| Wed 1 Aug 2001, 0:00 | | Decillion - Interim Results |
|
DECILLION LIMITED
SUPERB RETURN ON CAPITAL SUPPORTS GROWTH PLAN
Thursday 2 August 2001 - The interim results of Decillion Limited
("Decillion") for the six months ended 30 June 2001, announced today,
confirm the success of the financial services group's strategy to diversify
both geographically and in terms of its product offering. Decillion's
earnings for the period reflect a solid 21.1% return on capital. Headline
earnings increased by 15.8% to R37.5 million (2000: R32.4 million). A
turnaround in the group's offshore broking business, Cedef, ensured a
healthy contribution to a consolidated result.
Commenting on the results, Managing Director Alwyn Smit attributes the
group's success to the implementation of a winning strategy over the past
three years. "Our approach has been to use the revenue generated by our core
Treasury Services business and re-invest it in other types of business in
order to diversify our revenue base. This was the strategy that underpinned
our acquisition of Cedef and the establishment of our Alternative Investment
products business. Cedef has undergone a complete turnaround, and is now
also a strong producer of revenue alongside Treasury Services. In terms of
our growth and diversification strategy, we will invest these combined
revenues in Alternative Investment products, which represent a promising
growth area," says Smit.
For example, Decillion seeded The Decillion Convertible Arbitrage FundTM,
which was launched on the Irish Stock Exchange on 1 May 2001, with USD 5
million. The fund has consistently outperformed the reference index since
its inception. Decillion's primary investment vehicle, The Big Rock Fund,
also performed strongly. Excellent returns were delivered for the review
period, driven by growth in third party assets from R100.0 million to R190.0
million. A further two funds are planned for the latter half of 2001 - one
local fund and one global fund managed by existing managers in London.
"The hedge fund seeding model compliments the three pillars of Decillion's
business, namely treasury, funds management and broking," continues Smit.
"It also enhances business growth as it provides returns on Decillion's
proprietary investments; an in-flow of transactions to the broking business;
and generates management fees from third-party investment capital that is
attracted to the fund on the strength of Decillion's established risk
management reputation."
Going forward, Smit is confident that Decillion's strategic diversification
at both product and geographic level is key to strengthening the group's
position on both the local and international markets. "Our earnings are not
reliant on single market forces, such that Decillion has an inherent
resilience and stability," concludes Smit. "This means that the group is
well-placed to capitalise on attractive opportunities in the marketplace,
and that an equally strong performance can be anticipated in the latter half
of this year."
ANNOUNCEMENT OF INTERIM RESULTS
For the 6 months ended 30 June 2001
HIGHLIGHTS
21.1% return on shareholders' equity.
NAV per share up to 170.9 cents (2000:157.5 cents).
Headline earnings increased by 15.8% to R37.5 million (2000: R32.4 million).
Headline EPS of 19.6 cents (2000:18.5 cents).
Substantially improved contribution from offshore operations.
DIVISIONAL
ANALYSIS
Capital Revenues Net income Operating ROC
Allocation before tax margin
Treasury
Services 64,756 54,177 13,200 24.4% 33.7%
Funds
Management 155,966 32,919 15,160 46.1% 15.6%
Broking
Services 69,665 140,565 16,828 12.0% 39.5%
Interest 36,696 2,802 12.3%
327,083 227,661 47,990 21.1% 21.1%
FINANCIAL REVIEW
Decillion is a diversified financial services group focused on three pillars
of activity: treasury services, funds management and broking. Headline
earnings increased by 15.8%. This represented a 21.1% return on
shareholders' funds, of which R145.7 million (44.5%) are held offshore.
These results are very pleasing in that they demonstrate the group's
strategy of building a business with a high return on capital in a low risk
and diversified manner. The group is specifically contrasted by its
substantial offshore presence. This diversification of the group's earnings
stream, both geographically and by product type, enabled the group to
maintain revenues and operating margins. All divisions contributed
substantially to the consolidated result, with the contribution from the
offshore operations being particularly gratifying, following the management
actions taken in the business acquired in 1999.
Revenues decreased marginally to R227.7 million (2000: R237.6 million). An
improvement in operating margin to 19.9% (2000: 18.1%) resulted in operating
income of R45.2 million which compares favourably to the R42.9 million
achieved in the comparative period. The group benefited further from a
reduced effective tax rate due to the location of certain offshore
businesses in jurisdictions that enjoy lower corporate tax rates. Fully
diluted headline earnings per share increased by 5.9% to 19.6 cents (2000:
18.5 cents)
The retention of earnings after providing for the maiden dividend resulted
in shareholders funds increasing to R327.1 million (2000: R304.3 million).
Net asset value per share rose to 170.9 cents (2000: 157.5 cents). Cash
generated from operations was used to reduce working capital obligations; to
fund tax payments; and to make certain strategic investments, most notably
the establishment of the Decillion Convertible Arbitrage Fund. Together
these initiatives resulted in a net reduction in cash resources of R47.9
million. Decillion continues to reinvest funds generated from operations
into new funds management products, which over time will attract third party
investment.
REVIEW OF OPERATIONS
The segmental analysis highlights the complementary relationship between the
operating divisions, and the resilient earnings model that this diversity
supports. The review period is characterised by the turnaround of the
broking business and the increased contribution of the funds management
division.
Divisional
contribution
30 Jun 01 30 Jun 00 31 Dec 00
Contribution Contribution Contribution
Treasury Services 13,200 24,839 45,897
Funds Management 15,160 10,750 26,306
Broking Services 16,828 7,331 14,194
Operating income 45,188 42,920 86,397
Treasury services
The treasury services division offers treasury consulting, risk advisory and
valuation services, deal execution and treasury administration ("treasury
management services"), debt origination and structuring, as well as managing
fixed income hedges. These services are complementary and provide
significant opportunities for cross-selling Decillion's product range to
clients.
During the period under review, the division generated revenue of R54.2
million (2000: R55.6 million), having implemented structured deals with a
total nominal value of R3.7 billion. Operating income of R13.2 million
(2000: R24.8 million) reflected an investment in transacting staff both
locally and abroad. These initiatives are expected to contribute positively
to income in future periods. South African corporate business remains the
major contributor to income, although growth opportunities in the public
sector and in European markets are now being aggressively pursued. Operating
income for the six months included some R5.25 million of annuity revenue in
respect of retainers for ongoing treasury management services. Growing the
annuity base of this division remains a priority to management, as it
reduces the group's exposure to uncertain business volumes.
The division has also established an operation in Namibia in partnership
with Pamue Investments. This initiative has already made a positive
contribution to income, and good progress is being made in expanding the
range of services provided to this market. The agricultural business
established last year has been contracted to several of the top users of
grain in South Africa for procurement and commodity price risk management.
Despite a generally quiet corporate environment, the transaction pipeline is
promising and the second half of the year is expected to be busier than the
first six months, particularly as lower interest rates and market volatility
improve the viability of several transactions.
Funds management
The division increased operating income to R15.2 million (2000: R10.8
million) during the period. Three broad activities underpin Decillion's
funds management initiative:
Development and management of absolute return products;
Structuring of indexed and capital guaranteed products; and
Construction and distribution of multi-manager hedge fund portfolios.
Over the past two years, Decillion has built considerable experience in
managing absolute return portfolios. It is the intention to capitalise on
this specialised knowledge by identifying further management teams and
combining this with the necessary seed capital and risk management
infrastructure to launch new investment products. While only a few
investable funds exist in South Africa, we believe that Decillion can play a
prominent role in the development of the industry, utilising this incubator
model that has been deployed successfully internationally.
Decillion's primary investment product, Big Rock Capital, delivered
excellent returns for the period under review. Third party assets grew from
R100 million to R190 million. A number of institutional investors have
earmarked allocations to Big Rock for the quarter to 30 September. The
Decillion Convertible Arbitrage Fund, which was listed on the Irish Stock
Exchange in May, has outperformed the reference index over the period and is
well placed to attract more assets. Decillion intends launching two further
funds during the next six months, one local and one global fund managed by
existing managers from London.
The structured investment products team has launched a number of very
exciting initiatives which are now being implemented. This functionality is
complementary to our specialised investment management focus.
The joint venture with Harcourt was implemented during the period with one
mandate being completed and a number of proposals under consideration. We
are also in the process of evaluating the most effective distribution
channels for multi-manager hedge fund products in South Africa.
Broking services
The broking division achieved a significant increase in its contribution to
group earnings, producing operating income of R16.8 million (2000: R7.3
million) during the period. Broking revenues amounted to R140.6 million,
representing 61.7% of group revenues. Cash generated by this division is an
important source of seed capital for offshore expansion.
The operating margin for the division improved to 12.0% (2000: 4.9%).
Considerable attention has been given to increasing the variable component
of operating costs, particularly following the joint venture agreement with
Prebon Marshalls Yamane. Further synergistic benefits are expected to flow
from this joint venture over time.
Decillion has committed significant human and capital resources to bedding
down its offshore acquisitions over the past two years. The contribution of
this business over the period represents the first tangible benefits of our
offshore strategy, as well as providing a platform for the future growth of
the group's risk management strengths into offshore markets.
The results achieved during the current period can be attributed to strong
broking revenues in a period of global market volatility, together with the
reduction in the cost base achieved over the past year. Although volumes are
traditionally lower in the second half of the year, Decillion is confident
that the division will maintain its profitable performance.
DIVIDENDS
Decillion paid its maiden dividend of 8.0 cents per share on 11 May 2001. In
terms of the dividend announcement, shareholders were able to choose between
a capitalisation award and a cash distribution. Shareholders elected to
receive R10.4 million in cash with a further 2,252,420 shares being
distributed in terms of the capitalisation award. No interim dividend is
proposed.
PROSPECTS
The group's diverse product range and geographical spread ensure that
earnings are not reliant on single market forces. Management is confident
that Decillion is well positioned to capitalise on the various opportunities
that currently present themselves and to deliver a strong performance in the
second half of the year.
By order of the Board
Income Statement 6 months ended 30 June 2001
Interim Interim Audited
6 Months 6 Months 12 Months
to to to
30 Jun 01 30 Jun 00 31 Dec 00
R000's R000's R000's
Revenue 227,660 237,602 456,206
Operating expenses (182,472) (194,682) (369,809)
Operating income 45,188 42,920 86,397
Interest received 2,802 3,738 14,030
Net income before 47,990 46,658 100,427
discontinued operations
Discontinued operations - 529 3,375
and disposals
Net income before goodwill 47,990 47,187 103,802
and tax
Amortisation of goodwill (3,707) - (5,512)
Net income before tax 44,283 47,187 98,290
Taxation (8,545) (11,177) (22,542)
Net income after tax 35,738 36,010 75,748
Attributable to outside (1,963) (3,106) (3,380)
shareholders
Attributable income 33,775 32,904 72,368
Headline earnings 37,482 32,375 74,505
Amortisation of (3,707) - (5,512)
goodwill
Discontinued operations - 529 3,375
and
disposals
Weighted number of shares 180,775 158,815 170,682
in issue
Basic earnings per share 18.7 20.7 42.4
(cents)
Fully diluted weighted 191,416 175,010 185,328
number of shares
Diluted earnings per share 17.6 18.8 39.0
(cents)
Fully diluted headline 19.6 18.5 40.2
earnings per share (cents)
Group Balance Sheet as at 30 June 2001
Interim Interim Audited
6 Months 6 Months 12 Months
to to to
30 Jun 01 30 Jun 00 31 Dec 00
R000's R000's R000's
ASSETS
Non-current assets 322,034 189,340 286,581
Investments 242,514 129,934 202,810
Fixed assets 13,702 14,478 15,678
Intangible assets 65,818 44,928 68,093
Current assets 174,143 218,045 210,708
Cash 75,512 131,070 123,375
Tradeable securities 3,563 3,842 -
Accounts receivable 95,068 83,133 87,333
496,177 407,385 497,289
LIABILITIES AND EQUITY
Non-current liabilities 53,399 46,286 53,606
Long-term liability 49,935 42,573 46,396
Deferred taxation 3,464 3,713 7,210
Current liabilities 113,671 115,369 139,408
Accounts payable 98,125 82,930 104,611
Tradeable securities - - 8,988
Taxation 15,546 32,439 25,809
Capital and reserves
Share capital 1,808 1,594 1,785
Share premium 184,053 128,270 180,539
Non-distributable (3,281) (4,852) (3,058)
reserves
Distributable reserves 144,503 85,545 125,009
Vendors for shares - 7,785 -
Total shareholders' funds 327,083 218,342 304,275
Outside shareholders' 2,024 27,388 -
interest
329,107 245,730 304,275
496,177 407,385 497,289
Actual number of shares in 180,775 159,360 178,523
issue
Net asset value per share 180.9 137.0 170.4
Fully diluted number of 191,416 176,289 193,169
shares in issue
Fully diluted net asset 170.9 123.9 157.5
value per share
Cashflow information 6 Months ended 30 June 2001
Interim Interim Audited
6 Months 6 Months 12 Months
to to to
30 Jun 01 30 Jun 00 31 Dec 00
R000's R000's R000's
Net income before 41,481 43,449 80,885
interest and tax
Non-cash items 5,115 1,105 13,736
(Increase)/decrease in (28,669) 6,825 34,959
working capital
Cashflows from 17,927 51,379 129,580
operating activities
Net interest received 2,802 3,738 14,030
Dividends paid (10,745) - -
Taxation paid (22,554) 1,217 (13,282)
Net cash (applied (12,570) 56,334 130,328
to)/inflow from
operating activities
Cashflows from
investing activities
Additions to fixed (898) (4,266) (10,797)
assets
Additions to (999) (25,491) (34,535)
intangibles
(Acquisition)/disposal (36,935) 4,299 (68,098)
of investments
Proceeds from the - - 16,154
disposal of
subsidiaries
Loss on discontinued - - (12,779)
operation
Acquisition of - 2,278 (3,501)
subsidiaries
Net cash outflow from (38,832) (23,180) (113,556)
investing activities
Cashflows from
financing activities
Increase in long-term 3,539 42,573 46,396
liabilities
Proceeds from issue of - - 4,864
share capital
Net cash inflow from 3,539 42,573 51,260
financing activities
Net (decrease)/increase (47,863) 75,727 68,032
in cash & cash
equivalents
Cash and cash 123,375 55,343 55,343
equivalents at
beginning of year
Cash and cash 75,512 131,070 123,375
equivalents at end of
year
Statement of changes in equity 6 Months ended 30 June 2001
Interim Interim Audited
6 Months to 6 Months to 12 Months to
30 Jun 01 30 Jun 00 31 Dec 00
R000's R000's R000's
Share capital
Opening 1,785 1,575 1,575
balance
Shares 23 19 210
issued net
of
expenses
Closing 1,808 1,594 1,785
balance
Share premium
Opening 180,539 120,789 120,789
balance
Shares 3,514 7,481 59,750
issued net
of
expenses
Closing 184,053 128,270 180,539
balance
Non-
distributable
reserves
Opening (3,058) (2,770) (2,770)
balance
Changes in (223) (2,082) (288)
reserves
Closing (3,281) (4,852) (3,058)
balance
Distributable
reserves
Opening 125,009 52,641 52,641
balance
Dividends (10,745) - -
paid
Share (3,536) - -
capitalisatio
n
issue
Net profit 33,775 32,904 72,368
for the
period
Closing 144,503 85,545 125,009
balance
Vendors for
shares
Opening - 7,785 7,785
balance
Cedef - - (7,785)
acquisition
Closing - 7,785 -
balance
Total equity
Opening 304,275 180,020 180,020
balance
Changes in 22,808 38,322 124,255
equity
Closing 327,083 218,342 304,275
balance
Directors: A J N Smit (managing), T J Davis, M G Kotze, J F Marais*, U
Meyer, P Moodley, A P Nkuna*, G H Smale, W F Spruyt* (*non-executive)
Transfer secretaries: Mercantile Registrars Limited, 11 Diagonal Street,
Johannesburg 2001
Registered office: 26 Sturdee Ave, Rosebank 2121 Telephone: 011 328 1000
Fax: 011 442 4456 Company secretary: Paul Lapham
Company Registration: Decillion Limited (1998/11692/06)
Results on internet: http://www.decillion.net
