| Thu 20 Oct 2011, 10:35 | | IQG - IQuad Group Limited - Preliminary condensed unaudited financial statements |
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IQG
IQG
IQG - IQuad Group Limited - Preliminary condensed unaudited financial statements
for the six months ended 31 August 2011
IQuad Group Limited
(Incorporated in the Republic of South Africa)
Registration number 2004/025177/06
Share code: IQG
ISIN: ZAE000101622
("IQuad", the "Company" or "the Group")
Preliminary condensed unaudited financial statements
for the six months ended 31 August 2011
Commentary on interim results for the period ended 31 August 2011
General comments and prospects
Overall headline earnings for the six months ended 31 August 2011 declined by
11% from R3.93m to R3.49m. Whilst these results were below expectation,
significant progress has been made in cementing our business strategy over the
last six months and the Group is well positioned to focus on growth in the core
revenue producing areas of the business.
Strategic update
We have maintained our mission to "be the preferred supplier of high impact
strategic outsource and compliance services to business".
Whilst our broad strategy remained unaltered, we identified five medium term
strategic priorities to position the business for improved performance. These
initiatives have been the key focus over the last six months:
1. Ensure the right team is in place to achieve the growth plan
The management structure of the Group has been simplified, with a
streamlined management team who meet regularly to review the performance of
the Group. The six member management committee (MANCO) is made of a
dedicated and committed group of senior management representing all of the
business activities of the Group.
2. Win in the Gauteng market
Strengthening our presence in the Gauteng market continues to be our
primary organic growth focus area and is yielding positive results across
all business units. MANCO members have been assigned targets specifically
aligned to our Gauteng growth plan and we have also made good headway in
expanding our strategic alliance network in the Gauteng area. We have taken
the decision to delay the appointment of a strategic sales resource in the
Gauteng market and believe that recent developments in our business
outlined further below, may result in this position not being required.
3. Fix or exit underperforming businesses
This area has received the most attention over the last six months, with
the decision taken to disinvest from non-core areas in order to focus on
growing the traditionally strong business units. It was felt that the
profit contribution, risk and future prospects in these business units did
not correlate with the amount of management time that was being given to
certain of these smaller investments. The following table summarises the
restructuring activities taken by the Group:
Business unit Rationale
IQuad Verification Services Disposed of our 90% share in Iquad Verification
(Pty) Ltd ("IQuad due to non-core fit and historical poor
Verification") financial performance.
IQuad Finance Solutions Disposed of our 35% shareholding and loan
(Pty) Ltd ("IQuad Finance") accounts in IQuad Finance due to non-core fit
and lack of future profit prospects.
IQuad Technologies(Pty) Ltd Post the interim period, effective 1 September
("IQuad Technologies") 2011, we disposed of our 37.5% share in IQuad
Technologies. Negotiations are also underway to
dispose of our remaining 37.5% share in National
Money Transfer (Pty) Ltd.
Both of these businesses are involved in
specialised IT development and services, an area
where the broader group has limited
competencies.
4. Grow inorganically through significant acquisitions or new business
opportunities
We merged our KwaZulu-Natal BEE operation with that of Integra Scores (Pty)
Ltd ("Integra") effective 1 March 2011 and acquired further shares, with
the result that our overall investment in the merged entity totalled 51%.
The rationale behind this transaction was to extract value from the
outstanding loan stemming from our disinvestment from Entrepreneurial
Survival Solutions ("ESS") in 2010, with Integra being a wholly owned
subsidiary of ESS. We were further attracted by the variable cost BEE
verification model employed by Integra and encouraging historical profit
margins achieved by this business. As a result, IQuad has retained an
interest in the BEE verification and consulting industry with a KZN-based
focus.
We entered into negotiations with Sasfin Holdings Ltd ("Sasfin") during
July 2011 regarding the acquisition of a possible stake in IQuad. The
transaction was successfully concluded, with the announcement in mid-
September that Paladin Capital Ltd has sold its 42.9% stake in IQuad to
Sasfin with an option to also purchase the Thembeka Capital Ltd stake of
8%, at the same time triggering a mandatory offer to all minority
shareholders.
Sasfin is focused on providing banking and related services to the SME
market and there is a strong synergistic fit between the services offered
by IQuad and Sasfin. This will enable both parties to offer a broader range
of services to our respective clients and in so doing enhance value to
clients and grow revenues.
There are also prospects within the current Sasfin business, specifically
in the healthcare, short-term insurance and freight businesses to house
these investments within IQuad to further entrench a commercial service
offering to both IQuad and Sasfin clients.
5. Identify cost savings
Our final strategic priority relates to the streamlining of operations in
order to generate targeted cost savings of 5% in the current financial year
as measured against budgeted expenditure. We have implemented a number of
significant cost reduction measures which will benefit the second half of
the year.
Segment report
Investment incentives
The transition to the Enterprise Investment Programme ("EIP") has had an impact
on the performance of our Incentives business caused by delays on the part of
the Department of Trade and Industry ("dti") in getting their online claims
processing module up and running. Capacity within the dti has been further
hampered by the fact that system testing and training has taken the focus off
claims processing.
We do expect to see an improvement in processing turnaround time and payments
over the second six months of this financial year once the dti`s online claims
system has been implemented. Historically, the performance by the dti has always
been better in the second half of the year.
As at 31 August 2011, work in progress being the IQuad fee income on claims
submitted to the dti, amounted to R7.7 million. The total value of claims
submitted is expected to increase significantly during September/October as a
result of the deadline for the submission of claims being extended by two
months.
The number of new incentive applications submitted has exceeded our six month
target and has increased overall by close on 15% compared to the previous year
to date. It is gratifying to see that our focus on growing the Gauteng market is
paying off with a 30% increase in the incentives applications submitted by our
Gauteng region.
Global trade
Our global trade business activities incorporating specialised support for
importers and exporters, together with our foreign exchange risk management and
treasury execution activities, have performed well.
From a trade support perspective, our marketing efforts are well co-ordinated
and in the six months under review, we have signed up ten new clients, with a
large pipeline which we are working through.
Within our treasury operation, the current economic downturn has had a direct
impact on sectors of our client base, specifically those clients who are in the
motor industry. Rand strength over the preceding six months has meant that our
commission income stream has been under pressure. Fortunately around 40% of
income consists of fixed fees which have cushioned the blow. The recent global
uncertainty and resultant rand weakness have, however, been positive for the
performance income stream of our business.
Since its acquisition late last year, Kagiso Treasury Solutions has been
successfully integrated into the IQuad treasury operation. We anticipate that
other players in the treasury outsourcing sphere of business are likely to go
through a consolidation phase in the short to medium term, and we will be
actively pursuing opportunities in this market to acquire competitors.
Our main objective for the year ahead is to continue to grow our client base
within our existing infrastructure in order to maximise returns. We will also be
focusing on increasing and improving our conversion rate in respect of our
marketing efforts while being mindful that our existing clients continue to
receive excellent service.
Business development
This segment remains a relatively small contributor to our overall business,
especially following our exit from IQuad Technologies and IQuad Finance. Our
remaining activities are centred on the provision of ISO management systems
implementation and consulting, which has experienced increased activity and
profitability over the last six months.
Audit and verification
Our exit from IQuad Verification and investment in Integra has seen this segment
return to profitability. We are pleased with the profitability and progress
achieved by Integra over the last six months, and believe that there is scope
for further improvement by leveraging off the IQuad client network.
Cash flow
The Group generated R5.53m cash from its operating activities during the period
under review, including a R302k increase in working capital. Despite the
positive cash flow and improvement in the Group`s gearing levels, the board has
taken the prudent decision not to pay an interim dividend.
Statements of financial position
as at 31 August 2011
Unaudited Unaudited Audited
31-Aug-11 31-Aug-10 28-Feb-11
R`000 R`000 R`000
Assets
Non-current assets 108 264 98 930 111 428
Investment property 14 434 14 255 14 434
Property, plant and equipment 14 121 12 843 14 163
Goodwill 66 327 62 058 65 524
Intangible assets 4 959 3 238 4 430
Investment in associate 1 541 - -
Loan receivable 2 373 - 3 278
Deferred tax assets 4 509 6 536 9 599
Current assets 38 055 36 058 33 660
Work in progress 1 830 2 002 1 927
Current tax assets 1 770 1 448 676
Trade and other receivables 27 159 28 657 26 408
Amounts owing by associates and joint 1 516 317 787
venture
Cash and cash equivalents 5 780 3 634 3 862
Non-current asset held for sale - 14 268 -
Total assets 146 319 149 256 145 088
Equity and liabilities
Equity and reserves 110 907 104 423 108 792
Share capital 101 200 101 200 101 200
Other reserves - (369) (369)
Accumulated profits 8 899 2 942 9 776
Non-controlling interest 808 650 (1 815)
Non-current liabilities 14 805 22 000 15 279
Deferred tax liabilities 870 684 560
Operating lease liabilities 356 577 421
Borrowings 13 579 20 739 14 298
Current liabilities 20 607 22 833 21 017
Current tax liabilities 1 195 517 304
Trade and other payables 11 570 18 417 12 064
Provisions - - 25
Dividend payable 135 - 750
Current portion of borrowings 7 707 3 899 7 874
Total liabilities 35 412 44 833 36 296
Total equity and liabilities 146 319 149 256 145 088
Statements of comprehensive income
for the period ended 31 August 2011
Unaudited Unaudited Audited
31-Aug 11 31-Aug-10 28-Feb-11
R`000 R`000 R`000
Revenue 40 833 38 692 85 628
Cost of services rendered 18 375 (19 899) (38 625)
Gross profit 40 833 18 793 47 003
Other operating income 121 622 601
Operating expenses (21 432) (41 911) (62 365)
Operating profit / (loss) 1 147 (22 496) (14 761)
Investment income 2 223 1 590 3 553
Share of profits/(losses) of 70 (32) -
associate companies
Finance costs (1 744) (1 107) (2 099)
Profit/(loss) before taxation 1 696 (22 045) (13 307)
Taxation (2 454) (2 558) (4 062)
Loss and total comprehensive
loss for the period (758) (24 603) (17 369)
Loss and total comprehensive
loss for the period
attributable to: (758) (24 603) (17 369)
Non-controlling interest 119 156 (1 800)
Owners of the parent (877) (24 759) (15 569)
Basic and diluted loss per (3.2) (90.1) (56.9)
share (cents)
Condensed statements of changes in equity
for the period ended 31 August 2011
Attributable Non- Total
to equity controlling equity
holders of interest
Company
R`000 R`000 R`000
Balance at 1 March 2010 - audited 135 954 2 013 137 967
Total comprehensive (loss) / (24 759) 156 (24 603)
income for the period
Acquisition of non-controlling (1 993) (331) (2 324)
interest in existing subsidiary
Dividends (5 429) (706) (6 135)
Other movements in non-controlling - (482) (482)
interests
Balance at 31 August 2010 - 103 773 650 104 423
unaudited
Total comprehensive income/(loss) 9 190 (1 956) 7 234
for the period
Dividends (2 356) (750) (3 106)
Other movements in non-controlling - 241 241
interests
Balance at 28 February 2011 - 110 607 (1 815) 108 792
audited
Total comprehensive (loss) /income (877) 119 (758)
for the period
Business combinations - 1 244 1 244
Share reserve converted to loan 369 - 369
receivable
Disposals of shares in - 1 438 1 438
subsidiaries
Dividends - (178) (178)
Balance at 31 August 2011 - 110 099 808 110 907
unaudited
Condensed statements of cash flows
for the period ended 31 August 2011
31-Aug-11 31-Aug-10 28-Feb-11
R`000 R`000 R`000
Cash generated from operations 7 122 6 659 12 525
Investment income 2 207 1 590 3 303
Finance costs (1 744) (1 107) (2 066)
Tax paid (2 053) (4 511) (8 144)
Cash flows from operating 5 532 2 631 5 618
activities
Additions to investment property - - (1 343)
Acquisition of property, plant and (738) (1 575) (1 987)
equipment
Proceeds on disposal of property, - - 51
plant and equipment
Investment in subsidiaries (562) - (3 583)
Deconsolidation of subsidiary (63) -
Disposals of investments in (699) - (194)
subsidiaries
Acquisition of intangible assets (557) (1 200) (1 334)
Additions to non-current asset - - (1 100)
held for sale
Proceeds on disposal of non- - - 11 800
current asset held for sale
Cash flow on consolidation of non- - - 98
current asset held for sale
Contingent consideration paid - - (265)
Cash flows from investing (2 619) (2 775) 2 143
activities
Amounts advanced to associates and (729) (200) (265)
joint venture
Non-controlling interests` loans - (103) (238)
repaid
Loans receivable advanced 921 -
Borrowings (repaid)/advanced (394) (862) 241
Acquisition of additional shares - - (2 324)
in subsidiary from non-controlling
interest
Dividends paid (793) (6 135) (8 492)
Cash flows from financing (995) (7 300) (11 078)
activities
Net increase/(decrease) in cash 1 918 (7 444) (3 317)
and cash equivalents
Cash and cash equivalents at 3 862 7 179 7 179
beginning of period
Cash and cash equivalents at end 5 780 (265) 3 862
of period
Selected explanatory notes
Basis of preparation and accounting policies
This condensed interim financial report has been compiled in accordance with IAS
34: Interim Financial Reporting, as well as AC 500 standards and the JSE Limited
Listings Requirements. The accounting policies and critical accounting estimates
and judgements applied to this financial report are consistent with those
applied for the year ended 28 February 2011. This report was prepared under the
supervision of the financial director, Frans Botha.
Financial results
This condensed interim report has not been reviewed or audited by the Group`s
auditors.
Business combinations
51% of Integra was acquired on 1 March 2011 for a total consideration of R3 104
828. The purchase consideration was partially settled by converting an existing
loan of R1 095 000 to shares and Integra issued ordinary shares to the value of
R1 291 444 to the Company, which were paid for by transferring intangible assets
to the same value to Integra. The balance of the purchase consideration of 718
384 was settled in cash.
Goodwill of R1 809 593 arose on the transaction and is attributable to the
company`s business methodology and operating model.
The respective book and fair values acquired in the business combinations are as
follows:
Book values Fair Values
R`000 R`000
Property, plant and equipment 24 24
Deferred tax asset 465 465
Trade and other receivables net of impairment (331) (331)
Cash and cash equivalents 159 159
Trade and other payables (727) (727)
Intangible assets 1 308 2 616
Net assets acquired 898 2 206
Non-controlling interest (1 244)
Goodwill 2 143
Purchase price 3 105
Cash and cash equivalents (159)
Part-payment in shares (1 291)
Loan converted to equity in transaction (1 095)
Cash outflow on business combination 560
A reconciliation of the Group`s 31-Aug-11 31-Aug-10 28-Feb-11
goodwill is as follows:
R`000 R`000 R`000
Opening balance 65 524 87 006 87 006
Additions through business combinations 2 143 - 3 472
Addition through consolidation of - 1 848 -
subsidiary previously held for sale
Adjustments to purchase price - 265 259
considerations
Impairment losses (333) (27 061) (25 213)
Deconsolidation of subsidiaries (1 003) - -
Disposal of shares in subsidiaries (4) - -
Closing balance 66 327 62 058 65 524
Changes in investments
On 1 March the Group disposed of 12.6% of the interest in IQuad Technologies for
a consideration of R1 cash. Consequently the Group lost control and the
investment has been equity-accounted for since disposal date. The investment and
related loans were measured at fair value and a Group loss of R3 067 288 arose
on the transaction.
On 1 August the Group disposed of its entire interest in IQuad Verification for
a consideration of R1 500 000 and at a Group loss of R778 942. The proceeds are
still outstanding and are included in current assets in the statement of
financial position.
On 1 March the Group ceased accounting for IDEC Consulting Service (Pty) Ltd
"IDEC" as a subsidiary and has equity accounted the investment from that date.
No profit or loss arose as a result of the deconsolidation.
The book values of the entities disposed of during the year are as follows:
R`000
Non-current loans payable (492)
Goodwill 5
Property, plant and equipment 280
Intangible assets 497
Trade and other receivables 2 380
Cash and cash equivalents 699
Trade and other payables (1 747)
Deferred tax 5 613
Net assets disposed of 6 895
Non-controlling interests 1 912
Investment in associate retained (6)
Profit/loss on disposal (3 846)
Proceeds on disposal 5 045
Amount included trade and other receivables (5 045)
Cash and cash equivalents (699)
Net cash outflow on disposals of subsidiaries (699)
Earnings, dividend and net asset value per share
Unaudited Unaudited Audited
31-Aug-11 31-Aug-10 28-Feb-11
R`000 R`000 R`000
Headline earnings per share 12.7 14.3 37.3
Proposed dividend per share
- Interim - 8.0 8.0
- Final - - -
Weighted average number of ordinary 27 382 27 467
shares in issue (`000s)
Headline earnings are reconciled to earnings per the statement of
comprehensive income as follows:
R`000 R`000 R`000
Earnings attributable to equity (877) (24 759) (15 569)
shareholders of the Company
Impairment of goodwill 333 27 061 25 213
Impairment of intangible assets - - 977
Other impairments - 1 584 -
Loss/(profit) on disposal of property, 30 (1) (1)
plant and equipment
Fair value adjustment on re- - 48 -
measurement of disposal group held for
sale
Fair value adjustment on loss of 3 135 - -
controlling interest in subsidiary
Loss/(profits) on disposal of 857 - (232)
investments
Profit on disposal of non-current - - (164)
asset held for sale
Headline earnings for the period 3 478 3 933 10 224
Unaudited Unaudited Unaudited
31-Aug-11 31-Aug-10 28-Feb-11
Net asset value per ordinary share Cents Cents Cents
Net assets 402.1 377.8 403.9
Net tangible assets 141.8 140.1 148.5
Other significant matters
An amount of R369 231 previously included in other reserves has been converted
to a loan and the outstanding amount is included in trade and other receivables.
The loan bears interest at a market-related rate. The loan is carried at its
fair value and is considered recoverable. The amount arose in 2011 as a result
of a probable buyback of treasury shares utilised in a business combination in
2009.
Contingent asset
Future revenue approximating R9.8 million, to be earned from incentive
applications submitted to regulatory authorities but still waiting approval for
payment as at the statement of financial position date, has not been recognised
as income in these financial statements in accordance with the Group`s
accounting policy on revenue recognition (31 August 2010: R13 million; 28
February 2011: R10 million).
Subsequent events
No material events have been identified subsequent to the statement of financial
position date of the Group up to the date of this report, other than those
disclosed in these condensed financial statements and the commentary thereon.
Segment report
The Group has four reportable segments within which the Group`s operating units
("SBUs")are categorised.
The SBUs offer different services and are managed separately as they require
different technology and marketing strategies, and are reported separately to
the board of directors.
Certain information within the Global trade services and Investment incentives
segments has been restated in order to conform with the structure reported to
the board of directors. All comparatives presented have been restated to
incorporate these changes.
Investment incentives
Render consulting services aimed at enabling clients to obtain the maximum
benefits and refunds from Government and the dti incentive programmes.
Global trade services
Offer import and export business solutions, including customs consulting, rebate
administration and interest rate and forex risk management.
Business development
Provide consulting services and management tools to optimise business systems
and processes and technological solutions for third-party payment transactions.
Verification services
Conduct quality assurance, VAT and customs audits and verify BEE compliance.
Operating Investment Global Business Verification Total
segments incentives trade development services
services
R`000 R`000 R`000 R`000 R`000
31 August 2011
- unaudited
Revenue - 172 - 86 - 258
internal
Revenue - 8 937 23 365 1 603 6 206 40 111
external
Profit before 1 216 6 638 491 899 9 244
tax
31 August 2010
- unaudited
Revenue - - - 771 - 771
internal
Revenue - 14 032 15 471 3 504 4 683 37 690
external
Profit/(loss) 4 151 6 447 696 (841) 10 453
before tax
28 February
2011 - audited
Revenue - 192 - 1 113 - 1 305
internal
Revenue - 28 357 41 270 5 320 8 926 83 873
external
Profit/(loss) 8 851 14 569 (3 620) (2 604) 17 196
before tax
Unaudited Unaudited Audited
31-Aug-11 31-Aug-10 28-Feb-11
Segmental profit reconciliation R`000 R`000 R`000
Profit before tax for reportable 9 244 10 453 17 196
segments
Impairment losses (333) (28 645) (28 030)
Profits from unallocated segments 1 780 2 865 5 574
Elimination of intersegment and (8 995) (6 718) (8 047)
corporate profits
Group profit/(loss) before tax as per 1 696 (22 045) (13 307)
statement of comprehensive income
Transactions with individual clients did not amount to 10% or more of
the Group`s total revenue.
20 October 2011
Port Elizabeth
Corporate Adviser
PSG Capital (Pty) Limited
Designated Adviser
Questco Sponsors (Pty) Limited
Date: 20/10/2011 10:35:01 Produced by the JSE SENS Department.
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