Rivkind

Core net profit after tax of R427 million increased by R56 million (15%), equating to core earnings per share of 55,93c.

The financial results of the group for the year ended 31 May 2009 demonstrated the resilience of its product offerings to negative changes in economic conditions. An increase in demand for prepaid electronic tokens of value has resulted in a sound performance by the group. Organic growth contributed significantly to the increase in core earnings of 15%.

The above growth, together with the company's continued focus on stringent asset management, resulted in a substantial increase in cash generation.

OVERVIEW

Group income statement

Although net attributable earnings of R391 million exceeded the earnings for the 2008 relative period by R210 million, equating to a growth in basic earnings per share from 30,65c to 51,13c (66,82%), the board of directors believes it is more prudent to compare actual earnings to historical core pro forma earnings in order to evaluate the real growth of the group.

Core pro forma earnings are adjusted for nonrecurring and non-operational items that applied during the comparative period and assume that the listing and restructuring of the group took place on 1 June 2007.

The salient comparisons of the performance for the year against historical core pro forma results were as follows:

Revenue

Revenues increased by R2,4 billion to R15,3 billion (18%) which was predominantly volume related.

Gross profit

Gross profit increased from R719 million to R1,065 billion (48%).

This growth was attributable to a combination of the above turnover growth and an increase in margin from 5,56% to 6,97%.

The group’s trading environment is characterised by high volumes and relatively low margins. The increase in GP margins by 1,41% resulted from the increased purchasing power of the South African distribution division and the growth in value added services.

Employee costs

The increase in employee costs from R195 million to R278 million (42,60%) was attributable to the following:
– Acquisitions and start-ups during the year 11,6%
– Additional headcount and salary increases 28%
– Forfeitable share plan expense 3%

Other expenses

Other expenses increased from R156 million to R241 million (54,48%).

Acquisitions and start-ups accounted for R47 million. The balance of R38 million related to a growth in expenditure in the remaining group companies, equating to 24,35%.

EBITDA

EBITDA of R568 million increased by R132 million (30%) and the EBITDA margin increased from 3,37% to 3,72%.

Finance expense

Of the finance expense of R113 million, R108 million related to imputed interest payable on creditor balances in terms of IFRS requirements.

Finance income

Finance income of R205 million was earned by the group. Of this amount R47 million related to imputed interest receivable on debtor balances in terms of IFRS requirements and R158 million yielded from liquid working capital.

Finance income earned in the comparative pro forma period amounted to R239 million of which R16 million applied to imputed interest receivable on debtor balances in terms of IFRS requirements.

The above equated to a net decline of R65 million in finance income earned on cash resources mainly due to the application of an element of cash in order to gain early settlement discounts, the investment of R134 million on acquisitions and the incremental decline in interest rates by 3,5% during the year.

Depreciation

The increase in depreciation of R20 million was largely due to capital expenditure of R103 million.

Share of losses from associates and joint ventures

Oxigen Services India

Although Oxigen Services India continued to incur losses as anticipated, an improvement in the company’s performance in the last quarter of the financial year was evident.

Revenue for the year ended 31 March 2009 (year-end pertaining to Oxigen Services India Pvt Limited) increased from R1,02 billion to R1,34 billion (30,83%) in line with the continued rollout of point-of-sale devices.

Smart Voucher Limited t/a Ukash

The minority stake that was acquired in October 2008 was primarily for strategic reasons. Ukash’s technology offering of electronic pins, enabling the redemption of online products and services, is in line with the group’s objective to increase its bouquet of value-added services across its global footprint.

Core net profit after tax

Core net profit after tax of R427 million increased by R56 million (15%), equating to core earnings per share of 55,93c.

Segmental report

The following are the divisional segments that constitute the group profile:

South African distribution

International distribution

Value-added services

• Telemarketing of cellular and financial services products, inbound customer care and technical support via the group’s call centres.
• Marketing of the location-based products of “Look4Me” and “Look4Help” (Vodacom) “Where are U” and “2MyAid” (MTN), “miTraffic”    and “Look4Music”.
• Aggregation of localised content for mobile operators and third-party clients.

Technology

• Development, integration and management of the group’s IT systems and technologies.

Revenue

South African distribution
The growth of 16,4% was entirely volume related. The South African distribution continues to be the major contributor to group revenue.

International distribution
The revenue reflected is in respect of subsidiaries only and does not include turnover from associate companies, namely, Ukash (United Kingdom and Europe) and Oxigen Services India.

A hybrid of organic growth and contributions by start-up operations resulted in an increase in revenue of R224 million (44,8%).

Value-added services
Total growth in this segment was R128 million (61,7%) of which R48 million (23,2%) was acquisitive and R80 million (38,5%) organic.

Technology
The focus on in-house technological support and product development and enhancement has resulted in a conscious decision to reduce service and support to third parties. This has resulted in a decline in revenue from third parties by R5 million.

EBITDA

South African distribution
The growth in EBITDA of R198 million (46,5%), largely due to the increase in revenue, gross profit percentage margins and containment of expenditure, equated to an increase in EBITDA margin from 3,50% to 4,40%.

International distribution
There was a decline in EBITDA of R19 million comprising R4 million from Polsa Holdings’ trading operations, which was disposed of in March 2009, the loss on disposal thereof of R4 million and R11 million from start-up operations in the USA, Mexico and Australia.

This decline was set-off by a growth in EBITDA of R5 million from R16 million to R21 million (25%) by the remaining companies encompassing this segment.

Value-added services
Acquisitive contributions of R9 million (19,2%) and organic growth of R19 million (41,3%) equated to a growth of R28 million (60,5%) in EBITDA.

The marginal decline in EBITDA percentage to revenue from 22,6% to 22,4% was in line with the decision to incur additional expenditure on infrastructure costs in order to enhance the platform for growth in the future.

Technology and corporate
The growth in EBITDA generated by the trading operations from R495 million to R705 million (42,6%) could not have been achieved without skilled technological, administrative and managerial support.

The increase in negative earnings by these segments of R79 million is in line with the need to invest in skills and product development in order to strengthen the foundation for future expansion both locally and internationally. The very nature of international expansion requires extensive overseas travel and professional support delivered by both the technology and corporate divisions of the group.

Core net profit

The growth in core earnings of operational companies was 34% and net growth after technology and corporate expenses of 15%.

Balance sheet

Assets

Total assets increased by R658 million (20,4%) to R3,9 billion primarily as a result of an increase in current assets, of which R432 million related to a growth in cash resources.

Non-current assets
The net increase in non-current assets was R24 million.

• Capital expenditure net of disposals and depreciation on property, plant and equipment of R42 million, predominantly applied to expenditure on point-of-sale devices required in both the South African and international distribution segments.
• Disposal of property, plant and equipment of subsidiaries previously owned totalling R6 million.
• A decrease in intangible assets, comprising goodwill and intangibles of R29 million, net of acquisitions, disposals and amortisation.
• Investments in associates of R28 million comprising acquisitions of R55 million less share of losses of R27 million.
• A net decrease in unactivated starter packs of R18 million. Financial assets at amortised cost relate to starter packs which have been sold but not yet activated.

Current assets
Current assets increased by R634 million. The increase was mainly due to the growth in cash and cash equivalents of R432 million, trade and other receivables of R268 million less a reduction in inventories of R100 million. The stock turn averaged three times per month and debtor’s collections were 21 days.

Capital and reserves
The share capital and share premium declined by R26 million due to the purchase of shares for the group’s staff share incentive scheme.

Goodwill arising on transactions with minorities of R914 million is recognised against reserves on the balance sheet, as minority shareholders are treated as equity participants. This is in accordance with the economic entity method which was adopted by the group in the prior year.

Liabilities
Total liabilities increased by R331 million, the material items being an increase in minority shareholders’ loans to subsidiaries of R28 million and an increase in trade creditors of R366 million. These amounts are set off against a reduction in tax liabilities of R43 million.

The trade creditor payment terms equated to 40 days.

Cash flow

Growth in profitability and the benefits of stringent working capital management have resulted in the positive cash generated from trading operations of R746 million.

Net interest received of R154 million compounded this cash generation to R900 million. Of these funds generated R233 million was applied to taxation paid, resulting in net cash flows from operating activities of R667 million.

Against the above, R207 million was applied to investing activities and R10 million was applied to financing activities.

The resultant increase in net cash generation resulted in funds on hand accumulating to R1,76 billion at year-end.

Dividends

In line with the group’s current dividend policy, no dividends have been declared.

Directors’ dealings in securities post year-end

Further to the disclosure of directors’ interests on page 98, the interests of the directors changed as follows from the end of the financial year to the most recent information available at the date of publishing this report:

APPRECIATION

I wish to acknowledge and express my appreciation to the staff of the group, in particular the finance team for their concerted efforts and high-quality performance.

David Rivkind
Chief financial officer