| Thu 24 Mar 2011, 8:00 | | LHG - Litha Healthcare Group Limited - Reviewed condensed consolidated |
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LHG
LHG
LHG - Litha Healthcare Group Limited - Reviewed condensed consolidated
results for the year ended 31 December 2010
Litha Healthcare Group Limited
(formerly Myriad Medical Holdings Limited)
Registration number: 2006/006371/06
Share code: LHG ISIN: ZAE000144671
("The group")
REVIEWED CONDENSED CONSOLIDATED RESULTS FOR THE YEAR ENDED 31 DECEMBER 2010
At the heart of health
- Litha and Pharmafrica acquisitions effective 1 May 2010
- Only 8 months of trading results included
- Acquisition of remaining 49% of Litha (effective 1 January 2011)
- Pro forma core earnings per share 21 cents
- Earnings per share up 33% on annualised 2009
- Headline earnings per share up 45% on annualised 2009
Consolidated Statement of Financial Position
(R`000) Reviewed Audited
31 December 31 December
2010 2009
ASSETS
Non-current assets 394 643 85 190
Property, plant and equipment 79 134 3 495
Goodwill and intangible assets 294 925 81 468
Deferred taxation 17 884 227
Other non-current assets 2 700 -
Current assets 821 047 130 165
Inventory 233 795 53 920
Trade and other receivables 352 079 56 861
Other current assets 2 955 4 450
Cash and cash equivalents 232 218 14 934
Non-current assets available for sale 2 815 -
Total assets 1 218 505 215 355
EQUITY AND LIABILITIES
Total equity 502 256 140 803
Share capital and premium 197 447 64 371
Reserves attributable to holders of the 123 756 76 432
parent
Non-controlling interest 181 053 -
Non-current liabilities 102 723 27 798
Other financial liabilities 69 901 27 753
Non-interest bearing borrowings 11 000 -
Deferred taxation liability 21 822 45
Current liabilities 613 526 46 754
Accounts payable and provisions 558 593 30 372
Other current liabilities 54 228 9 811
Bank overdraft 705 6 571
Total equity and liabilities 1 218 505 215 355
Total number of shares in issue 325 091 589 154 230 364
Net asset value per share (cents) 98,8 91,3
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Reviewed Audited
year ended 7 months
31 December ended
2010 31 December
2009
(R`000)
Revenue 1 290 184 178 047
Turnover 1 254 873 176 876
Cost of sales (946 464) (96 294)
Gross profit 308 409 80 582
Net operating costs (186 134) (59 130)
Operating profit 122 275 21 452
Non-operating interest received - 858
Non-operating interest paid (6 912) (1 464)
Profit before taxation 115 363 20 846
Taxation (34 005) (6 256)
Profit for the period 81 358 14 590
Other comprehensive income net of tax
Fair value adjustments to available for sale 1 892 -
financial assets
Total comprehensive income 83 250 14 590
Profit attributable to:
Equity holders of Litha Healthcare Group 46 360 14 590
Limited
Non-controlling interest 34 998 -
Total profit for the period 81 358 14 590
Total comprehensive income attributable to:
Equity holders of Litha Healthcare Group 47 324 14 590
Limited
Non-controlling interest 35 926 -
Total comprehensive income for the period 83 250 14 590
Earnings per share (cents) 16,6 7,3
Diluted earnings per share (cents) 15,9 7,1
COMMENTARY TO THE CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Headline earnings reconciliation
Attributable profit 46 360 14 590
Adjusted for:
Goodwill impairment 4 250 -
Profit from disposal of property, plant and (98) (55)
equipment
Tax effect of profit from disposal of 27 15
property, plant and equipment
Headline earnings 50 539 14 550
Weighted average number of shares 279 582 073 199 452 211
Diluted weighted average number of shares 291 057 373 206 148 569
The prior periods` weighted average number of shares and diluted weighted
average number of shares have been recalculated to account for the bonus
portion of the rights issue that took place during the period under review.
Headline earnings per share (cents) 18,1 7,3
Diluted headline earnings per share (cents) 17,4 7,1
CONSOLIDATED STATEMENT OF CASH FLOWS
(R`000) Reviewed Audited
year ended 7 months
31 December ended
2010 31 December
2009
Cash generated by operating activities 119 096 13 318
Cash flows from operating activities 119 421 2 785
Cash flows from investing activities (151 710) (1 386)
Cash flows from financing activities 88 825 1 863
Net (decrease)/increase in cash and cash 56 536 3 262
equivalents
Cash acquired on acquisition of subsidiary 166 614 -
Cash and cash equivalents at beginning of 8 363 5 101
period
Cash and cash equivalents at end of period 231 513 8 363
Consolidated Statement of Changes in Equity
Balance at 1 June 2009 94 271 673 -
Total comprehensive income - - -
Share based payment reserve - 31 -
adjustment
Share buyback (29 900) - -
Balance at 31 December 2009 64 371 704 -
Rights issue 95 836 - -
Acquisition of subsidiary 34 240 - -
companies*
Total comprehensive income - - 964
Share based payment reserve - 270 -
adjustment
Shares issued during the year 3 000 - -
Reviewed balance at 31 197 447 974 964
December 2010
(R`000) Accumulated Ordinary Non- Total
profits Share- controlling
holders interest
interest
Balance at 1 June 2009 61 138 156 082 - 156 082
Total comprehensive income 14 590 14 590 - 14 590
Share based payment reserve - 31 - 31
adjustment
Share buyback - (29 900) - (29 900)
Balance at 31 December 2009 75 728 140 803 - 140 803
Rights issue - 95 836 - 95 836
Acquisition of subsidiary - 34 240 145 127 179 367
companies*
Total comprehensive income 46 090 47 054 35 926 82 980
Share based payment reserve - 270 - 270
adjustment
Shares issued during the year - 3 000 - 3 000
Reviewed balance at 31 121 818 321 203 181 053 502 256
December 2010
*Refer to note 3.
Commentary
1. NATURE OF BUSINESS
Litha Healthcare Group Limited listed on the main board of the JSE Limited in
May 2010, following the acquisition by Myriad Medical Holdings Limited
("Myriad") of a 51% stake in 18-year old Litha Healthcare Holdings
(Proprietary) Limited ("LHH"). The transaction significantly increased the
group`s size and diversified its healthcare offering into three major
divisions - Biotechnology (vaccines), Pharmaceuticals and Medical Devices.
Post year end, the group purchased the remaining 49% of the issued share
capital of LHH.
2. OPERATIONAL REVIEW
Demand from the public sector for the group`s products was strong, with the
private sector sales being somewhat slower. The mix between public and
private sector contributions to group gross profit following the creation of
the enlarged group is public sector at 45% and the private sector 55%.
Litha Biotech Division
The Biotechnology division imports and distributes paediatric and adult
vaccines under agency from several major international pharmaceutical
companies. It is a supplier of paediatric vaccines to the South African
government through the Biovac Institute ("TBI"). TBI finalised its
fundraising for up-scaling the vaccine manufacturing facility. At the end of
2010, the Final Supply Agreement ("FSA") with government was further extended
to December 2016, which allows the division to continue supplying
government`s paediatric vaccine requirements whilst TBI continues to build
its local manufacturing capacity.
In February 2011, the group increased its shareholding in The Biovac
Consortium by 15%, which increased its effective shareholding in TBI.
Litha Pharma Division
The Pharmaceutical division, currently the smallest division, sells, markets
and distributes pharmaceutical, generic, over-the-counter ("OTC") and
ancillary products to the pharmaceutical and consumer related industry.
During the year, the division was integrated with Pharmafrica (Pty) Ltd
("Pharmafrica").This will improve business development and regulatory
management and augment the benefits of shared services such as IT and HR.
During the year, Litha Pharma purchased a range of complementary products to
add further scale to its business. The recently announced sourcing and
distribution agreement with Canadian based CPOINT Capital and its business
development team will assist the group in signing up licensing deals from
India and Europe.
Litha Medical Division
This division`s main activities relate to the distribution, assembly and
importing of local and international medical devices and consumables. Despite
difficult market conditions the Litha Medical business units continued to
perform well with strong sales growth and careful management of operational
costs. Two of the business units, Earth Medical and Manta Forensic,
demonstrated exceptional growth, with the development of new product agencies
and the securing of national formularies respectively.
3. RESULTS
Financial overview
As stated above, the period under review saw the acquisition of 51% of LHH
and the remaining 74% of shares in Pharmafrica not already owned by the
group. To fund the cash portion of the acquisition of LHH, the group
conducted a rights offer of 125 million shares, which raised a net amount of
R95,8 million. The effective date for the acquisitions was 1 May 2010. Their
results are therefore only included for eight months to 31 December 2010.
Due to a previous change in year end, the prior period to December 2009 was
only for seven months. To ensure a like-for-like comparison, the group has
annualised the prior year`s earnings per share ("EPS") and headline earnings
per share (`HEPS"). On this basis, HEPS increased by 45% to 18,1c per share
(annualised 2009: 12,5c). EPS increased by 33% to 16,6c per share (annualised
2009: 12,5c). These increases were achieved despite significant non-operating
adjustments totalling R7,2 million, which consists of:
- R4,8 million - Non-recurring transaction costs relating to acquisitions of
LHH and Pharmafrica
- R4,3 million - The impairment of the remainder of the goodwill pertaining
to the Litha Critical Care business unit due to the lack of visibility in
terms of its future earnings
- R1,9 million - Revaluation to other comprehensive income of one of the
group`s minor investments. The investment was classified as a non-current
asset held for sale after a decision was taken to sell it.
Proforma Core Earnings
For information purposes, the table below indicates comparative financial
information for the group had the LHH and Pharmafrica results been included
for the full 12 months. The earnings have been adjusted for the non-operating
adjustments described above. This table has not been reviewed by the group`s
auditors.
Without the above non-operating adjustments, core EPS and HEPS increased by
65% to 20,6c (2009 annualised pro forma earnings: 12,5c).
As 90% of the group`s products are imported, the strength of the Rand
contributed positively to gross profit margin growth within each of the
group`s divisions. The group`s policy is to take out forward cover for
approximately 70% of its estimated foreign purchases for a year in advance.
The Biotechnology division is largely hedged against currency fluctuations
due to exchange rate mechanisms in place with the National Department of
Health.
(R`000) Reviewed Pro forma Percentage Annualised
year core increase in pro forma
ended earnings pro forma core
31 Dec year core earnings
2010 ended amounts for period
31 Dec ending
2010 31 Dec
2009
Turnover 1 254 873 1 626 848 436% 303 216
Net profit attributable to 46 360 66 846 167% 25 011
holders of the parent
Earnings per share (cents) 16,6 20,6 65% 12,5
Headline earnings per share 18,1 20,6 65% 12,5
(cents)
The group`s net operating margin was 9,7% (2009: 12,1%) during the period
under review. The decline in operating margin was due to a change in product
mix from the original medical devices products to a broader product basket
consisting of both higher and lower margin products. The Biotech division,
which contributed 35% to net operating profit, has a low margin as it is
purely an importer and distributor, however, as manufacturing commences in
2013, its margin is expected to gradually increase.
Financial Position
The vast majority of the group`s property, plant and equipment relates to
assets situated in TBI. This Institute is a Public Private Partnership
between LHH and the South African Government, which owns 35% through the
Department of Health and 12.5% through the Technology Innovation Agency
("TIA"), which forms part of the Department of Science and Technology.
Funding arrangements for a R75 million loan with the Industrial Development
Corporation ("IDC"), and a grant from the Italian government to the value of
Euro 2,4 million will provide the bulk of the funding needed to complete the
initial phase of manufacturing. This will enable TBI to manufacture part of
its vaccine product offering by 2013. The budget for the full four years of
the initial phase of the project is estimated at Euro 12 million. The balance
of the funding requirements will be used from cash generated by the TBI
business. TBI operates as a stand-alone company raising its own financing
when required.
The increase in goodwill and intangible assets relates to the acquisitions
concluded during the period, as well as payments made to the vendors of the
Filterworks and Earth Medical business units within the Litha Medical
division for their achievement of warranted profit targets. The payments to
the vendors of Filterworks and Earth Medical amounted to R5,5 million and
R9,3 million respectively. Part of the payment to the vendor of Earth Medical
was settled through the issue of 3,1 million shares valued at 98 cents in
terms of the acquisition agreement. See note 3 to the condensed financial
statements for further detail regarding the goodwill allocation for Litha and
Pharmafrica. As outlined above, an amount of R4,3 million was impaired in the
group`s Critical Care business unit, after which the full purchase price of
R8,5 million has been fully written off. Restructuring efforts initiated in
early 2010 are starting to improve the business unit`s performance.
The group maintained a healthy financial position with an interest bearing
debt:equity ratio of 20% (2009: 25%). The group continued to effectively
manage its working capital.
Cash Flow
Cash generated from operating activities amounted to R119,1 million (2009:
R13,3 million) which indicates good working capital management. Cash outflow
from investing activities R151,7 million (2009: R1,3 million), the vast
majority of which relates to cash payments made to the vendors of LHH and
Pharmafrica, as well as warranted profit payments made to the vendors of
Earth Medical and Filterworks. The group purchased property plant and
equipment to the value of R22,9 million during the year. The majority of cash
inflows from financing activities relates to cash raised in terms of the
rights issue during the period to finance the LHH and Pharmafrica
acquisitions. Net interest bearing loans repaid amounted to R7,5 million.
Cash and cash equivalents increased by R56,5 million for the period under
review to R231,5 million (2009: R8,3 million) after including cash and cash
equivalents acquired as a result of the LHH and Pharmafrica acquisitions of
R166,6 million.
4. PROSPECTS
With the acquisition of the balance of the shares in LHH, the group expects
to start extracting cost benefits from the integration and rationalisation of
logistics and shared services. The new, enlarged and diversified group gives
it the scale to compete more effectively.
In the Biotech Division, the focus for the next year will be on equipping the
manufacturing facility, whilst attracting the appropriate additional skills
to effectively operate the facility in 2013 and beyond.
In terms of Litha Pharma, the group continues to look for transactions that
will give the division more scale to effectively compete with other listed
pharmaceutical companies, as well as develop a balanced product pipeline of
its own.
The focus for Litha Medical will be on creating a new Cardiac business unit
to further grow the division`s presence in this fast-growing and innovative
therapeutic area. Management will focus on export sales and business within
the public sector to further diversify the customer base and to ensure a
healthy mix of public and private customers. The business units will also
continue to focus on streamlining operational efficiencies and synergies, as
well as adding more quality medical agencies to their portfolio.
In the coming year, the group will focus on continuing to bed down the
acquisitions that took place in 2010 and on completing divisional integration
with shared services and logistics. All divisions are profitable and well
placed for continued growth.
Notes To The Financial Statements
1. ACCOUNTING POLICIES
The reviewed condensed consolidated results have been prepared in accordance
with the Framework concepts and the measurement and recognition requirements
of the International Financial Reporting Standards and containing information
required by the IAS 34 Interim Financial Reporting and in the manner required
by the Companies Act.
This report has also been prepared in accordance with and containing the
information required by AC 500 series as issued by the Accounting Practices
Board. The reviewed condensed consolidated financial statements are prepared
on the historical cost basis, with the exception of certain financial
instruments which are measured at fair value. These financial statements
should be read in conjunction with the audited financial statements for the
seven months ended 31 December 2009. The condensed consolidated financial
statements for the year ending 31 December 2010 have been reviewed, but not
audited, by Mazars, the group`s auditors. Their unqualified review report is
available for inspection at Litha`s registered office during normal business
hours.
The condensed consolidated financial statements are prepared using the same
policies and method of computation as the audited financial statements for
the seven months ended 31 December 2009, except for the application of IFRS
3, Business Combinations and IAS 27, Group and Separate Financial Statements.
The application of IFRS 3, Business Combinations resulted in the business
combination being accounted for using the acquisition method. The revised IAS
27, Group and Separate Financial Statements resulted in the acquisition of a
non-controlling shareholding post year end being accounted for as an equity
transaction. The preparation of condensed consolidated financial statements
requires the use of estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at year end and the reported amounts of revenue and expenses
during the reporting periods. Although these estimates are based on
management`s best knowledge of current events and actions that the group may
undertake in the future, actual results may differ from those estimates.
2. RELATED PARTY TRANSACTIONS
The group paid R4.7 million to Blackstar Group (Pty) Ltd for underwriting and
transaction arranging fees relating to the LHH and Pharmafrica acquisitions,
as well as non-executive director fees.
3. ACQUISITION OF LITHA HEALTHCARE HOLDINGS (PTY) LTD AND PHARMAFRICA (PTY)
LTD
Effective 1 May 2010, the group acquired 51% of the issued share capital of
LHH and the remaining 74% of shares in Pharmafrica not already owned by the
group. The Pharmafrica shares were acquired for a total purchase
consideration of R58,9 million payable as follows: R37,5 million on 1 May
2010; R8,7 million to be paid on 4 June 2011; R8,7 million on 4 June 2012 and
R4,0 million on 30 September 2012. R2,0 million of the final payment is
contingent upon Pharmafrica signing an extension to a contract with one of
its suppliers. (All amounts are to be paid together with interest thereon at
the prime rate calculated from the effective date)
Qualitative factors that make up goodwill of LHH include: experience and
regard for their executive management team, the high barriers to entry in
their vaccine and pharmaceutical businesses, the strong relationships that
they have within the public and private healthcare sectors, the scale that
LHH brought to the group and the potential to unlock savings by
centralising/streamlining certain shared functions where operationally and
commercially justifiable. Qualitative factors that make up goodwill in
Pharmafrica include: the high barriers to entry in their pharmaceutical
business, the market regard for and brand strength of Pharmafrica`s products.
LHH Pharmafrica
Effective date of acquisition for accounting 1 May 2010 1 May 2010
purposes
Voting equity percentage 51% 100%*
Number of shares issued (Issued at 80c per share) 42 800 000 -
At acquisition values (At 1 May 2010)
(R`000)
Non-current assets acquired
Property, plant and equipment 64 707 1 443
Intangible assets 79 511 22 651
Deferred taxation assets 2 551 -
Current assets acquired
Inventory 275 298 10 606
Trade receivables 111 800 14 041
Cash and cash equivalents 166 617 7 033
Non-current liabilities assumed
Other non-current financial liabilities (46 087) (307)
Deferred taxation liability (15 242) (6 312)
Current liabilities assumed
Accounts payable and provisions (429 276) (7 171)
Other current liabilities (5 945) (10 811)
Bank overdraft (10) -
Net asset value 203 924 31 173
Non-controlling interest at acquisition date (145 523) (10 049)
Total Cost of acquisition 114 240 58 926
Fair value of shares issued 34 240 -
Fair value of cash paid 80 000 37 526
Fair value of liability assumed - 21 400
Goodwill 55 839 58 506
Revenue for the period 1 May 2010 to 31 December 919 248 59 745
2010
Profit for the period 1 May 2010 to 31 December 41 418 18 865
2010
Revenue for the period 1 January to 31 December 1 223 117 72 486
2010
Profit for the period 1 January to 31 December 53 744 21 854
2010
* (30% owned by LHG and 70% owned by LHH).
The outside non-controlling interest was measured by multiplying the outside
shareholders percentage ownership by the fair value of assets and liabilities
at acquisition date.
Average debtors days outstanding in LHH were 78 days and 75 days in
Pharmafrica. LHH and Pharmafrica assess impairment on individual receivables
and there are currently no material receivables considered irrecoverable. The
debtors in LHH have been ceded to Nedbank Limited for an overdraft facility
granted. The net asset value of receivables acquired equals their fair value.
The amounts disclosed above are considered to be fair value. The fair value
of shares issued on acquisition date was determined by reference to the
closing price on the JSE Limited stock exchange.
As announced on SENS on 6 December 2010, the group purchased the remaining
49% of the issued share capital of LHH with effect from 1 January 2011. The
purchase price will be settled through the issue of 48.2 million shares at
R2.20 per share, the balance being settled with cash. This ensures that
senior management`s goals are aligned with shareholders.
4. ACQUISITIONS AND DISPOSALS OF ASSETS
During the period under review, the group purchased property, plant and
equipment as follows:
Medical device division: R4,6 million
Pharmaceutical division: R1,1 million
Biotechnology division: R17,0 million
There were no material disposals of equipment or other assets.
Provision for stock obsolescence
The group increased its provision for stock obsolescence as follows during
the period under review:
Medical device division: R1,3 million
Biotechnology division: R1,4 million
Capital commitments
TBI has entered into agreements to purchase Euro 9.6 million of equipment
relating to the manufacturing facility, which is expected to be incurred by
December 2011.
5. SEGMENT INFORMATION
Segment Medical Pharma- Bio- Group
device ceutical technology
division division division
(R`000) (8 months) (8 months)
Year ended 332 922 79 200 842 751 1 254 873
31 December 2010
Turnover (External)
Reportable segment profit 77 135 16 567 50 446 144 148
Head Office costs (17 073)
Once off head office (4 800)
costs
Operating profit 122 275
Total assets 387 486 54 119 776 899 1 216 629
7 months ended 31
December 2009
Turnover (External) 176 876 - - 176 876
Reportable segment profit 36 914 - - 36 914
Inter-group services (15 462)
Operating profit 21 452
Total assets - - - 215 355
Previously, segments were classified into medical consumables, medical
capital equipment and medical services. However, with the acquisitions that
took place during the reporting period, segments are now classified into
medical devices, pharmaceuticals and biotechnology which is consistent with
the way in which the group reports internally.
6. Board changes
Ian Jacobson was appointed as a non-executive member of the board on 16
February 2011. He has over 30 years of pharmaceutical industry experience. He
has been involved with various global pharmaceutical companies in the USA,
Canada, Europe and South Africa.
Fadl Hendricks was appointed as a non-executive member of the board on 22
March 2011. He has a B.Sc. in Chemical Engineering and has specialised in
innovative chemical engineering technologies. He has worked on several high
level projects including one for the CSIR where the preferred methodology for
development and commercialisation of novel technologies was adopted.
7. Dividend
No dividend has been recommended or declared for the period. It is
anticipated that while the group continues with its acquisition strategy,
specifically in the pharmaceutical division, the group will continue to
reinvest any profit generated back into the business. The group will review
its dividend declaration policy in the medium term.
For and on behalf of the board
AD Bonamour S Kahanovitz
Chairman Chief Executive Officer
Johannesburg
Directors
A Bonamour*, S Kahanovitz, M Makhoana, M Kahanovitz, N Sowazi*,
W Marshall-Smith*, M Mzimba*, I Jacobson*, F Hendricks*
(*non-executive)
Sponsor
Java Capital
Registered auditors
Mazars
Transfer Secretaries
Computershare Investor Services
Registered Office
Manta Place
Turnberry Office Park
48 Grosvenor Road
Bryanston
2191
www.lithahealthcare.co.za
24 March 2011
Date: 24/03/2011 08:00:07 Produced by the JSE SENS Department.
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