| Thu 14 May 2009, 17:53 | | HCI - Hosken Consolidated Investments Limited - Reviewed Abridged Consolidated |
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HCI
HCI
HCI - Hosken Consolidated Investments Limited - Reviewed Abridged Consolidated
Group Results For The Year Ended 31 March 2009
Hosken Consolidated Investments Limited
Incorporated in the Republic of South Africa
Registration number 1973/007111/06
Share code: HCI & ISIN: ZAE000003257
"HCI" or "the company" or "the group"
Reviewed Abridged consolidated group results for the year ended 31 March 2009
ABRIDGED CONSOLIDATED INCOME STATEMENT
31 March 31 March
2009 2008
R`000 R`000
Reviewed Audited
Revenue 8 059 441 5 427 667
Net gaming win 3 468 702 3 392 232
Income 11 528 143 8 819 899
Expenses (8 256 173) (5 665 330)
EBIDTA 3 271 970 3 154 569
Depreciation and amortisation (642 079) (495 626)
Operating profit 2 629 891 2 658 943
Investment income 126 760 111 985
Finance costs (722 350) (344 470)
Share of profits of associates and joint
ventures 68 196 188 036
Negative goodwill released 876 023 4 885
Investment surplus 49 778 83 884
Fair value adjustments of investment properties (15 608) 29 171
Other impairment reversals 4 070 30 175
Asset impairments (72 517) -
Fair value adjustments of financial instruments (225 148) (57 956)
Impairment of goodwill and investments (73 594) (12 422)
Profit before taxation 2 645 501 2 692 231
Taxation (776 762) (859 336)
Profit for the year from continuing operations 1 868 739 1 832 895
Discontinued operations 14 552 6 133
Profit for the year 1 883 291 1 839 028
Attributable to:
Equity holders of the parent 1 110 488 871 855
Minority interest 772 803 967 173
1 883 291 1 839 028
RECONCILIATION OF HEADLINE EARNINGS
2009 2009
Gross Net
R`000 R`000
Earnings attributable to equity
holders of the parent - 1 110 488
IAS 16 Gains on disposal
of property - -
IAS 16 (Gains)/losses on disposal
of plant and equipment (13 083) (2 731)
IAS 16 Impairment of plant
and equipment 72 517 49 307
IAS 38 Impairment
of intangible assets 861 472
IAS 39 Impairment of Investments - -
IFRS 3 Impairment of goodwill 12 106 12 106
IFRS 3 Negative goodwill (876 023) (873 551)
IFRS 3 Excess of fair value
of assets of an associate - -
IAS 28 Gain on disposal
of associates (9 972) (8 840)
IAS 28 Impairment of joint venture 59 999 47 521
IAS 36 Reversal of impairments (4 070) (4 070)
IAS 27 Profit from disposal/part
of subsidiary (39 805) (24 706)
IAS 40 Fair value adjustment of
investment property 15 608 11 090
Remeasurements included in
equity-accounted earnings
of associates - -
Headline profit 317 086
Earnings per share
- Basic (cents) 890,58
- Headline (cents) 254,30
Weighted average number
of shares in issue (`000) 124 692
Actual number of shares in
issue at end of period
(net of treasury shares) (`000) 124 909
Diluted earnings per share
- Basic (cents) 869,09
- Headline (cents) 248,16
Weighted average number
of shares in issue (`000) 127 776
2008 2008
Gross Net
R`000 R`000
Earnings attributable to equity
holders of the parent - 871 855
IAS 16 Gains on disposal
of property (38 898) (10 418)
IAS 16 Gains/(losses) on disposal
of plant and equipment 403 967
IAS 16 Impairment of plant
and equipment 2 500 264
IAS 38 Impairment
of intangible assets - -
IAS 39 Impairment of Investments 7 534 5 752
IFRS 3 Impairment of goodwill 4 888 4 888
IFRS 3 Negative goodwill (4 885) (2 613)
IFRS 3 Excess of fair value
of assets of an associate 4 489 1 533
IAS 28 Gain on disposal
of associates (75 394) (59 855)
IAS 28 Impairment of joint venture
IAS 36 Reversal of impairments (30 175) (19 306)
IAS 27 Profit from disposal/part
of subsidiary (7 209) (7 209)
IAS 40 Fair value adjustment of
investment property (29 171) (24 519)
Remeasurements included in
equity-accounted earnings
of associates (71 799) (71 799)
Headline profit 689 540
Earnings per share
- Basic (cents) 702,10
- Headline (cents) 555,28
Weighted average number
of shares in issue (`000) 124 179
Actual number of shares in
issue at end of period
(net of treasury shares) (`000) 123 896
Diluted earnings per share
- Basic (cents) 684,86
- Headline (cents) 541,65
Weighted average number
of shares in issue (`000) 127 304
ABRIDGED CONSOLIDATED BALANCE SHEET
31 March 31 March
2009 2008
R`000 R`000
Reviewed Audited
ASSETS
Non-current assets 14 006 932 9 714 163
Property, plant and equipment 9 548 618 6 885 818
Investment properties 166 937 182 665
Goodwill 1 263 883 846 098
Interest in associates and joint ventures 1 960 894 753 567
Other financial assets 63 752 353 159
Intangibles 429 409 305 405
Finance lease receivables 35 412 -
Deferred taxation 343 446 255 004
Operating lease equalisation asset 4 970 4 980
Long-term receivables 189 611 127 467
Current assets 4 045 127 2 527 587
Other 3 149 773 1 854 597
Bank balances and deposits 895 354 672 990
Non-current assets held for sale 26 972 3 855 894
Total assets 18 079 031 16 097 644
EQUITY AND LIABILITIES
Equity 7 619 925 6 232 034
Equity attributable to equity holders of the
parent 4 211 289 2 940 494
Minority interest 3 408 636 3 291 540
Non-current liabilities 6 118 617 3 181 381
Deferred taxation 684 909 511 902
Long-term borrowings 4 937 437 2 259 258
Operating lease equalisation liability 262 067 279 521
Other 234 204 130 700
Current liabilities 4 340 489 2 920 044
Non-current liabilities held for sale - 3 764 185
Total equity and liabilities 18 079 031 16 097 644
Net asset value carrying per share (cents) 3,371 2,373
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
31 March 31 March
2009 2008
R`000 R`000
Reviewed Audited
Balance at beginning of year 6 232 034 4 937 311
Share capital and premium
Shares issued 79 102 42 500
Shares repurchased - (67 000)
Treasury shares released 3 620 1 441
Treasury shares acquired by subsidiary (22 950) (27 333)
Current operations
Profit for the year 1 883 291 1 839 028
Equity settled share-based payments 2 629 1 816
Transfers to profit and loss - (5 621)
Revaluations 274 554 20 656
Foreign currency translation differences 144 242 127 590
Hedging (21 819) (19 427)
Minority interest on acquisition of subsidiaries 437 101 23 440
Effects of changes in holding (533 819) (258 684)
Capital reductions and dividends (858 060) (383 683)
Balance at end of year 7 619 925 6 232 034
ABRIDGED CONSOLIDATED CASH FLOW STATEMENT
31 March 31 March
2009 2008
R`000 R`000
Reviewed Audited
Cash flows from operating activities 891 554 1 823 373
Cash flows from investing activities (4 041 064) (1 593 668)
Cash flows from financing activities 3 073 810 (335 264)
Decrease in cash and cash equivalents (75 700) (105 559)
Cash and cash equivalents
At beginning of period 621 719 710 445
Foreign exchange differences 3 679 16 833
At end of period 549 698 621 719
Bank balances and deposits 895 354 722 266
Bank overdrafts (345 656) (100 547)
Cash and cash equivalents 549 698 621 719
SEGMENTAL ANALYSIS
31 March 2009 31 March 2008
Net Net
Revenue gaming win Revenue gaming win
R`000 R`000 R`000 R`000
Media and broadcasting 1 504 367 - 1 175 169 -
Financial services - - - -
Limited payout gaming 10 534 225 226 3 075 169 242
Casino gaming 639 427 3 243 476 610 122 3 222 990
Hotels 2 037 375 - 1 665 645 -
Information technology 220 582 - 204 662 -
Transport 938 789 - 782 416 -
Industrial 902 021 - 737 041 -
Exhibition and
properties 60 553 - 49 824 -
Mining 6 409 - - -
Natural gas 220 994 - 177 357 -
Clothing and textile 1 494 828 - - -
Other 23 562 - 22 168 -
Total 8 059 441 3 468 702 5 427 479 3 392 232
Profit before tax Headline profit
31 March 31 March 31 March 31 March
2009 2008 2009 2008
R`000 R`000 R`000 R`000
Media and broadcasting 466 392 459 698 179 833 174 081
Financial services - 38 310 (253) (6950)
Limited payout gaming (7 350) 11 656 (15 007) 6649
Casino gaming 1 012 942 1 312 303 266 904 273 943
Hotels 641 602 600 407 126 849 136 971
Information technology 40 009 45 705 17 020 14 932
Transport 92 418 116 905 71 077 84 578
Industrial 3 444 37 550 (4 622) 30 542
Food and beverage (2 398) 129 802 (2 398) 64 322
Exhibition and
properties 13 077 40 874 29 498 19 357
Mining (19 380) (9187) (19 380) (3205)
Natural gas (189 586) (98 732) (78 903) (33 344)
Clothing and textile (169 401) - (55 070) -
Other* 763 732 6 940 (198 462) (72 336)
Total 2 645 501 2 692 231 317 086 689 540
* Profit before tax includes investment surplus and negative goodwill.
EBITDA
31 March 31 March
2009 2008
R`000 R`000
Media and broadcasting 568 427 481 567
Limited payout gaming 28 584 30 611
Casino gaming 1 655 232 1 618 132
Hotels 790 568 647 600
Information technology 55 239 50 970
Transport 168 423 174 049
Industrial 28 363 76 099
Exhibition and properties 31 941 36 995
Mining (22 810) (3 948)
Natural gas 79 615 50 434
Clothing and textile (44 298) -
Other (67 314) (7 940)
Total 3 271 970 3 154 569
NOTES TO THE ABRIDGED CONSOLIDATED FINANCIAL STATEMENTS
Basis of preparation and accounting policies
The results for the year ended 31 March 2009 have been prepared in accordance
with International Financial Reporting Standards ("IFRS"), specifically IAS 34
Interim financial reporting, and comply with the requirements of the South
African Companies Act, 1973 and the Listings Requirements of the JSE Limited.
The accounting policies of the group are consistent with those applied for the
year ended 31 March 2008.
As required by the JSE Limited Listings Requirements, the group reports
headline earnings in accordance with Circular 8/2007 Headline earnings, as
issued by the South African Institute of Chartered Accountants.
Business combinations
During the year under review the group acquired control of the following
entities:
Hotels segment
Cullinan Hotel (Pty) Limited (50% on 1 April 2008)
Industrial segment
Stainless Precision Components (Pty) Limited (100% on 1 October 2008)
Limited payout gaming segment
Luck Holdings (Pty) Limited (100% on 1 October 2008)
Clothing and textiles segment
Seardel Investment Corporation Limited (70% on 1 November 2008)
The group had previously equity accounted Cullinan Hotel (Pty) Limited.
The acquired businesses contributed revenues of R1 684 million and losses after
tax of R137 million to the group for the periods from dates of effective
control to 31 March 2009. Had the acquisitions been effective on 1 April 2008,
the contribution to revenue would have been R3 106 million and the contribution
to profit after tax would have been R289 million of losses.
The details of the net assets acquired and goodwill at acquisition on business
combinations are as follows:
R`000
Non-current assets 1 682 823
Current assets 2 075 306
Non-current liabilities (290 949)
Current liabilities (1 780 859)
1 686 321
Minority (619 067)
Existing share of net assets before business combinations (216 892)
Net assets acquired 850 362
Goodwill arising on acquisitions 69 628
Negative goodwill arising on acquisitions (876 023)
Purchase price 43 967
Cash contributed by minority (50 678)
Net cash over drafts on acquisition 299 130
Net cash paid 292 420
Discontinued operations and non-current assets held for sale
Discontinued operations as disclosed in the group income statement relates to
the following:
* The convention business of Gallagher Estates which the group has been
ordered by the competition commission to dispose of. The group is
currently awaiting the Commission`s response to proposals by the group
regarding the manner of disposal; and
* The financial services companies of the Mettle Group which were disposed
of during the year.
The non-current assets held for sale, as disclosed in the group balance sheet,
relate to the following:
* A subsidiary of Johnnic Holdings USA, Montauk Energy Capital LLC, has
taken a decision to dispose of certain of its non-material passive
landfill sites in the next 12 months; and
* Certain assets of the Seardel Group which has been committed to being
disposed of.
COMMENTARY
OVERVIEW OF RESULTS
Group results
The group results reflect an overall increase of 27% in basic earnings
attributable to HCI shareholders and a decline of 54% in headline earnings.
These results have been somewhat skewed by the occurrence of the following
onceoff non-recurring events:
* Fair value losses incurred due to the mark to market of Tsogo Sun`s
initial investment in Gold Reef Resorts;
* Fair value losses resulting from the collapse of Lehman Brothers resulting
in impairment of natural gas put options held by Montauk; and
* the consolidation of the Seardel Group, who have reported significant
losses for the period under review. HCI has structured its exposure to
this company on a basis of limiting its downside to R50 million while
retaining 80% of the upside.
Growth in the media businesses together with the first-time consolidation of
Seardel and the Cullinan Hotel were the most significant drivers of growth in
revenue with the growth in trading expenses being largely in line with growth
in revenue, the result of which has been a marginal increase in EBITDA despite
the negative impact of the acquisition of Seardel. The increase in depreciation
and amortisation largely reflects the group`s increased level of investment in
fixed assets.
Finance costs for the year have increased significantly primarily as a result
of the increased level of group borrowings. The decrease in the group`s share
of the profits of associates has decreased as a result of the results of the
Cullinan, previously accounted for as an associate, now being consolidated; and
the group`s current year share (R2,3 million) of the loss of Clover Industries
Limited compared to the group`s share (R129 million) of its profits in the
prior year.
Negative goodwill released relates primarily to the excess value of the assets
over the purchase price in Seardel.
Included in investment surplus are the profits on the disposal of the financial
services businesses in the Mettle Group of companies and a purchase price
adjustment in respect of the group`s disposal of its interest in Africa on Air
(Pty) Limited in the 2004 financial year.
Asset impairments relate primarily to property, plant and equipment impaired by
Seardel.
The fair value adjustments of financial instruments relates primarily to the
following:
* R132 million fair value losses charged by Tsogo Sun to its income
statement. These fair value losses relate to the mark to market of the
Tsogo Sun`s initial 5% investment in the issued share capital of Gold Reef
Resorts Limited ("GRR"). These losses remain in headline earnings.
Following the acquisition by Tsogo Sun of a further 18% interest in GRR,
the investment has been accounted for as an associate, with Tsogo Sun
holding a 23% interest in GRR at year-end;
* The group`s USA subsidiary, Montauk Energy Corporation LLC (MEC) had as
part of its price hedging strategy purchased natural gas price put
contracts from Lehman Brothers Commodity Services, Inc. ("LBCS"). On 3
October 2008, LBCS filed a petition in the United States Bankruptcy Court
seeking relief under Chapter Eleven of the United States Bankruptcy Code,
triggering default under the terms of the contracts. On 8 October 2008 MEC
exercised its right under the terms of the contracts to terminate the
remaining put option contracts with LBCS and claim early termination
damages from LBCS of approximately $6,6 million. The bankruptcy filing of
LBCS was the culmination of publicised defaults by LBCS relating to other
third party claims prior to 30 September 2008. As a result of the
uncertainty that existed at 30 September 2008 relating to the
creditworthiness of LBCS, MEC has effectively, as of 1 April 2008,
discontinued the hedge accounting that had previously been applied to the
LBCS put contracts and as at 30 September 2008, fully impaired the
carrying value of the LBCS put contracts. The total pre-tax loss
recognised by MEC relating to the LBCS hedges amounted to approximately
$8,6 million (R76 million) which remains in headline earnings.
The impairment of goodwill and investments relates primarily to the impairment
of by MEC of its investment in the Magellan joint venture, by an amount of R60
million, which has continued to produce losses.
The net result of all of the above has been a 54% drop in headline earnings to
255 cents per share while basic earnings per share increased 26% to 890 cents
per share with negative goodwill released being the main contributing
difference between the basic and headline earnings.
Group balance sheet
As stated above, the group has consolidated Seardel for the first time, as a
result of which the group`s assets have increased by R2,6 billion with
liabilities increasing by R1,2 billion and attributable group equity increasing
by R1,26 billion largely due to the negative goodwill released through the
income statement on the acquisition of Seardel. The group has also raised
significant amounts of borrowings to fund its acquisitions of the remaining
Johnnic minorities and its investment in Gold Reef Resorts, which is in line
with its strategy to grow the gaming and hotel businesses. As part of the
consideration paid to the Johnnic minorities, 1 005 744 shares were issued.
INVESTMENTS
Media and broadcasting
Sabido Investments (Pty) Limited ("Sabido")
Sabido has performed very well despite the general decline in economic
activity. Television adspend continues to increase over the period, albeit at a
slower rate. e.tv. continued a steady gain in market share of that spend. Its
audience share likewise continues to creep up slowly. A key part of Sabido`s
results is also the performance of the e-News channel which has been operating
for almost a year now. While e.tv. took some five years to become profitable,
it is expected that e-News will turn positive in the near future. It is a
credit to the broadcast skills that have been developed in e.tv. that the news
channel was able to emerge, broadcasting 24 hours a day live news without any
noticeable glitches. Costs across all media operations, as always, have been
tightly controlled and all foreign currency obligations completely hedged.
Gaming, Hotels and Leisure
Tsogo Sun Holdings (Pty) Limited ("Tsogo Sun")
The financial results for the year to 31 March 2009 represents a solid
performance with growth in group revenue to R5 921 million (8% above the prior
year) and EBITDAR of R2 623 million (2%) despite the economic slowdown
impacting hotels and gaming and the reduction of the Montecasino market share
in Gauteng as a result of the opening of Silverstar casino on the West Rand of
Johannesburg.
In South Africa, different markets have experienced differing results with the
Western and Eastern Cape most severely impacted. However, the overall casino
industry has continued to grow.
The contraction in the local economy has pressurised the South African tourism
and hospitality industry in the second half of the financial year. After a
number of years of unprecedented growth in room rates and rooms sold, demand in
the key corporate, leisure and special tour operators ("STO") markets has
declined significantly. To date, the government, group and conference segments
have maintained prior year levels.
Importantly, the three major sporting events in the first half of F`10,
including the IPL cricket tournament, the British and Irish Lions tour and the
Confederations Cup will assist occupancies and ensure the group is well
prepared for the FIFA World Cup in 2010.
A segmental analysis of the Tsogo Sun Group`s revenue and EBITDAR is as follows:
2009 2008
Revenue EBITDAR Revenue EBITDAR
Montecasino 1 817 694 1 910 786
Suncoast 1 167 510 1 058 453
Other Gaming 902 529 865 541
Tsogo Sun Gaming 3 886 1 733 3 833 1 780
Southern Sun Hotels: South
Africa 1 778 781 1 474 694
Southern Sun Hotels: Offshore 294 104 222 84
Inter-group elimination (37) 5 (30) 4
5 921 2 623 5 499 2 562
In addition to major maintenance and refurbishment capital expenditure, the
group has undertaken a number of corporate activities during the financial year
which will position the group to benefit substantially from the economic
recovery, when it arrives. These activities include:
* The addition of five hotels to the portfolio (StayEasy Rustenburg - opened,
and Southern Sun Hyde Park, Southern Sun Montecasino, StayEasy Witbank and
Southern Sun Ikoyi - all under construction);
* The acquisition of the Century Casinos Caledon and Newcastle operations
(subject to regulatory approval);
* The acquisition of the 23% (33% voting) interest in Gold Reef Resorts. Gold
Reef Resorts has been accounted for as an associate with effect from
October 2008. Accordingly, R45 million has been included in the group`s
equity earnings during this financial year;
* The mixed use development at Montecasino, now officially named The Pivot,
which is under construction and includes offices, parking and the Southern
Sun Hotel mentioned above; and
* Redevelopment and expansion of The Ridge Casino including a new Prive,
cinemas and the StayEasy Hotel.
The Tsogo Sun Group remains focused on a growth strategy and will continue to
pursue opportunities to develop and enhance its core Hotels and Gaming
businesses.
Vukani Gaming Corporation (Pty) Limited ("Vukani")
The business continued to grow significantly despite a small decline in average
gross gaming revenues per machine with the machine base growing to 2 972 at 31
March 2009. Significant growth in revenues has not translated into growth in
EBITDA due to certain non-recurring expenses, the costs of the Gauteng office
incurred in anticipation of the Gauteng license and the start up costs incurred
in establishing the ATM and VPlay divisions, all of which were expensed.
Vukani won a license to operate in the key Gauteng area and is in the process
of starting to rollout machines there despite a challenge from a party that
contested for a license but failed to succeed. We do not anticipate this
challenge will seriously hamper the roll out of our operations there. Our own
contest with the award in the Free State is likely to be heard in court in the
last quarter of this financial year. In the meantime all LPM operations in the
Free State remain interdicted. During the year we also bought out a competitor,
the effect of this transaction is that we effectively increased our machine
base somewhat and also acquired a second license in KwaZulu-Natal. All these
developments continue to entrench Vukani as the market leader in the LPM
industry.
The rollout of machines remains frustratingly slow. The eighth region (North
West) has issued an RFP for LPM operators but the local requirements are so
extensive that it is unclear whether Vukani can operate profitably there and no
decision has been made yet as to whether or not to bid for this license. The
roll-out of 20 and 40 machine sites have taken longer than expected due to the
requirement that the National Gaming Board is required to approve the
applications, which approvals were obtained subsequent to year-end. With the
assistance of the regional gaming boards these sites should be operational in
the near future.
Transport
Golden Arrow Bus Services (Pty) Limited ("GABS")
Golden Arrow Bus Services continued to be run well. The cost pressures through
the escalation of diesel prices were managed carefully and our decision to
tighten our belt rather than try to pass on these costs in their entirety was
rewarded by the fact that there was no disruption of our services, which
continued to grow steadily with some 5% increase in passenger numbers.
The company has provided transport to the public in Cape Town for 147 years and
during that time has had several moments where change swept through such
services. We are currently rapidly approaching another of these moments with
two key pressures unfolding simultaneously, namely the introduction of the BRT
system into Cape Town over the next period and major efforts by Government to
reduce the cost of bus subsidies.
The BRT is an opportunity in the long term to modernise the city`s transport
system, which, if successful could significantly reduce congestion through
private motor vehicles over the next two decades. It should also shorten the
time it takes to travel to work and back in peak periods for hundreds of
thousands of commuters in Cape Town. GABS is committed to participating in this
system and generally doing its best to make it a success. Nevertheless, we
believe the timetable for the first phase of its implementation is too tight
for the World Cup soccer and GABS has as a result purchased buses for an
upgrade in our inner city service, which will ensure that any delay in the
implementation of the first phase of the BRT does not cause serious congestion
during the World Cup. Secondly, we believe the advice on which government is
relying, namely that the system will ultimately run without subsidies as is the
case in several South American cities, takes insufficient account of the low
density nature of our cities and resultant long distances people have to be
transported. Hopefully these issues will be dealt with appropriately and the
difficulties of introducing such a modern public transport system will be
overcome over the period of its introduction.
On the other hand, the decision by Government to simply withhold amounts
contractually due to GABS under its main contract resulted in the company being
driven to litigate with the state in regard to approximately R100 million
revenue so withheld, as were other bus operators similarly afflicted. While
this litigation was successful, we are still no nearer resolving the underlying
issue. It seems Government is heading down a path obliging the curtailment of
bus services nationally. This is an issue that is completely destabilising the
industry and if implemented as thoughtlessly as has been the case to date, will
in due course, cause significant retrenchments, commuter dissatisfaction, and
disruption to many businesses dependent on people who travel to work by public
transport. Hopefully the newly elected government will act decisively to
resolve this impasse with due care for passengers.
Food and beverages
Clover Industries Limited ("Clover")
The company has had a difficult year financially. It has continued to drag its
feet over a necessary capital restructuring for a further year. HCI has as a
result lost confidence this will ever happen and is contemplating reducing its
exposure to the company.
Mining
HCI Kusela Coal (Pty) Limited ("HKC")
HKC has had several difficulties in the start up phase of its operations. In
the case of the Palesa mine, after some delay, the mine has started production
of raw coal to supply to Eskom under its current contract. In the next few
months the completion of the construction of its wash plant will allow it to
increase production significantly but we currently believe it will only be at
full production levels in the second half of our financial year.
In the case of the Mbali mine the inexplicable granting of a key portion of the
mining right to CEF, despite our prospecting right, has resulted in us having
to redesign the placement of slurry ponds and this in turn requires further
environmental approvals before mining can be commenced. We have in addition
challenged the decision of the DME to withhold the portion concerned and expect
this decision to be reviewed by court over the coming year.
We have nearly completed the prospecting on the Nokuhle property and shall be
lodging a mining right application in the near future.
Clothing and textiles
Seardel Investment Corporation Limited ("Seardel")
During the year, HCI took over the Seardel Group by acquiring about 70% of its
issued share capital through underwriting a major share issue in that company
funded primarily by non-recourse ringfenced debt. In essence the opportunity is
a turn around one. The company has an NAV per share backed by large industrial
properties significantly higher than where the share trades but operates a
business that currently generates enormous losses.
In the four months since taking over the group, we have introduced new
management personnel, announced the closure of the manufacture of the textile
production facility at New Germany which was generating completely
unsustainable losses, and taken a number of key steps to limit the overhead of
several clothing factories within the group. While the past philosophy was
essentially to leave each factory as a freestanding business entity, the new
direction of the group intends these units to function as a single integrated
production platform for the group. It is our commitment to raise the standards
of the group to being a world class operation that is demonstrably better able
to provide the local manufacturing requirements of all major clothing and
textile retailers.
We anticipate the loss-making operations of the group will be turned around or
curtailed over the next six months and that the second half of the financial
year will see the group`s continuing operations producing profitably. While we
appreciate there is a fair amount of market scepticism in this regard, we are
satisfied that we have the right vision, dedication and the right management to
make a go of the turnaround. We believe it is a vital contribution to the
reversal of fortune of an industry that has shed more jobs than it has created
over the last decade. Jobs, frankly, that the country cannot afford to lose.
Nevertheless, it goes without repeating, the future of the Seardel group depends
on the success of the turnaround.
Energy
Montauk Energy Corporation LLC ("Montauk")
As has been previously stated, this business has been badly hit by the collapse
of Lehman Brothers which was a counterparty to various puts the company held to
protect it against very low gas prices such as are available at present. The
demise of our counterparty left the business greatly exposed in the short term
and unquestionably loss-making. Besides issues related to the gas price,
however, the business remains steady with slow increases in the volumes of gas
it produces. A renegotiated contract to supply electricity from the Monmouth
operation will result in electricity prices doubling from July 2009. The future
gas curve, and US drill rig data, suggests that the current low prices for gas
should begin to ease significantly by calendar year-end and that next year
should see the company again producing a positive EBITDA. We have negotiated
with debt providers in the US to reduce the level of third party debt in the
business to more manageable levels to stabilise the business through the
current period. We have also sent a South African engineering team to the USA
to strengthen its management team and to ensure continued focused effort to
increase production levels from existing gas fields.
Exhibitions and property
Gallagher Estate Holdings Limited ("Gallagher Estates")
The resolution of the complexities of the Competition Tribunal`s order that we
must dispose of the exhibition business of Gallagher Estates remains
outstanding though we anticipate it will be to hand shortly. In essence the
matter is with the Competition commission who are considering whether it will
support the solution offered, namely to unbundle the exhibition business to HCI
shareholders who will lease the premises from Johnnic. The business is
currently independently managed and would continue to be so after the
contemplated unbundling.
Information technology
Syntell (Pty) Limited ("Syntell")
The company has won a significant contract to operate cameras in Cape Town with
effect from July 2009.
Otherwise its other contracts continue to provide stable earnings for the
company which remains a well run operation.
Industrial
Formex Industries (Pty) Limited ("Formex")
This business has been heavily affected by the world downturn in the motor
assembly industry and had been obliged to retrench several hundred of its staff
to meet the curtailed opportunities in the industry. While these are
exceptionally difficult times for a business such as Formex, the general clean
up it is forced to confront will hopefully stand it in good stead when the
cycle turns.
CHANGES IN DIRECTORATE
There were no changes in the year under review.
AUDITOR`S REVIEW
These results have been reviewed by the company`s auditors, PKF (Jhb) Inc.
Their unqualified review opinion is available for inspection at the registered
office of the company.
DIVIDEND ANNOUNCEMENT
Your directors have resolved not to declare a dividend at this time.
For and behalf of the board of directors
MJA Golding JA Copelyn
Chairman Chief Executive Officer
Cape Town 14 May 2009
Registered office
Block B, Longkloof Studio, Darters Road, Gardens, Cape Town, 8001,
PO Box 5251, Cape Town, 8000
Transfer secretaries
Computershare Investor Services (Pty) Limited
70 Marshall Street, Johannesburg, 2001, PO Box 61051, Marshalltown, 2107
Sponsor
Investec Bank Limited
Directors
MA Golding (Chairman), JA Copelyn (Chief Executive Officer), VE Mphande,
A van der Veen, JG Ngcobo*, VM Engel*, MF Magugu*, AM Ntuli*, Y Shaik*,
JA Mabuza, ML Molefi*, R Garach*
*(Non-executive)
Company secretary
HCI Managerial Services (Pty) Limited
www.hci.co.za
Date: 14/05/2009 17:53:24 Produced by the JSE SENS Department.
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