| Wed 11 Jul 2001, 0:00 | | Connection Group Holdings Limited - Results |
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ConNection Group Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number 1997/005390/06)
Results for the year ended 31 May 2001
Turnover up 11,1% at R746m
Operating profit up 35% at R29,6m
Headline earnings per share (before deferred tax) up 62% at 8,13c
Group Income Statement
Year Year
ended ended
31 May 31 May
2001 2000
R'000 R'000 %
(audited) (audited) Increase/
(restated) (decrease)
Revenue 746 154 671 337 11,1
Cost of sales (565 108) (511 199) 10,5
Staff costs (75 370) (72 233) 4,3
Other operating expenses (76 031) (65 860) 15,4
Operating profit before
interest and depreciation 29 645 22 045 34,5
Depreciation and amortisation (8 984) (7 202) 24,7
Operating profit before
interest 20 661 14 843 39,2
Net interest paid (1 540) (2 719) (43,4)
Profit before exceptional
items and goodwill
amortisation 19 121 12 124 57,7
Exceptional items (2 042) (1 885) 8,3
Amortisation of goodwill (697) (473) 47,4
Profit before taxation 16 382 9 766 67,7
Deferred taxation (3 317) 3 092 -
Profit after taxation 13 065 12 858 1,6
Attributable to
minority shareholders 18 (377) -
Net profit for the year 13 083 12 481 4,8
Headline earnings per share
before deferred tax (cents) 8,13 5,02 62,0
Headline earnings per
share (cents) 6,71 6,34 5,9
Earnings per share (cents) 5,58 5,33 4,7
Fully diluted headline
earnings per share (cents) 6,20 5,71 8,6
Fully diluted earnings
per share (cents) 5,16 4,80 7,5
Weighted average number of
ordinary shares in issue
(000's) 234 374 234 374 -
Net asset value per
share (cents) 19,58 13,76 42,3
Group Cash Flow Statement
Year Year
ended ended
31 May 31 May
2001 2000
R'000 R'000
(audited) (audited)
(restated)
Net cash inflow from
operating activities 31 426 33 818
Investment to maintain operations 168 (2 519)
Investment to expand operations (26 904) 2 725
Net increase in cash and
cash equivalents 4 690 34 024
Cash and cash equivalents at
beginning of the year 27 714 (6 310)
Cash and cash equivalents
at end of the year 32 404 27 714
Capex for the year 23 535 10 218
Segmental Analysis
31 May 31 May
2001 2000
R'000 R'000
(audited) (audited)
(restated)
Turnover per division
Incredible Connection 599 610 529 544
Enterprise Connection 130 442 129 289
Ultimate Connection 11 422 8 744
Group services 4 680 3 760
Operating profit before
interest and depreciation
Incredible Connection 25 819 15 288
Enterprise Connection 1 432 6 424
Ultimate Connection 2 634 4 621
Group services (240) (4 288)
Group Balance Sheet
31 May 31 May
2001 2000
R'000 R'000
(audited) (audited)
(restated)
Assets
Non-current assets 73 600 59 736
Plant and equipment 23 800 13 519
Intangible assets 21 802 14 902
Deferred taxation 27 998 31 315
Current assets 123 460 116 844
Inventories 47 609 46 349
Receivables 43 447 42 781
Bank balances and cash 32 404 27 714
Total assets 197 060 176 580
Equity and liabilities
Capital and reserves 45 888 32 227
Share capital and premium 31 536 31 536
Non-distributable reserve 1 379 801
Retained income/(accumulated deficit) 12 973 (110)
Minority shareholders - 18
Shareholders' equity 45 888 32 245
Current liabilities 151 172 144 335
Payables 151 172 144 335
Total equity and liabilities 197 060 176 580
Group Statement of Changes in Equity
31 May 31 May
2001 2000
R'000 R'000
(audited) (audited)
(restated)
Balance as previously reported 32 227 12 163
Prior year adjustment - leave pay - (3 493)
Prior year adjustment - deferred
taxation - 28 223
Attributable profit for the year 13 083 12 481
Movement in non-distributable reserve 578 62
Intangible assets written off - (17 209)
Balance at end of the year 45 888 32 227
Group Statement of Changes in Retained Earnings
31 May 31 May
2001 2000
R'000 R'000
(audited) (audited)
(restated)
Balance as previously reported (110) (37 321)
Prior year adjustment - leave pay - (3 493)
Prior year adjustment - deferred
taxation - 28 223
Attributable profit for the year 13 083 12 481
Balance at end of the year 12 973 (110)
Commentary
OVERVIEW
Your directors are pleased to report that the Connection Group
made good progress in the year to May 2001, building on the sound
platform established during the previous financial year.
Notwithstanding a marked slowdown in the retail and IT industries
in which the Group operates, the company achieved a 68% increase
in profit before taxation. The retail division, in particular,
attained highly satisfactory results, thanks to an exceptional
performance from Incredible Connection.
REVIEW OF OPERATIONS
Incredible Connection
Incredible Connection's stated objective is to achieve critical
mass during the 2003 financial year, defined as sales of R1
billion at a return on sales of 4%. To this end, it expanded
rapidly but in a controlled manner during the year, opening six
new stores in prime locations, while relocating three existing
outlets. At the end of May 2001, the number of Incredible
Connection stores totalled 23.
Besides increasing Incredible Connection's national footprint, the
quality of its leased property portfolio has been enhanced
significantly. As the new stores were opened at various stages
during the year, the results do not reflect the full benefits of
the expansion programme.
One of Incredible Connection's strategic imperatives is to operate
off a superior IT platform that supports a low relative cost base.
During the year, Ultimate Connection's ActiveRetail software
system was implemented throughout Incredible Connection. A version
upgrade of the system will be implemented during July, allowing
Incredible Connection to realise the significant efficiency
benefits that the system offers.
An ongoing key initiative is to improve the skills base of
Incredible Connection's staff. In this respect, a holistic,
integrated approach has been followed, combining formal and
informal training in a wide variety of disciplines with constant
measurement of training needs and results. This approach has
resulted in a marked increase in skill levels during the year and
promises similar results in future.
The achievement of superior customer satisfaction levels remains
a cornerstone of Incredible Connection's business philosophy. A
comprehensive customer satisfaction strategy is being implemented
and the results of initiatives in this area are measured
regularly. Incredible Connection's objective is to exceed a
customer satisfaction index of 83%, an international benchmark.
Good progress is being made in this regard.
The past year has been a resounding success. Besides delivering
excellent results in the face of adverse market conditions,
Incredible Connection has continued to successfully implement its
strategic plan, devised towards the end of 1999. It remains well
on track towards achieving critical mass and entrenching its
position as the country's leading IT retailer.
Enterprise Connection
At the end of the 2000 financial year, Enterprise Connection took
a decision to move its business model from being a supplier of IT
products to becoming a provider of IT infrastructure solutions.
The most important reasons for this shift can be summarised as
follows:
- Declining margins as the supply of IT products becomes
increasingly commoditised
- Customers prefer to deal with suppliers who are able to provide
complete solutions
- An attractive target market, being small to mid-size corporate
customers
- Increasing levels of recurring income
This fundamental shift in Enterprise Connection's approach
involved developing a new strategy, aligning its operations with
this strategy and significantly changing the skills base of its
employees. In addition, much focus was put on developing and
packaging its suite of products in a way that customers find
flexible and easy to understand. These initiatives have now been
completed. The process outlined above took us longer and cost more
than expected. As a result, Enterprise Connection reported a drop
in profitability for the year. Early indications are that the
change in Enterprise Connection's approach has been successful,
with some substantial contracts being concluded. Future prospects
look encouraging.
Ultimate Connection
Ultimate Connection has developed a full range of software
solutions, that it markets and sells under the "ActiveRetail"
brand name, to retail organisations. Its customers extend from
single store retailers to large multi-nationals, both local and
international.
Ultimate Connection's latest product, ActiveRetail 4 Solomon, was
completed in October 2000 and released to the value added reseller
(VAR) channel at that time. As anticipated, local and
international sales of this product began to materialise towards
the end of the financial year, with successful deals being
concluded locally, in Kuwait and in Europe.
Some of the notable customers who successfully deployed
ActiveRetail during the year include Marks & Spencer Lingerie
(MSL), the Foschini Group and all Incredible Connection stores.
These installations serve as good reference sites for potential
clients of Ultimate Connection.
Ultimate Connection suffered a setback when Marks & Spencer plc
decided to close all of its retail outlets on continental Europe.
MSL was a concept that Marks & Spencer only intended deploying in
this region, with a planned roll-out of 240 stores across Europe.
As a result of this strategic decision by Marks & Spencer, the MSL
initiative was cancelled and all 6 existing outlets will be
closed. Ultimate Connection had spent considerable resources
translating ActiveRetail into various languages, ensuring that it
was Euro compliant and localising it for European countries.
Faced with the challenge of finding another reference site in
Europe, Ultimate Connection concluded a significant sale to
another UK based clothing retailer towards the end of the year. In
addition, the strategy of increasing sales in the European market
received a further boost following the signing of a VAR agreement
with NCR Corporation, a leading global retail solution provider.
Ultimate Connection's reduced profitability in the current year is
attributable to the loss of revenue from MSL and the inclusion of
a large sale to Foschini in 2000. However, Ultimate Connection's
performance during the last quarter enabled it to remain
profitable for the year, while providing encouraging signs for
next year.
Financial results
The financial results for the year to 31 May 2001 have been
prepared on a basis consistent with the prior year annual
financial statements, with the exception of the treatment of
goodwill, deferred taxation and the provision for leave pay.
The profits to 31 May 2000 have therefore been restated to reflect
the changes in accounting policy. The financial results have been
prepared in compliance with South African statements of generally
accepted accounting practice.
The Group increased turnover by 11%, largely as a result of the
greater number of Incredible Connection retail outlets.
Despite a generally tough trading environment, the Group achieved
an operating profit before interest and depreciation of R29,6m,
35% higher than the prior year. In particular, Incredible
Connection delivered an outstanding performance, largely because
of increased sales volumes, improved efficiencies and a number of
strategic initiatives. Although Enterprise Connection and Ultimate
Connection showed a marginal increase in turnover they recorded a
reduction in operating profit for the reasons outlined in the
review of operations.
The exceptional item of R2m relates to the costs of exiting excess
office space in the Golf Park property in Cape Town.
Intangible assets of R21,8m comprise goodwill on the acquisition
of Ultimate Connection and R9,0m capitalised software development
costs. Goodwill is being amortised over 20 years and software
development costs over 5 years.
The Group's increased investment in Ultimate Connection of R4,5m,
capitalised software development costs of R4,2m and capital
expenditure in the retail division of R19,3m were funded from cash
generated by operations, which amounted to R31,4m.
Inventory levels and accounts receivable have been well
controlled, bearing in mind the increase in the number of retail
outlets.
The financial results for the year to 31 May 2000 have been
restated in line with recent changes in accounting practice for
goodwill, deferred taxation and leave pay provisioning. A deferred
tax asset of R28,2m arising from unutilised assessed tax losses
available to the Group was raised as at 1 June 1999. The taxation
charge of R3,3m in the current year and a credit of R3,1m in the
prior year relate to the movement in the deferred taxation
balance. The change in accounting policy for deferred taxation
negatively impacted headline earnings. The Group still has R93,3m
of assessed tax losses available at 31 May 2001. A provision for
leave pay of R3,5m was charged to opening retained earnings at 1
June 1999.
Capital commitments approved but not contracted for amount to
R10,2m. This capital expenditure will be funded from existing cash
resources. Lease commitments in respect of operating leases,
payable within one year, amount to R19,4m and those payable
thereafter amount to R48,9m.
PROSPECTS
The Connection Group will continue with its strategy of building
its various businesses to a point where they are relevant or
dominant players in their respective markets. In order to achieve
this objective, it is essential that each business has a
sustainable competitive advantage, based on its size, technology
or unique product offering.
Incredible Connection aims to build on its dominant position as an
IT retailer, progressing towards its strategic imperative of
critical mass. In the process, it will continue to focus on its
additional strategic initiatives of offering superior customer
service, developing the core competencies of its staff,
maintaining product leadership and implementing a superior IT
platform.
Enterprise Connection now has an improved business model,
appropriate skills and a strong product offering which is gaining
market acceptance. The focus in the year ahead will be to build on
the early successes and to raise its profile as a quality supplier
of IT infrastructure solutions.
Ultimate Connection has developed retail software that is
comparable with the best in the world, as evidenced by its success
both locally and abroad. It will continue to develop the VAR
channel for ActiveRetail with a view to increasing sales in its
primary target markets, being Africa and Europe. At the same time,
every effort will be made to ensure that ActiveRetail remains a
world-class product.
Much has been accomplished towards achieving these objectives
during the past year. All three businesses are budgeted to
increase profitability during the coming year.
Although market conditions are expected to remain challenging, we
are confident of achieving real earnings growth in the year ahead.
For and on behalf of the board
S. Mulholland P.G. Joubert
Chairman Chief Executive Officer
Johannesburg
11 July 2001
Transfer Secretaries: Ultra Registrars (Pty) Limited, 11 Diagonal
Street, Johannesburg 2001
Directors: Stephen Mulholland (Chairman)*, Pierre Joubert (Chief
Executive Officer), Wendy Appelbaum*, Michael Dowsley, Antonio
Fourie, Grattan Kirk, Paul Moses, Neels van Tonder *Non-
Executive
Registered Office: 6 Mellis Road, Rivonia 2128, POBox 2214,
Rivonia 2128
