| Fri 28 May 2004, 17:09 | | REVIEWED PROVISIONAL RESULTS FOR THE 14 MONTHS END |
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DECILLION LIMITED - REVIEWED PROVISIONAL RESULTS FOR THE 14 MONTHS ENDED
29 FEBRUARY 2004
Decillion Limited
Registration number 1998/011692/06
JSE Share code: DEC
ISIN: ZAE000017612
REVIEWED PROVISIONAL RESULTS FOR THE 14 MONTHS ENDED 29 FEBRUARY 2004
KEY FEATURES
* Decillion`s financial year-end has been changed to end-February and these
results therefore represent the provisional reviewed results for the 14
months to 29 February 2004
* Headline profit of R22,4 million is 34% down and diluted headline earnings
per share are down 21% compared to the 12 months ending 31 December 2002
* Reduction in profitability compared to 2002 mainly as a result of difficult
domestic trading conditions in the last eight months of the period, and
lower activity in Corporate and Institutional Finance (CIF)
* Steps taken to strengthen weak performance areas are expected to have the
desired impact over the medium to longer term
* Funds under management in local hedge funds grew by 17% over the fourteen
month period with a 41% growth in operating profit
* Ongoing benefit from cost restructuring undertaken during 2002 and 2003
* Measures have been put in place to retain key revenue earners
* Impairment and change in estimate of goodwill taken of R73,5 million as a
result of a more conservative approach adopted to amortise goodwill over a
period not exceeding the remaining life of service contracts
* The AC133 transitional adjustment represents the conversion to a full mark-
to-market valuation methodology for all trading positions as well as for
all structured long dated swap transactions
FINANCIAL RATIOS
Reviewed Restated
14 months 12 months
29 Feb 2004 31 Dec 2002
Income statement
- Headline earnings R`m 22,4 34,2
- Attributable R`m (72,6) 22,4
(loss)/earnings
- Diluted headline cents 13,9 17,6
earnings per share
- Diluted (loss)/earnings cents (44,9) 11,5
per share
Selected ratios
- Headline return on % 11,6 13,0
average shareholders`
funds
- Cost to income ratio % 89,3 89,1
Capital
- Total share capital and R`m 161,3 335,8
reserves
- Tangible share capital R`m 139,4 248,9
and reserves
- Diluted tangible NAV cents 84,2 135,6
per share
- Market capitalisation R`m 140,6 172,4
Share statistics
- Share price cents 85 105
- Number of shares million 165,5 164,2
- Diluted number of million 165,5 183,5
shares
- Diluted weighted number million 161,5 193,9
of shares
- Diluted headline price times 6,1 6,0
earnings ratio
(historical)
FINANCIAL REVIEW
* Headline earnings decreased by 34% to R22,4 million (2002: R34,2 million)
and diluted headline earnings per share by 21% to 13,9 cents per share
(2002: 17,6 cents per share).
* Operating results for the period were negatively affected by volatile and
difficult local trading conditions, especially in the second half of the
period, which impacted on the profitability of the Capital Markets
division. The International broking operation, Funds Management and CIF all
performed well, with RORAC (return on risk adjusted capital) in excess of
market benchmarks for peer companies.
* Operating expenses are well below those of the previous year, mainly as a
result of cost cutting over the past two years, the closure of the offshore
fund management operation and its associated cost structure, and the
exchange rate impact on the overseas cost base.
* The provisional results include the once-off transitional AC133 adjustment
of R77,6 million through the balance sheet. The AC133 adjustment resulted
in a decrease of 42 cents in tangible net asset value per share.
* The impact of the stronger Rand through the non-distributable reserves
resulted in a 12 cents per share downward adjustment for the 14-month
reporting period, leaving a diluted tangible NAV as at 29 February 2004 of
84,2 cents per share compared to 135,6 cents per share as at 31 December
2002.
* A more conservative treatment of goodwill was approved by the Board whereby
goodwill will be amortised over a period not exceeding the remaining life
of service contracts. This has resulted in an impairment and change in
estimate of goodwill of R73,5 million taken at 31 December 2003.
* In the financial years ended 31 December 2001 and 31 December 2002, the
group capitalised as goodwill certain legal costs related to claims pending
at the time of the acquisition of the International broking business, which
was acquired during the financial year ended 31 December 1999. As a result
of a revision of this accounting treatment, the group and its auditors
concluded that these amounts should have been expensed when incurred and
have as a consequence restated prior periods. The effect of the restatement
is to reduce retained earnings at 1 January 2002 by R6,0 million and to
increase operating expenses in the income statement for the year ended 31
December 2002 by R3,2 million. The restatement reduces goodwill at 31
December 2002 by R6,6 million, but has no impact on net cash flow for the
year ended 31 December 2002. As the goodwill was fully amortised/impaired
as at 31 December 2003, the adjustment has no effect on the group`s net
asset value.
SEGMENTAL ANALYSIS
14 months to Restated 12
29 Feb 2004 months(*)
31 Dec 2002
R000`s % R000`s %
Capital markets (5 293) (20,1) (7 439) (21,4)
Funds management 14 243 54,2 10 120 29,1
Corporate and 16 614 63,2 41 372 119,1
Institutional
Finance
Head office and 706 2,7 (9 311) (26,8)
investments
Net income before 26 270 100,0 34 742 100,0
disposals and
goodwill
Onshore 8 529 32,5 29 811 85,8
Offshore 17 741 67,5 4 931 14,2
Net income before 26 270 100,0 34 742 100,0
disposals and
goodwill
(*) restated for new divisional structure and goodwill adjustment
REVIEW OF OPERATIONS
Capital Markets
The Capital Markets division comprises all of the group`s trading and securities
distribution activities in the domestic and offshore markets. The division
incurred an operating loss of R5,3 million (2002: loss of R7,4 million).
The group`s fixed income proprietary trading activities were subjected to
volatile and uncertain trading conditions, especially due to the negative impact
that the CPI restatement and unscheduled interest rate cuts had on the local
capital markets during the period. Although this business unit was the only unit
in the division to have incurred an operating loss for the 14-month period, it
still traded above break-even on a gross revenue basis.
The agricultural products business and corporate sales desk (hedging and debt
management strategies) continued to make a positive contribution, underpinned by
a shared commitment to market and company specific research and customer driven
strategies.
The International broking business on the other hand, particularly the swaps
component in Switzerland, performed well in the current period, mainly as a
result of the division`s success in exploiting niche markets. In the first
quarter of calendar 2004 a number of senior brokers resigned from the
International broking business. This will have a negative impact on
profitability in the medium term. The group has since renegotiated service
agreements with all remaining key brokers for a period of three years.
Furthermore, as a result of Decillion International`s market position, it has
already been able to replace some of the brokers that have left and the group is
in the process of rebuilding the business on a sustainable basis.
Funds Management
The Funds Management division significantly increased its profitability over the
current 14-month period, contributing an operating profit of R14,2 million
(2002: R10,1 million).
All three of the division`s long-standing funds performed positively during the
period under review. The Big Rock Capital Fund is established as one of South
Africa`s premier hedge funds with a good 5-year track record. It achieved a
gross return of 18,4% for the 14 months to 29 February 2004, and a net return of
14,1% to investors (after performance and management fees). The two funds
launched during the latter part of the 2002 financial year, the Headland Fund
(equity long/ short fund) and the Granite Fund (fixed income) performed
particularly well and realised net returns to investors (after management and
performance fees) of 23,7% and 15,2% respectively in the period. Total funds
under management have grown by 16,5% over the last 14 months. The Funds
Management division has attracted a number of new clients during the period
under review as investors continue to focus more on absolute returns. The
business base has thus been diversified, both by additional funds and new
clients.
All of the funds are now well established and there are further opportunities
for new product development. Two new domestic funds (Fairtree and Kingstone)
were launched towards the end of the financial period. Both funds have performed
well to date and are now starting to achieve inflows from investors. The
division is in the process of establishing a new international fund that will
invest in both South Africa and other international markets. A significant
portion of the fund`s cost base will be in South Africa so that set-up costs are
minimised and the fund will have time to establish a track record and build
critical mass.
The services of all the teams managing the hedge funds launched by the division
have been secured for a period of five years.
The division`s related equity broking activities, that contributed R3,1 million
of operating profit in 2004, have been discontinued in the new financial year
for strategic reasons. This will enable the division to focus on its core
business of fund management. The group`s investment in the hedge funds at year-
end amounted to R31 million.
Corporate and Institutional Finance
Corporate and Institutional Finance comprises the deal originating units of the
group, which are focused on earning fee income from the arrangement of debt and
placing of such products with institutions or investors, having tailored the
products to suit the borrowers` and investors` specific needs. Although the
operating profit of R16,6 million (2002: R41,4 million) realised by the division
is well below the level of the previous year, this was anticipated due to the
opportunistic nature of advisory services business. The division uses minimal
capital from the group.
Transactions concluded during the period comprised a wide range of solutions
including equity linked notes, capital guarantees, debt raisings, placement of
investment grade paper and derivative sales. The division has furthermore
invested in broadening its portfolio of fee earning products in areas adjacent
to the existing products.
The division also entered the project finance sector as agent/advisor and
concluded its first deal during the period. The division secured the services of
its core CIF team by concluding five-year service agreements.
Head Office and Investments
Head Office and Investments contributed an operating profit of R0,7 million
(2002: R9,3 million loss).
The improved results are mainly as a result of savings in central administration
costs and the disposal of Decillion Solutions (a Singapore based IT business),
which incurred a loss during the previous period. The business was sold at its
carrying value and no profit or loss was incurred on the sale.
AC133 ADJUSTMENT
The introduction of AC133 resulted in the group adopting a market quotation base
of measurement on all its trading portfolios. The effect of the revised
valuation methodology is a downward adjustment of R77,6 million against the
opening balance of retained income, in accordance with the transitional
provisions of AC133. The R77,6 million includes an adjustment of R26,2 million
announced in the first interim results in June 2003 and a final R51,4 million
adjustment made at period end. The adjustment of R26,2 million represented the
conversion to a full mark-to-market valuation of all trading positions other
than five specifically structured and long-dated interest rate swaps, maturing
between September 2008 and June 2016. As provided for in terms of AC133, a mark-
to-model approach was applied in the group`s interim financial results in the
valuation of these five transactions as the market for these swaps is not well
established.
Subsequent to the financial period end, Decillion has entered into an agreement
with its counter party to these swaps in terms of which these transactions,
together with supporting hedges, will be ring-fenced and managed until maturity
in an SPV on the mark-to-model basis as previously applied in the valuation of
these transactions. The SPV will continue to be consolidated by the group in
terms of AC412 (Consolidations - Special purpose entities). Notwithstanding the
contractual agreement with regard to the valuation of these swaps, the Audit
Committee has recommended, and the Board has approved, the application of a mark
to-market approach in accordance with AC133 on these specific contracts for its
financial period ended 29 February 2004, for reasons of prudence and consistency
in future reporting. Although this approach resulted in a further adjustment of
R51,4 million against the group`s opening retained income, it will have no cash
flow impact on the group.
The income statement for the period includes the impact of the implementation of
AC133 on the trading portfolio since 31 December 2002.
GOODWILL AMORTISED, IMPAIRED AND WRITTEN OFF
As announced with the second interim results, an impairment of goodwill was
taken as a result of a more conservative view adopted. The table below provides
a breakdown of goodwill amortised on the previous basis, goodwill amortised due
to a change in estimate, goodwill impaired and goodwill written off on disposal.
2004
Description R million
Goodwill impaired 46,2
Change in estimate 27,3
Normal amortisation 17,8
91,3
Loss on disposal 3,0
94,3
The remaining goodwill in the balance sheet as at 29 February 2004 will be
amortised over the next two financial years.
DISPOSALS
During the period the group disposed of three businesses, Decillion Solutions,
the treasury outsourcing business and the trade finance business.
Decillion Solutions was disposed of for a small consideration at carrying value,
inclusive of goodwill, realising no profit or loss on disposal.
The treasury outsourcing business was disposed of at tangible carrying value,
realising a loss of R3,0 million on disposal, representing the goodwill carried
at the time of the disposal.
In addition the group incurred a loss of R0,7 million on the disposal of the
trade finance business, resulting in a total loss on disposal of R3,7 million.
INCOME STATEMENT
14 months ended 29 February 2004
Reviewed Restated
14 Months to 12 Months to
29 Feb 04 31 Dec 02
R000`s R000`s
Revenue 383 374 447 438
Operating expenses (357 853) (416 673)
Operating income 25 521 30 765
Net interest income 749 3 977
Net income before disposals 26 270 34 742
Disposals (3 721) -
Net income before goodwill 22 549 34 742
Goodwill amortised, impaired (91 282) (11 832)
and change in estimate
Net (loss)/income before tax (68 733) 22 910
Taxation (2 709) (2 478)
Net (loss)/income after tax (71 442) 20 432
Attributable to outside (1 121) 1 928
shareholders
Attributable (loss)/income (72 563) 22 360
Weighted number of shares in 161 539 174 498
issue (`000)
Basic (loss)/earnings per share (44,9) 12,8
(cents)
Basic headline earnings per 13,9 19,6
share (cents)
Diluted weighted number of 161 539 193 872
shares (`000)
Diluted (loss)/earnings per (44,9) 11,5
share (cents)
Diluted headline earnings per 13,9 17,6
share (cents)
Reconciliation of headline
earnings
Attributable (loss)/income (72 563) 22 360
Disposals 3 721 -
Goodwill impaired and amortised 91 282 11 832
Headline earnings 22 440 34 192
CASH FLOW STATEMENT
14 months ended 29 February 2004
Reviewed Restated
14 Months to 12 months to
29 Feb 04 31 Dec 02
R000`s R000`s
Operating income before 25 521 30 765
interest
Elimination of non-cash items 2 132 21 932
Increase in working capital (59 635) (65 772)
Cash flows from operating (31 982) (13 075)
activities
Net interest received 749 3 977
Dividends paid (4 875) (2 375)
Taxation paid (9 022) (10 926)
Net cash outflow from operating (45 130) (22 399)
activities
Cash flows from investing
activities
Additions to fixed assets (5 674) (3 343)
Additions to intangibles (19 961) (15 514)
Disposals of investments 28 958 23 158
Disposals (692) -
Net cash inflow from investing 2 631 4 301
activities
Cash flows from financing
activities
Increase in long-term 5 849 38 810
liabilities
Treasury shares purchased (7 915) (22 572)
Net cash (outflow)/inflow from (2 066) 16 238
financing activities
Net decrease in cash and cash (44 565) (1 860)
equivalents
Cash and cash equivalents at 122 075 123 935
the beginning of the period
Cash and cash equivalents at 77 510 122 075
the end of the period
BALANCE SHEET
as at 29 February 2004
Reviewed Restated
29 Feb 04 31 Dec 02
R000`s R000`s
ASSETS
Non-current assets 196 235 307 069
Investments 164 307 212 097
Fixed assets 8 477 7 988
Deferred taxation 1 527 -
Intangible assets 21 924 86 984
Current assets 1 597 308 496 183
Cash 77 510 132 075
Tradable securities 53 989 53 110
Accounts receivable 1 458 661 309 023
Taxation 7 148 1 975
1 793 543 803 252
LIABILITIES AND EQUITY
Non-current liabilities 98 492 96 029
Long-term liability 98 492 92 643
Deferred taxation - 3 386
Current liabilities 1 533 131 370 884
Accounts payable 1 433 327 321 188
Tradable securities 96 031 39 696
Taxation 3 773 -
Bank overdraft - 10 000
Capital and reserves
Share capital 1 655 1 642
Share premium 149 598 147 325
Non-distributable reserves (8 884) 13 490
Distributable reserves 18 950 173 381
Total shareholders` funds 161 319 335 838
Outside shareholders` interest 601 501
161 920 336 339
1 793 543 803 252
Actual number of shares (`000) 165 463 164 197
Net asset value per share (cents) 97,5 204,5
Tangible net asset value per 84,2 151,6
share (cents)
Diluted number of shares in issue 165 463 183 480
(`000)
Diluted net asset value per share 97,5 183,0
(cents)
Diluted tangible net asset value 84,2 135,6
per share (cents)
STATEMENT OF CHANGES IN EQUITY
14 months ended 29 February 2004
Reviewed Restated
14 Months 12 Months
to to
29 Feb 04 31 Dec 02
R000`s R000`s
Share capital
Opening balance 1 642 1 745
Shares issued net of expenses - 93
Treasury shares 13 (196)
Closing balance 1 655 1 642
Share premium
Opening balance 147 325 161 753
Shares issued net of expenses - 7 948
Treasury shares 2 273 (22 376)
Closing balance 149 598 147 325
Non-distributable reserves
Opening balance as previously 13 490 34 512
stated
Restatement of prior year - 674
goodwill
Restated opening balance 13 490 35 186
Transfer (to)/from distributable (600) 500
reserves
Currency translation differences (21 774) (22 196)
Closing balance (8 884) 13 490
Distributable reserves
Opening balance as previously 173 381 167 872
stated
Restatement of prior year - (6 016)
goodwill
AC133 transitional adjustment (77 593) -
Restated opening balance 95 788 161 856
Dividends paid (4 875) (2 294)
Share capitalisation issue - (8 041)
Transfer from/(to) non- 600 (500)
distributable reserves
Attributable (loss)/income for (72 563) 22 360
the period
Closing balance 18 950 173 381
Total shareholders` funds
Opening balance 335 838 365 882
Changes in equity (174 519) (30 044)
Closing balance 161 319 335 838
RESTATEMENTS
The table below provides a detailed breakdown of the effect of the restatement,
referred to above, on the 2002 financial statements.
Audited Restated
12 months to 12 months to
31 Dec 02 Restatement 31 Dec 02
R000`s R000`s R000`s
Income Statement
Operating expenses (413 522) (3 151) (416 673)
Goodwill (12 777) 945 (11 832)
amortised,
impaired and
change in estimate
Attributable 24 566 (2 206) 22 360
income
Headline earnings 37 343 (3 151) 34 192
Basic earnings per 14,1 (1,3) 12,8
share (cents)
Basic headline 21,4 (1,8) 19,6
earnings per share
(cents)
Diluted earnings 12,7 (1,2) 11,5
per share (cents)
Diluted headline 19,3 (1,7) 17,6
earnings per share
(cents)
Balance Sheet
Intangible assets 93 599 (6 615) 86 984
Non-distributable 11 883 1 607 13 490
reserves
Distributable 181 603 (8 222) 173 381
reserves
Net asset value 208,6 (4,1) 204,5
per share (cents)
Diluted net asset 186,6 (3,6) 183,0
value per share
(cents)
Cash flow
Statement
Operating income 33 916 (3 151) 30 765
before interest
Additions to (18 665) 3 151 (15 514)
intangibles
ACCOUNTING POLICIES
Accounting policies adopted for purposes of this reporting period comply with
South African Statements of Generally Accepted Accounting Practice as well as
with applicable legislation. Other than the implementation of AC133, the
accounting policies are consistent with those adopted in the prior financial
year.
REVIEWED RESULTS
The provisional results have been reviewed by Decillion`s auditors, Deloitte &
Touche, Chartered Accountants (SA), and their review opinion is available for
inspection at Decillion`s registered office.
By order of the Board
28 May 2004
Directors:
AJN Smit (CEO), JF Marais* (Chairman), TJ Davis, Dr M Mostert, WF Spruyt*,
Prof NI Morgan*, SI Millman*, J Molobela*
(*non-executive)
Transfer Secretaries:
Computershare Investor Services 2004 (Pty) Limited,
70 Marshall Street,
Johannesburg, 2001
Registered Office:
1st Floor, ABN AMRO House,
2 Exchange Square,
85 Maude Street,
Sandton, 2196
Telephone: +27 11 217 9000
Facsimile: +27 11 883 0165
Company Secretary:
Laurinda da Camara
e-mail: laurindad@decillion.net
Results on internet: www.decillion.net
Date: 28/05/2004 05:01:21 PM
Produced by the JSE SENS Department
