| Tue 28 Jan 2003, 9:55 | | Connection Group Holdings Limited - Results for th |
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CONNECTION GROUP HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1997/005390/06)
(ISIN code: ZAE 000016630)
(Share code: CCT)
Results for the six months ended 30 November 2002
Turnover (Continuing operations) up 7,6% at R392m
Profit before tax up 31,7% at R11m
Headline earnings per share (Continuing operations) up 15,8% at 16,91c
Group Income Statement
Six months Six months Year ended
ended ended
30 Nov 2002 30 Nov 2001 % 31 May 2002
R`000 R`000 Increase/ R`000
(reviewed) (reviewed) (decrease) (audited)
Revenue 391 775 380 105 3,1 886 139
Continuing 391 775 364 119 7,6 858 670
operations
Discontinued - 15 986 - 27 469
operations
Cost of sales (289 656) (280 507) 3,3 (673 003)
Staff costs (40 067) (42 683) (6,1) (91 307)
Other operating (46 591) (42 067) 10,8 (86 097)
expenses
Operating profit 15 461 14 848 4,1 35 732
before interest
and depreciation
Continuing 15 461 13 558 14,0 34 631
operations
Discontinued - 1 290 - 1 101
operations
Depreciation and (4 878) (5 477) (10,9) (11 015)
amortisation
Operating profit 10 583 9 371 12,9 24 717
before interest
Net interest 424 (667) - (564)
received (paid)
Profit before 11 007 8 704 26,5 24 153
exceptional items
Continuing 11 007 9 353 17,7 27 085
operations
Discontinued - (649) - (2 932)
operations
Exceptional items - - - (18 875)
Amortisation of - (344) - (697)
goodwill
Profit before 11 007 8 360 31,7 4 581
taxation
Taxation (3 080) (2 076) 48,4 (2 378)
Profit after 7 927 6 284 26,1 2 203
taxation
Attributable to - (102) - -
minority
shareholders
Net profit for the 7 927 6 182 28,2 2 203
period
Continuing 7 927 6 825 16,1 20 874
operations
Discontinued - (643) - (18 671)
operations
Headline earnings
per share -
continuing 16,91 14,60 15,8 44,68
operations (cents)
Headline earnings 16,91 13,97 21,1 41,24
per share (cents)
Earnings per share 16,91 13,19 28,2 4,70
(cents)
Fully diluted
headline earnings
per share (cents) 15,76 12,05 30,8 36,30
Fully diluted 15,76 11,39 38,4 4,15
earnings per share
(cents)
Weighted average
number of ordinary
shares in issue 46 875 46 875 - 46 875
(000`s)
Net asset value 119,02 111,35 6,9 102,25
per share (cents)
Reconciliation of Headline Earnings per share
Six months Six months Year
ended ended ended
30 Nov 2002 30 Nov 2001 31 May 2002
R`000 R`000 R`000
(reviewed) (reviewed) (audited)
Net profit attributable to 7 927 6 182 2 203
ordinary shareholders
Adjustments:
Loss on disposal of fixed - 21 70
assets
Discontinued operations - - 1 430
Net after tax loss on sale - - 14 931
of investments
Amortisation of goodwill - 344 697
Headline earnings 7 927 6 547 19 331
attributable to ordinary
shareholders
Weighted average number of 46 875 46 875 46 875
shares in issue (000`s)
Headline earnings per share 16,91 13,97 41,24
(cents)
Headline earnings 7 927 6 547 19 331
attributable to ordinary
shareholders
Discontinued operations - 299 1 613
Headline earnings per share 7 927 6 846 20 944
- continuing operations
Weighted average number of 46 875 46 875 46 875
shares in issue (000`s)
Headline earnings per share 16,91 14,60 44,68
(cents) - continuing
operations
Group Balance Sheet
30 Nov 2002 30 Nov 2001 31 May 2002
R`000 R`000 R`000
(reviewed) (reviewed) (audited)
Assets
Non-current assets 58 196 76 410 51 106
Plant and equipment 24 261 24 201 22 800
Non-current receivables 13 011 3 271 4 302
Intangible assets - 23 016 -
Deferred taxation 20 924 25 922 24 004
Current assets 149 265 139 632 195 165
Inventories 76 310 68 336 75 343
Trade and other receivables 33 489 46 090 38 633
Bank balances and cash 39 466 25 206 81 189
Total assets 207 461 216 042 246 271
Equity and liabilities
Capital and reserves 55 790 52 189 47 927
Share capital and premium 31 536 31 536 31 536
Foreign currency translation 1 151 1 498 1 215
reserve
Accumulated profit 23 103 19 155 15 176
Minority shareholders - 102 -
Shareholders` equity 55 790 52 291 47 927
Current liabilities 151 671 163 751 198 344
Trade payables and provisions 151 671 163 751 198 344
Total equity and liabilities 207 461 216 042 246 271
Group Cash Flow Statement
Six months Six months Year ended
ended ended
30 Nov 2002 30 Nov 2001 31 May 2002
R`000 R`000 R`000
(reviewed) (reviewed) (audited)
Net cash inflow from 15 821 14 321 33 886
trading activities before
working capital movements
Working capital movements (51 205) (14 062) 10 444
Investment to maintain (2 874) (988) (2 213)
operations
Investment to expand (3 465) (6 469) (11 581)
operations
Cash inflow on disposal of - - 18 249
subsidiary
Net (decrease) increase in (41 723) (7 198) 48 785
cash and cash equivalents
Cash and cash equivalents 81 189 32 404 32 404
at beginning of the period
Cash and cash equivalents 39 466 25 206 81 189
at end of the period
Capex for the period 6 339 7 499 13 873
Segmental Analysis
Six Six Year ended
months months
ended ended
30 Nov 30 Nov % 31 May
2002 2001 2002
R`000 R`000 Increase/ R`000
(reviewed) (reviewed) (decrease) (audited)
Turnover per division
Incredible Connection 303 674 304 447 (0,3) 707 955
Enterprise Connection 86 305 62 015 39,2 154 744
Ultimate Connection - 10 340 - 19 275
Group Services 1 796 3 303 (45,6) 4 165
Operating profit
(loss) before
interest and
depreciation
Incredible Connection 16 216 14 590 11,1 37 321
Enterprise Connection 2 859 (2 290) 224,8 (356)
Ultimate Connection - 2 479 - 2 342
Group Services (3 614) 69 - (3 575)
Commentary
OVERVIEW
The board of Connection Group is pleased to report a real growth in earnings for
the six months to November 2002.
We are further pleased to report that both Incredible Connection and Enterprise
Connection generated solid earnings, with, in particular, a very strong
turnaround from Enterprise Connection. Incredible Connection again produced a
very good return on sales of 4,2% and Enterprise Connection an acceptable 2,9%.
Connection Group is now in the position where for the first time all entities in
the Group are profitable.
The 7,6% like-on-like growth in revenue is largely due to good growth in
turnover at Enterprise Connection. Incredible Connection`s turnover growth
remained flat when compared to the prior period, during which sales were boosted
by panic buying, precipitated by the collapse of the Rand/Dollar exchange rate.
In addition, the four interest rate increases led to a marked slow down in the
retail durable market sector.
In the period to November the Group bought back 22,2m shares into the Share
Trust Scheme for the sum of R8,8m. This allowed the Group to reduce the impact
on fully diluted headline earnings. In addition, the share consolidation, odd
lot offer and share buy back announced at the Group`s year-end were completed.
The results of these activities were published in November. The comparative
earnings per share and net asset value per share calculations have been restated
to reflect the share consolidation.
Connection Group commenced a process of strategic change in May 2002 with the
sale of Ultimate Connection and the subsequent transfer of its listing to the
retail sector of the JSE Securities Exchange SA. Connection Group continues the
next period with two very focused and profitable businesses.
REVIEW OF OPERATIONS
Incredible Connection
Incredible Connection delivered solid earnings growth with operating profit
before interest up 10% to R11,7m and a 4,2% return on sales. This performance
was achieved despite the tough trading conditions in the technology retail
category.
The trading environment was characterised by slower demand for PC`s on the back
of the four interest hikes, lack of stock continuity from some of the largest PC
vendors and negative inflation in IT hardware as a result of the strengthening
Rand. The management of Incredible Connection was, however, able to strengthen
margins and contain costs sufficiently to mitigate the pressures on turnover.
As a result of the difficult market conditions Incredible Connection tempered
the pace of its store expansion programme, opening three stores in Windhoek,
Klerksdorp and Polokwane. Two of the three stores were opened in the last weeks
of October and November and therefore made no contribution to the results in the
first half.
Incredible Connection continued to make good progress in respect of its
strategic imperatives. Significant levels of investment were made in the ongoing
development of human capacity, particularly in the categories of selling skills,
performance management and Unisa`s Retail Management Programme.
Further investments were made in Incredible Connection`s IT infrastructure,
thereby concluding the strategic initiative to replace and upgrade the overall
IT platform and retail software. The new IT platform will ensure a sufficiently
robust and reliable IT system for both Incredible Connection`s and the Group`s
current and future growth needs.
Good progress was made in the merchandise environment in pursuit of additional
significant strategic relationships. These new relationships will introduce more
international brands and range extensions in the near future, reinforcing
Incredible Connection`s positioning as the market leader in the sector.
Independent qualitative and quantitative research conducted during the period by
one of South Africa`s premier research companies confirms Incredible
Connection`s position as the authoritative and leading specialist IT retailer in
all attributes deemed important by consumers. The research highlights both the
efficacy of Incredible Connection`s strategy and the strong foundation upon
which it will be built for the future. In the next six months Incredible
Connection will focus on delivering a steady performance through what is likely
to remain a difficult trading environment.
Enterprise Connection
Enterprise Connection had a singularly strong performance generating operating
profit before interest of R2,5m, a significant turnaround on last year`s losses
of R2,8m. The restructuring in January 2002 brought immediate benefits to
Enterprise Connection. A more focused and rationalised business resulted in a
reduced cost base and this coupled with good revenue growth ensured Enterprise
Connection`s strong performance. Enterprise Connection has now completed one
full year of uninterrupted monthly profit generation and has a firm foundation
on which to build.
Although corporate spending has slowed and empowerment credentials have become a
significant purchasing criterion for government and parastatal clients,
Enterprise Connection managed to further strengthen its customer and vendor
relationships and forge strategic alliances with some competitors, allowing it
to increase turnover and profitability for the half year.
While market conditions are not likely to improve in the short term, Enterprise
Connection has a manageable cost base and some exciting products and projects to
deliver to the market that should build on the performance of the last six
months.
Financial results
The financial results for the six months ended 30 November 2002 have been
prepared on a basis consistent with the prior year annual financial statements
and in compliance with South African Statements of Generally Accepted Accounting
Practice. The results to 30 November 2002 exclude Ultimate Connection which was
sold effective 31 May 2002. The results to 30 November 2001 incorporate Ultimate
Connection and a number of business units within Enterprise Connection which
were closed, thereby making direct comparison difficult.
The Group achieved a 13% increase in operating profit before interest owing to
higher earnings from Incredible Connection and an excellent performance from
Enterprise Connection. Incredible Connection was able to improve its margins
while maintaining its costs at prior year levels. Enterprise Connection
benefited from good revenue growth, improved margins and a significant reduction
in overheads.
In the current period the Group earned interest of R0,4m due primarily to the
proceeds on disposal of Ultimate Connection and improved working capital
management at Incredible Connection.
The notional tax charge of R3,1m relates to the movement in the deferred
taxation account and, therefore, has no cashflow implications. As at 30 November
2002 the Group has R56,7m of tax losses available to it.
In respect of working capital, both inventory and receivables were extremely
well controlled during the period. The Group utilised R35,4m of cash in
operations due primarily to a reduction in trade payables. The decrease in trade
payables was the result of the reduction in purchasing in the October/November
period when compared to April/May 2002. The Group spent R6,3m on capex during
the six months, which included opening three new retail outlets as well as
upgrading the IT infrastructure. At the end of November the Group had R39,5m of
cash available.
Capital commitments contracted but not provided for amount to R1,2m. Any future
capital expenditure will be funded from existing cash resources. Operating lease
commitments payable within a one year period amount to R18,1m and those payable
thereafter amount to R45,8m. The results have been reviewed by Deloitte & Touche
and their audit report is available for inspection at the registered office of
the company.
PROSPECTS
In the forthcoming period, Connection Group will concentrate all its energies
and resources on sustaining the profitability at Enterprise Connection and
building a substantive retail organisation over time.
The Group will re-evaluate and refine its business model in respect of its
focus, positioning, cost structures and customer offering. The initiatives to be
undertaken will ensure that all organisational structures, strategies and
business processes are aligned to enhance profitability in the medium to long
term. To more accurately reflect the Group`s trading cycles, in terms of
consumer demand and working capital requirements, it is proposed that the Group
change its year end to 31 August.
It is anticipated that market conditions in the technology and IT retail sectors
will remain challenging in the next period and this, together with the very
strong performance of Incredible Connection in the second half of last year,
will make year on year revenue growth difficult. Despite the tough economic
conditions the Group expects to improve its profitability in the next period and
deliver real earnings growth for its shareholders.
As stated in the last annual report, it is the Group`s intention to pay a
dividend at the year end.
For and on behalf of the board
S. Mulholland A. Fourie
Chairman Chief Executive Officer
Johannesburg
27 January 2003
Transfer Secretaries: Ultra Registrars (Pty) Limited, 11 Diagonal Street,
Johannesburg 2001
Directors: Stephen Mulholland (Chairman)*, Antonio Fourie (Chief Executive
Officer), Wendy Appelbaum*, Pierre Joubert*, Grattan Kirk, Andisiwe Kawa*, Paul
Moses, Gnter Steffens* *Non-Executive
Registered Office: 6 Mellis Road, Rivonia 2128, PO Box 2214, Rivonia 2128
www.connect.co.za
Date: 28/01/2003 09:00:00 AM Produced by the JSE SENS Department
