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UCS
UCS
UCS - UCS Group Limited - Interim report for the six months ended 31 March 2008
UCS Group Limited
Incorporated in the Republic of South Africa
Reg No. 1993/002253/06
ISIN: ZAE000016150 & JSE code: UCS
UCS is an IT business with a primary focus on Software, Solutions and Services
for selected markets.
Interim report for the six months ended 31 March 2008
Growth in normalised PBIT 16%
Growth in revenue 11%
Growth in annuity revenue 25%
Improved normalised PBIT margin of 10,7%
Condensed consolidated income statement for the period ended 31 March 2008
Reviewed Reviewed Audited
6 months 6 months 12 months
31/3/2008 31/3/2007 30/9/2007
R`000 R`000 % change R`000
Revenue 567 888 510 529 11,2% 1 070 539
Profit from operations 104 464 106 883 (2,3%) 270 613
before interest,
depreciation,
amortisation and
research and development
Depreciation of (18 908) (17 882) 5,7% (34 124)
property, plant &
equipment (including
rental equipment)
Amortisation of (12 669) (13 332) (5,0%) (27 954)
intangible assets
Adjustment to goodwill - - - (1 270)
Research and (3 701) (14 886) (75,1%) (21 425)
development expenditure
Profit before net 69 186 60 783 13,8% 185 840
interest paid and
taxation
Net interest paid (3 702) (2 123) 74,4% (1 318)
Interest paid (7 438) (3 811) 95,2% (8 281)
Investment revenues 3 736 1 688 121,3% 6 963
Profit before taxation 65 484 58 660 11,6% 184 522
Taxation (18 861) (8 269) 128,1% (17 916)
Profit for the period 46 623 50 391 (7,5%) 166 606
Attributable to:
Equity holders` of the 42 032 42 383 (0,8%) 153 254
parent
Minority interest 4 591 8 008 (42,7%) 13 352
46 623 50 391 (7,5%) 166 606
Earnings per share
(cents)
Basic 14,7 17,1 (14,0%) 57,4
Diluted 14,1 16,0 (11,9%) 54,1
Dividends paid per share 5,0 4,0 25,0% 9,0
(cents)
Net asset value per 150,3 159,3 (5,6%) 136,5
share (cents)
Ordinary shares in issue
net of treasury
shares held (`000) 289 722 277 254 4,5% 283 841
Weighted average number
of ordinary shares
in issue (`000) 285 022 248 112 14,9% 267 098
Diluted weighted average 297 228 264 877 12,2% 283 496
number of ordinary
shares (`000)
Headline earnings per
share (cents)
Basic 13,3 14,5 (8,3%) 34,7
Diluted 12,8 13,6 (5,9%) 32,7
Condensed consolidated balance sheet at 31 March 2008
Reviewed Reviewed Audited
31/3/2008 31/3/2007 30/9/2007
R`000 R`000 R`000
ASSETS
Non-current assets 482 632 456 890 430 733
Property, plant and equipment 83 365 59 237 72 754
(including rental equipment)
Intangible assets 85 842 116 115 65 775
Goodwill 271 489 246 965 250 522
Investments and loans receivable 11 446 7 888 7 028
Deferred tax assets 30 490 26 685 34 654
Current assets 401 432 295 677 371 582
Inventory 33 270 27 063 28 034
Trade and other receivables 211 575 167 238 197 963
Taxation 234 1 018 762
Cash and cash equivalents 156 353 100 358 144 823
Total assets 884 064 752 567 802 315
EQUITY AND LIABILITIES
Capital and reserves 463 990 460 048 410 769
Equity attributable to equity 435 438 441 649 387 402
holders` of the parent
Minority interest 28 552 18 399 23 367
Non-current liabilities 118 659 52 214 65 406
Long and medium term loans 109 965 39 196 55 277
Revenue in advance - 3 204 -
Deferred tax liabilities 8 694 9 814 10 129
Current liabilities 301 415 240 305 326 140
Trade and other payables 196 199 164 182 205 980
Current portion of long term loans 62 896 58 097 93 543
Revenue in advance 23 329 8 881 7 408
Taxation 18 991 9 145 19 209
Total equity and liabilities 884 064 752 567 802 315
condensed consolidated statement of changes in equity for the period ended 31
March 2008
Share
based
payments
reserve
Ordinary Prefe-
share rence
capital share
capital
Share
premium
R`000 R`000 R`000 R`000
Balance at 1 October 2006 1 246 25 69 767 8 093
Exchange differences
arising on translation of
foreign operations
Net income recognised
directly in equity
Net profit for the period
Total recognised income and
expenses for the period
Ordinary shares issued at a 134 74 632
premium
Fair value adjustments for 31 484
equity instruments issued
or to be issued
Preference shares converted 6 (6)
to ordinary shares
Preference shares (1) (35)
repurchased
Increase in share based 2 318
payments reserve
Dividend paid
Share issue expenses (206)
applied to share premium
Minority acquired share of
equity in subsidiaries
Minorities share of equity
acquired
Balance at 31 March 2007 1 386 18 175 642 10 411
Exchange differences
arising on translation of
foreign operations
Net income recognised
directly in equity
Net profit for the period
Total recognised income and
expenses for the period
Ordinary shares issued at a 33 10 031
premium
Fair value adjustments for 5 853
equity instruments issued
or to be issued
Preference shares converted
to ordinary shares
Preference shares
repurchased
Treasury shares held (9) (8 076)
Increase in share based 1 928
payments reserve
Argility Limited unbundling (158 448)
dividend in specie
Dividends paid
Share issue expenses
applied to share premium
Minority acquired share of
equity in subsidiaries
Balance at 30 September 1 410 18 25 002 12 339
2007
Exchange differences
arising on translation of
foreign operations
Net income recognised
directly in equity
Net profit for the period
Total recognised income and
expenses for the period
Ordinary shares issued at a 23 7 868
premium
Fair value adjustments for 3 798
equity instruments issued
or to be issued
Preference shares converted 8 (8)
to ordinary shares
Decrease in treasury shares 7 7 026
held
Increase in share based 2 967
payments reserve
Dividends paid
Share issue expenses (27)
applied to share premium
Minorities increase in
share of equity
Balance at 31 March 2008 1 448 10 43 667 15 306
Attri-
Foreign butable
currency to equity
transla- Accumu- holders of
tion lated the parent Mino-rity Total
reserve profit interest equity
R`000 R`000 R`000 R`000 R`000
Balance at 1 (340) 222 205 300 996 38 448 339 444
October 2006
Exchange 36 36 36
differences arising
on translation of
foreign operations
Net income 36 36 36
recognised directly
in equity
Net profit for the 42 383 42 383 8 008 50 391
period
Total recognised 36 42 383 42 419 8 008 50 427
income and expenses
for the period
Ordinary shares 74 766 74 766
issued at a premium
Fair value 31 484 31 484
adjustments for
equity instruments
issued or to be
issued
Preference shares
converted to
ordinary shares
Preference shares (36) (36)
repurchased
Increase in share 2 318 2 318
based payments
reserve
Dividend paid (10 092) (10 092) (2 609) (12 701)
Share issue (206) (206)
expenses applied to
share premium
Minority acquired 2 984 2 984
share of equity in
subsidiaries
Minorities share of (28 432) (28 432)
equity acquired
Balance at 31 March (304) 254 496 441 649 18 399 460 048
2007
Exchange 63 63 63
differences arising
on translation of
foreign operations
Net income 63 63 63
recognised directly
in equity
Net profit for the 110 871 110 871 5 344 116 215
period
Total recognised 63 110 871 110 934 5 344 116 278
income and expenses
for the period
Ordinary shares 10 064 10 064
issued at a premium
Fair value 5 853 5 853
adjustments for
equity instruments
issued or to be
issued
Preference shares
converted to
ordinary shares
Preference shares
repurchased
Treasury shares (8 085) (8 085)
held
Increase in share 1 928 224 2 152
based payments
reserve
Argility Limited (5 224) (163 672) (163 672)
unbundling dividend
in specie
Dividends paid (11 269) (11 269) (683) (11 952)
Share issue
expenses applied to
share premium
Minority acquired 83 83
share of equity in
subsidiaries
Balance at 30 (241) 348 874 387 402 23 367 410 769
September 2007
Exchange (1 314) (1 314) (1 314)
differences arising
on translation of
foreign operations
Net income (1 314) (1 314) (1 314)
recognised directly
in equity
Net profit for the 42 032 42 032 4 591 46 623
period
Total recognised (1 314) 42 032 40 718 4 591 45 309
income and expenses
for the period
Ordinary shares 7 891 7 891
issued at a premium
Fair value 3 798 3 798
adjustments for
equity instruments
issued or to be
issued
Preference shares - -
converted to
ordinary shares
Decrease in 7 033 7 033
treasury shares
held
Increase in share 2 967 2 967
based payments
reserve
Dividends paid (14 344) (14 344) (1 796) (16 140)
Share issue (27) (27)
expenses applied to
share premium
Minorities increase 2 390 2 390
in share of equity
Balance at 31 March (1 555) 376 562 435 438 28 552 463 990
2008
condensed consolidated cash flow statement for the period ended 31 March 2008
Reviewed Reviewed Audited
6 months 6 months 12 months
31/3/2008 31/3/2007 30/9/2007
R`000 R`000 % change R`000
Cash flow from operating 19 929 37 772 (47,2%) 118 850
activities
Cash generated from 92 923 85 686 8,4% 178 720
operations
Working capital changes (37 133) (23 502) (18 533)
Cash generated from 55 790 62 184 (10,3%) 160 187
operating activities
Investment income and net (3 718) (1 227) 433
finance cost
Dividends paid (16 140) (12 701) (24 307)
Taxation paid (16 003) (10 484) (17 463)
Cash applied to investing (60 197) (19 392) 210,4% (69 055)
activities
Cash received from
(utilised in)
financing activities 51 798 (14 854) (448,7%) (1 804)
Cash and cash equivalents
-?Net increase 11 530 3 526 47 991
-?At beginning of the 144 823 96 832 96 832
year
- At end of period 156 353 100 358 55,8% 144 823
condensed consolidated segmental analysis for the period ended 31 March 2008
Reviewed Reviewed Audited
6 months 6 months 12 months
31/3/2008 31/3/2007 30/9/2007
R`000 R`000 % change R`000
Revenue 567 888 510 529 11,2% 1 070 539
Software 216 279 185 321 16,7% 380 386
Solutions & Services 350 359 325 208 7,7% 690 153
Corporate 1 250 - 100% -
Profit from operations
after research
& development but before
interest
depreciation and 100 763 91 997 9,5% 249 188
amortisation (EBITDA)
Software 48 509 29 828 62,6% 128 384
Solutions & Services 54 961 66 004 (16,7%) 129 846
Corporate and (2 707) (3 835) (29,4%) (9 042)
eliminations
Profit before interest 69 186 60 783 13,8% 185 840
and taxation
Software 36 455 16 978 114,7% 101 066
Solutions & Services 35 986 47 948 (24,9%) 95 560
Corporate and (3 255) (4 143) (21,4%) (10 786)
eliminations
Depreciation and 31 577 31 214 1,2% 63 348
amortisation
Software 12 054 12 849 (6,2%) 27 318
Solutions & Services 18 974 18 057 5,1% 34 286
Corporate and 549 308 78,2% 1 744
eliminations
Research and development
expenditure 3 701 14 886 (75,1%) 21 425
Software 1 584 13 091 (87,9%) 17 707
Solutions & Services 2 117 1 795 17,9% 3 718
Note: Comparative figures are reclassified, where necessary, in accordance with
current year classifications.
notes to the financial statements
1. Basis of preparation
This abridged report complies with International Accounting Standard 34 -
Interim Financial Reporting as well as with Schedule 4 of the South African
Companies Act and the disclosure requirements of the JSE Limited`s Listings
Requirements. The abridged report has been prepared using accounting policies
that comply with International Financial Reporting Standards. The accounting
policies are consistent with those applied in the financial statements for the
year ended 30 September 2007, except for the adoption of IFRS7 Financial
Instruments - Disclosures. This is a disclosure standard which has no impact on
recognition, measurement and presentation of financial instruments and
consequently has no impact on profit or loss or equity for the period.
2. Reconciliation of earnings to headline earnings
Reviewed Reviewed Audited
6 months 6 months 12 months
31/3/2008 31/3/2007 % 30/9/2007
cents cents change cents
Earnings attributable to
equity holders`
of the parent 42 032 42 383 (0,8%) 153 254
Preference share 10 14 28
entitlement
Basic earnings 42 022 42 369 (0,8%) 153 226
Adjusted for:
Goodwill adjustment - - 1 270
Assessed losses not
previously recognised
at acquisition - - (1 270)
Negative goodwill realised (3 316) - -
Profit on sale of a
division by a
subsidiary company - (6 090) (5 368)
Profit on sale of equity in (664) - -
subsidiary
Profit on sale of
Intellectual Property and
Software Products to
Argility Limited
(Product Co) - - (54 809)
Profit on disposal of
property,
plant & equipment (227) (374) (503)
Basic headline earnings 37 815 35 905 5,3% 92 546
R`000 R`000 R`000
3. Commitments
Capital 12 174 8 786 13 642
Operating leases 52 825 47 973 57 051
4. Borrowings
Interest bearing borrowings 163 387 59 691 126 942
Non-interest bearing 9 474 37 602 21 878
borrowings
172 861 97 293 148 820
5. Capital expenditure
Tangible assets 31 182 26 565 62 254
Intangible assets 25 789 10 961 19 593
56 971 37 526 81 847
6. Operating lease charges
Premises 13 447 10 293 21 242
Office equipment 31 15 573
Vehicles 577 247 37
14 055 10 555 21 852
7. Review report
These results have been reviewed by Deloitte & Touche and their unmodified
review report is available at the Group`s registered office.
Commentary
Trading conditions for UCS Group for the 6 months to 31 March 2008 were very
challenging, with the retail market in particular under considerable pressure as
consumers felt the impact of rising interest rates, rapidly escalating fuel
costs and the tightening of credit availability.
These factors caused some of the Group`s retail customers to postpone or even
cancel certain projects planned for the period. In addition, the effects of
national load shedding caused significant productivity drops, particularly in
our field service operations. This improved once the scheduled cuts were
introduced and we were able to schedule our calls more effectively.
Despite the challenging operating environment, the resilience of the Group`s
strong annuity revenue base and diversified service offerings underpinned
reasonable revenue growth and considering the circumstances, excellent
operational profit growth, though slightly behind original budgeted figures.
OPERATIONAL OVERVIEW
The Software division continued its drive for improved efficiencies with a 16,7%
increase in turnover leading to a more substantial 35,2% increase in normalised
EBITDA. The ongoing achievement of margin improvements in this division is in
line with management expectations following the unbundling of the Argility unit
in September 2007 and the continued commercialisation of the UCS Software
Manufacturing (UCSSM) facility.
The Solutions & Services division recorded a modest 7,7% increase in turnover
and a 5,2% decline in normalised EBITDA. The SAP consulting and implementation
practice, in particular, was severely impacted by projects being delayed or
cancelled by retailers due to the challenging retail environment.
Field service operations were disrupted by unscheduled load shedding.
FINANCIAL OVERVIEW
UCS Group achieved a 11,2% increase in turnover for the period to R568 million
(2007: R511 million) with 4,6% due to current and historic acquisition activity
and the balance of 6,6% reflecting organic growth.
Annuity revenues grew strongly by 24,6% to R349 million (2007: R280 million)
representing 61% (2007: 55%) of total revenue. Sales of 3rd party products &
services amounted to R97 million or 17,1% of total revenues (2007: R71 million
or 13,9% of revenue).
The Aquitec acquisition could only be implemented with effect from 1 March 2008
due to the delayed fulfilment of the outstanding condition precedent in respect
of the South African Reserve Bank ("SARB") approval, and therefore contributed
one month of revenue in the period under review.
R&D expenditure reduced by 75,2% to R3,7 million (2007: R14,9 million) largely
as a consequence of the unbundling of Argility Limited in September 2007 and the
set-up of the outsourced product development agreement with UCS Software
Manufacturing where development services in respect of the Active Retail and
Dolfin products are recovered based on a fixed cost contract and therefore no
longer represent an internal investment or R&D cost to the Group.
EBITDA for the period was up 9,6% to R100,8 million (2007: R92,0 million)
including R8,2 million profit associated with the acquisition of Aquitec which
comprises negative goodwill of R3,3 million and a revaluation of loan receivable
of R4,9 million. After excluding this once off profit normalised EBITDA grew by
10,2% to R92,6 million (2007: R84,0 million).
Normalised PBIT grew by 15,5% to R61,0 million (2007: R52,8 million)
representing an improving PBIT margin of 10,7% (2007: 10,3%).
As expected, the utilisation of the assessed losses in UCS Software and UCSSM in
the 2007 financial year contributed to a significant increase in the taxation
charge to R18,9 million (2007: R8,3 million). The utilisation was triggered by
the unbundling of Argility Limited. The raising of the balance of the assessed
losses not previously recognised in UCS Solutions as a deferred tax asset at 30
September 2007 also contributed to the increased tax charge.
Taking this into account, earnings per share decreased by 14% to 14,7 cents
(2007: 17,1 cents). Headline earnings per share, which excludes the negative
goodwill arising on the Aquitec transaction, decreased by 8,3% to 13,3 cents
(2007: 14,5 cents).
Other factors that impacted earnings per share were the reduction in the
allocation of the minority interests of 42,7% to R4,6 million (2007: R8 million)
largely as a result of the TSS roll up transaction concluded with effect from 1
March 2007; as well as a 14,9% increase in the weighted average number of
ordinary shares in issue to 285 million (2007: 248 million).
The net growth in the intangible assets as well as the growth in goodwill on the
Group`s balance sheet was largely due to the Aquitec acquisition. Trade and
other receivables were unusually inflated at R211,6 million due to the timing
around specific billing in the TSSMS business.
As a result, whilst the trade and receivables balance appears to have grown
substantially year on year it still reflects an acceptable debtors day ratio of
53 days and the cash related to this specific billing has, subsequent to the
period end, been banked. Taking into account the unusual component referred to
above, as well as the Aquitec contribution to debtors, the normalised debtor
days reduces to 49 days (2007:47 days).
The movement in the current and long term liabilities on the Group`s balance
sheet relates essentially to the post balance sheet events disclosed in the
Group`s year end announcement dated 27 November 2007 where it was tabled that
the Group had obtained approval from Nedbank to raise a R50 million medium term
loan to fund the settlement of the short term loan owing to Argility Limited.
This increase was partly offset by the settlement of R11 million of the above
mentioned Argility loan as well as the settlement, through the issue of equity,
of R10,5 million representing the balance of the purchase consideration owing in
respect of the DiverseIT acquisition. The Group still owes Argility Limited R39
million as at 31 March 2008 of which R35,6 is short term.
Cash generated from operations grew by 8,4% to R92,9 million and is directly
comparable to the normalised EBITDA of the Group. The substantial lock-up of
cash in working capital, up 57,9% at R37,1 million (2007: R23,5 million), was
largely driven by unusual inflation in trade and other receivables which has
subsequently reversed with the collection of cash related to the specific
invoicing.
The increase in cash applied to investing activities which amounted to R60,2
million related largely to capital expenditure in respect of property, plant and
equipment of R36,6 million as well as the acquisition of Aquitec which utilised
net cash of R22,8 million.
PROSPECTS
Trading conditions for the Group`s traditional products and services in its
target retail markets, both domestic as well as international, are expected to
remain turbulent and challenging for the foreseeable future. This will have a
negative impact on organic growth potential but will also present opportunities
for growth through innovation and acquisitions.
The market for specialist IT services to Government, which the Group addresses
through its investment in the TSSMS business, remains robust and the outlook for
this unit for the remainder of this year is positive.
Markets for products and services for other businesses within the Group
currently remain healthy and the majority of these units are expected to deliver
results in line with their original budgets for the year.
Barring further unforeseen circumstances arising, the Group remains well
positioned, strategically as well as operationally, to deliver good growth in
operating profits and cash flows for the full 2008 financial year.
ACQUISITION
UCS implemented the Aquitec acquisition, which was disclosed as a post balance
sheet event in the Group`s year end results published on 27 November 2007, with
effect from 1 March 2008, following the receipt of the SARB approval on 15
February 2008.
POST BALANCE SHEET EVENT
Further to the cautionary announcement released on 13 May 2008, and updated in a
separate announcement today, UCS has signed a term sheet and exclusivity
arrangement whereby it has proposed to negotiate and finalise the purchase of
the business of Computer Software Consultants (Proprietary)Limited as a going
concern.
CONTINGENT LIABILITY
In terms of the management agreement entered into with TSS, there exists a
management incentive fee that is payable annually for a three year period ending
30 June 2009. The contingent liability (incentive fee) equates to that portion
of the profits which exceed the warranted profits.
DIVIDEND DECLARATION
Notice is hereby given that the board of directors has declared an interim
dividend of 4 cents per ordinary share in respect of the 6 months ended 31 March
2008. The dividend will be paid on Monday 14 July 2008.
To comply with the procedures of STRATE, the last day to trade in the shares for
the purpose of entitlement to the interim dividend is Friday 4 July 2008. The
shares will commence trading ex dividend on Monday 7 July 2008 and the record
date will be Friday 11 July 2008.
Share certificates may not be dematerialised or rematerialised between Monday 7
July 2008 and Friday 11 July 2008, both days inclusive.
For and on behalf of the Board
DF Coles JD Bright
(Chairman) (CEO)
20 May 2008
Company Secretary
Corporate Governance CC
UCS Group Limited
("UCS" or "the UCS Group")
Incorporated in the Republic of South Africa
Reg No. 1993/002253/06
ISIN ZAE000016150
JSE code UCS
Registered office
20th Floor, 209 Smit Street,
Braamfontein 2001
PO Box 31266,
Braamfontein 2017
Transfer secretaries
Link Market Services South Africa (Pty) Ltd
11 Diagonal Street,
Johannesburg 2001
PO Box 4844,
Johannesburg 2000
There is more to UCS than meets the eye.
www.ucs.co.za
Date: 20/05/2008 07:05:41 Produced by the JSE SENS Department.
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