| Wed 12 Mar 2003, 8:26 | | Decillion Limited - Reviewed Preliminary Results F |
|
DECILLION LIMITED
Registration number 1998/011692/06
Share code: DEC
ISIN code: ZAE000017612
Reviewed preliminary results for the 12 months ended 31 December 2002
INCOME STATEMENT
12 months ended 31 December 2002
Reviewed Audited
12 months to 12 months to
31 Dec 02 31 Dec 01
R000s R000s
Revenue 447 438 447 657
Operating expenses (413 522) (373 910)
Operating income 33 916 73 747
Net interest income 3 977 4 387
Net income before discontinued 37 893 78 134
operations
Discontinued operations and - (4 445)
disposals
Net income before goodwill and 37 893 73 689
tax
Goodwill (12 777) (9 938)
Net income before tax 25 116 63 751
Taxation (2 478) (7 814)
Net income after tax 22 638 55 937
Attributable to outside 1 928 50
shareholders
Attributable income 24 566 55 987
Headline earnings 37 343 70 370
Amortisation of goodwill (12 777) (9 938)
Discontinued operations and - (4 445)
disposals
Net weighted number of shares 174 498 177 911
in issue
Basic earnings per share 14,1 31,5
(cents)
Headline earnings per share 21,4 39,6
(cents)
Net fully diluted weighted 193 872 177 911
number of shares
Diluted earnings per share 12,7 31.5
(cents)
Fully diluted headline earnings 19,3 39,6
per share (cents)
Balance sheet as at 31 December 2002
Reviewed Audited
12 months at 12 months at
31 Dec 02 31 Dec 01
R000s R000s
ASSETS
Non-current assets 313 684 429 040
Investments 212 097 326 088
Fixed assets 7 988 13 668
Intangible assets 93 599 89 284
Current assets 496 183 470 172
Cash 132 075 123 935
Tradable securities 53 110 47 634
Accounts receivable 309 023 297 778
Taxation 1 975 825
809 867 899 212
LIABILITIES AND EQUITY
Non-current liabilities 96 029 120 537
Long-term liabilities 92 643 109 853
Deferred taxation 3 386 10 684
Current liabilities 370 884 409 935
Accounts payable 321 188 405 769
Tradable securities 39 696 4 166
Bank overdraft 10 000 -
Capital and reserves
Share capital 1 642 1 745
Share premium 152 603 163 010
Non-distributable reserves 11 883 34 512
Distributable reserves 176 325 166 615
Total shareholders" funds 342 453 365 882
Outside shareholders" interest 501 2 858
342 954 368 740
809 867 899 212
Net actual number of shares 164 619 174 521
Net asset value per share 208,0 209,6
Tangible net asset value per 151,2 158,5
share
Net fully diluted number of 183 902 174 521
shares in issue
Fully diluted net asset value 186,2 209,6
per share
Cash flow information 12 months ended 31 December 2002
Reviewed Audited
12 months to 12 months to
31 Dec 02 31 Dec 01
R000s R000s
Operating income before 33 916 73 747
interest
Elimination of non-cash items 21 932 7 622
(Increase)/decrease in (65 772) 33 755
working capital
Cash flows from operating (9 924) 115 124
activities
Net interest received 3 977 4 387
Dividends paid (2 375) (10 745)
Taxation paid (10 926) (30 975)
Net cash (outflow)/inflow (19 248) 77 791
from operating activities
Cash flows from investing
activities
Additions to fixed assets (3 343) (4 575)
Additions to intangibles (18 666) (9 791)
Disposals/(acquisition) of 79 179 (92 124)
investments
Loss on discontinued - (4 445)
operation
Net cash inflow/(outflow) 57 170 (110 935)
from investing activities
Cash flows from financing
activities
(Decrease)/increase in long- (17 210) 63 457
term liabilities
Treasury shares purchased (22 572) (29 753)
Net cash (outflow)/inflow (39 782) 33 704
from financing activities
Net (decrease)/increase in (1 860) 560
cash and cash equivalents
Cash and cash equivalents at 123 935 123 375
the beginning of the period
Cash and cash equivalents at 122 075 123 935
the end of the period
Divisional analysis
Capital Revenues Contribution
Treasury services 66 617 88 110 18 997
Funds management 164 969 78 559 16 980
Broking services 83 474 270 248 11 227
Head office and
investments 39 107 10 521 (9 311)
Average capital 354 167 447 438 37 983
Operating Annualised
margin return on
% equity %
21,6 28,5
21,6 10,3
4,2 13,4
(88,5) (23,8)
8,5 10,7
Accounting policies
Accounting policies adopted for purposes of this year-end report comply with
South African Statements of Generally Accepted Accounting Practice as well as
with applicable legislation and are consistent with those adopted in the prior
financial year.
Where necessary and appropriate, comparative figures have been restated to
conform with changes in presentation in the current year.
Reviewed results
The 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.
STATEMENT OF CHANGES IN EQUITY
12 months ended 31 December 2002
Reviewed Audited
12 months to 12 months to
31 Dec 02 31 Dec 01
R000s R000s
Share capital
Opening balance 1 745 1 730
Shares issued net of expenses 93 159
Treasury shares (196) (144)
Closing balance 1 642 1 745
Share premium
Opening balance 163 010 167 417
Shares issued net
of expenses 11 969 25 202
Treasury shares (22 376) (29 609)
Closing balance 152 603 163 010
Non-distributable reserves
Opening balance 34 512 (3 058)
Transfer from distributable
reserves 500 100
Changes in reserves (23 129) 37 470
Closing balance 11 883 34 512
Distributable reserves
Opening balance 166 615 125 009
Dividends paid (2 294) (10 745)
Share capitalisation issue (12 062) (3 536)
Transfer to
non-distributable
reserves (500) (100)
Net profit for the period 24 566 55 987
Closing balance 176 325 166 615
Total equity
Opening balance 365 882 291 098
Changes in equity (23 429) 74 784
Closing balance 342 453 365 882
Commentary
FINANCIAL OVERVIEW
2002 2001
R millions R millions
Revenues 447,4 447,7
Made up of
Proprietary returns 31,0 84,8
Advisory fees 106,5 79,0
Management fees 36,0 13,9
Broking 273,9 270,0
Net income before
discontinued operations 37,9 78,1
Discontinued operations
and disposals - (4,4)
Amortisation (12,8) (9,9)
Net income before tax 25,1 63,8
Tax and minorities (0,5) (7,8)
Attributable income 24,6 56,0
Shares in issue (million)
Actual weighted shares 174,5 177,9
Fully diluted weighted shares 193,9 177,9
Earnings per share (cents)
Earnings 14,1 31,5
Fully diluted earnings 12,7 31,5
Fully diluted headline
earnings 19,3 39,6
Net asset value per
share (cents)
Fully diluted 186,2 209,6
Tangible 151,2 158,5
STRATEGIC REVIEW
Decillion is firmly positioned as an investment banking boutique with niche and
specialised operations from which to capitalise profitably on market
opportunities. The management team has continued its focus on its strong risk
management, corporate governance and intellectual capital during 2002:
Risk management protected the capital of the Group and has been viewed
positively by other market participants, enhancing Decillion"s reputation as a
counterparty of choice.
A number of Board committees support the Board of Directors in maintaining
corporate governance standards and protecting the intellectual property of the
Group.
The outlook for 2003 is positive. The increased focus of the Group"s market
neutral revenue model and the extensive steps which have been taken to reduce
the cost base during the year position it favourably.
FINANCIAL REVIEW
As envisaged in the trading statement in December 2002, pretax profits and
earnings per share for the Decillion group were significantly lower in 2002 than
2001.
- The decline in profitability was largely due to an increase in costs, while
revenues remained stable. As the cost issues have been addressed, it is expected
that profitability is set to return to previous levels.
- Despite turbulent conditions in world markets and a series of closures within
the financial services sector, the Group earned a net return on group capital
after tax and amortisation of about 7% (approximately 11% pretax and
amortisation on equity including minority shareholder interests).
- Tangible net asset value per share decreased marginally to 151,2c from 158,5c
in 2001. Translation differences, the repurchase of treasury shares and the
payment of the dividend impacted on the net asset value.
- Good quality of earnings was achieved in 2002, with increased fee income in
absolute and relative terms, and a lower proportion of proprietary returns
enhancing the predictability of earnings going forwards.
- All three divisions were profitable at an operating income level.
- The reduction in headcount and other cost containment measures taken by
management result in the elimination of approximately R25 million in annualised
costs from 2003.
SEGMENTAL ANALYSIS
2002 2001
R000s % R000s %
Proprietary returns 2 990 7,9 28 053 35,9
Advisory fees 16 007 42,2 7 422 9,5
Treasury services 18 997 50,1 35 475 45,4
Advisory fees 19 492 51,4 8 276 10,6
Proprietary returns 2 381 6,3 17 703 22,7
Management fees (4 893) (12,9) (8 503) (10,9)
Funds management 16 980 44,8 17 476 22,4
Broking services 11 227 29,6 21 448 27,4
Head office and (9 311) (24,5) 3 735 4,8
investments
Net income before
discontinued
operations 37 893 100,0 78 134 100,0
Onshore 29 811 78,7 57 860 74,1
Offshore 8 082 21,3 20 274 25,9
Net income before
discontinued
operations 37 893 100,0 78 134 100,0
REVIEW OF OPERATIONS
Treasury services
Advisory fee income in 2002 increased to R57,9 million (2001: R46,4 million)
making a pleasing contribution of R16,0 million (2001: R7,4 million). This was
despite the personnel departures in early 2002, demonstrating the strength of
client relationships and intellectual capital.
Low volatility reduced arbitrage and relative trading opportunities. Trading
revenues reduced to R30,2 million (2001: R63,4 million) with the emphasis placed
on providing liquidity to an otherwise range-bound market, entrenching Decillion
as a preferred counterparty.
Overall staff expenses were lower in 2002, reflecting an average headcount
reduction of about ten people and the lower levels of incentive payable
resulting from lower proprietary profits. A non-recurring R6,3 million charge
was incurred when offshore advisory operations were closed during the
consolidation phase.
The risk management disciplines on which the business was founded were fully
maintained during the period of lower profitability, with no relaxation of risk
limits or parameters and no speculative directional positioning. Particular
emphasis continues to be placed on risk, profit and liquidity measurement
systems.
Among the positive indicators for 2003, and beyond, are that Decillion"s client
base continues to broaden, both in the proprietary and advisory segments, and
among commercial and parastatal customers as well as banks. Decillion is
becoming an important provider of liquidity to the market. The management
believes that this broadening of its client base supports its view of the
professionalism and quality of Decillion"s people, and the innovation they offer
their clients.
Funds management
The division contributed an operating profit of R17,0 million (2001: R17,5
million). While the domestic operating profit has grown by 49%, this has been
largely negated by losses suffered in our European operations.
The domestic fund management business achieved an operating profit of R31,7
million (2002: R21,3 million). The quality of earnings was enhanced as only 4%
(2001: 35%) thereof was derived from investment returns. The investment products
division concluded a number of large transactions with a total nominal value of
R1,3 billion (2001: R1,2 billion), culminating in a very successful year. The
team continues to develop new products and expand their corporate and
institutional client base.
During the year Decillion launched two further hedge funds, an equity fund and
the other a fixed income orientated fund. This product diversification has
assisted the division to grow assets under management from R822 million to R1,1
billion, a 39% increase. All fund products delivered excellent risk adjusted
returns during a year characterised by unprecedented market volatility.
The international business reported an operating loss of R14,7 million (2001
loss R3,9 million). 2002 was a disappointing year for Decillion in its single
fund businesses. With sub-optimal funds under management and returns below
expectation, Decillion decided to exit managing the Odyssey Fund. We continue to
manage the Convertible Arbitrage Fund, while analysing opportunities to ensure
profitability for the international operation.
The Funds Management business will be further developed through a combination of
product development, performance delivery and client service. Given the base and
track record established to date, the management is confident of improved
performance in 2003.
Broking services
The division managed to achieve a 26% cost saving - US$3,6 million, which was
mainly from consolidating and streamlining the back office functions. The
reorganisations, including relocating the swaps team to Nyon, and external
market conditions however, resulted in a 32% - US$5,1 million decrease in
revenue. This was primarily in the first half of 2002. Revenues normalised in
the second half of the year. The offshore broking division contributed R5,2
million (2001: R15,7 million).The South African broking operation enjoyed
another successful year; increasing operating profits by 6% to R6 million (2001:
R5,7 million).
The offshore broking business"s distribution capability is demonstrated by its
transactions in bonds for clients exceeding US$16 billion nominal per annum. In
addition, it is a dominant player in emerging market fixed income derivatives.
The broking units are thus important components of the Group"s ambitions to
expand into cross-border debt and fixed income markets.
Head office and investments
Central administration costs were R5,6 million (2001: R3,1 million) with once-
off listing and legal expenses representing R2,1 million of the increase.
The contracted sale of Decillion Solutions (a Singapore-based IT business) was
not completed by the purchaser in December 2002. Decillion Solutions made a loss
before goodwill and tax of R8,1 million. Alternative methods of dealing with or
disposing of this subsidiary are being actively pursued.
Profits on private equity investments yielded only R0,4 million (2001: R2,6
million). Interest income is slightly lower at R4,0 million (2001: R4,4
million).
In line with its increased focus on its core competencies, Decillion decided in
June to dispose of its private equity investments and had by year-end reduced
its investments from R44,2 million to 14,7 million. The cash generated was
applied to the ongoing share buyback programme during the second half of the
year.
DIVIDEND
Notice is hereby given that the Board of Directors has declared a final dividend
of 3 cents per share for the year ended 31 December 2002.
In terms of the requirements of STRATE the last day to trade cum dividend will
be Friday, 28 March 2003. The shares will commence trading ex dividend as from
Monday, 31 March 2003 and the record date will be Friday, 4 April 2003. The
dividend will be paid on Monday, 7 April 2003.
Share certificates may not be dematerialised or rematerialised between Monday,
31 March 2003 and Friday, 4 April 2003, both days inclusive.
STRUCTURING FOR SHARPER FOCUS
The Group has sharpened the focus of its strategy to its investment banking
activities. As a result, Decillion will make two significant changes to the way
it manages its businesses from 2003 in order to leverage its positioning as an
investment banking boutique.
- Capital will be centralised in the Group"s Capital Markets division to
maximise the Group"s ability to participate in transactions which it originates,
and to deploy surplus cash to trading and fund portfolios on a more considered
basis.
- The composition of the three pillars has been altered to bring together the
business units most likely to benefit from synergies resulting from closer
internal cooperation.
In summary:
- Funds Management will be reported inclusive of its related executing broking
activities and will exclude the specialist product units earning advisory fees.
The division will be focused on what has always been its core business, that is,
management of hedge fund products.
- A new Corporate and Institutional Finance division includes all the business
units focused on earning advisory fees, whether from corporate, governmental,
parastatal or investment clients. The units comprising Corporate and
Institutional Finance were previously within Treasury Services and Funds
Management.
- A new Capital Markets division, consisting of proprietary and client units,
will comprise all the Group"s trading activities and securities distribution
activities in the domestic and offshore markets. The units comprising Capital
Markets were previously within Treasury Services and the international broking
unit which operates predominantly in the public debt and related fixed income
markets.
In the 2002 annual report, a reconciliation will be provided between the 2002
and 2003 divisional structures to ensure full transparency for shareholders and
analysts. The Group"s substantial wholesale broking businesses have higher cost
to income ratios than the other pillars because of the contractual broker
commission obligations. To enable more accurate groupwide analysis, in addition
to the presentation of statutory accounts, the directors" report will present
these ratios with these obligations netted out of gross group revenue.
DIRECTORS
During the past six months the following changes to the Board of Directors have
occurred:
The Board welcomes Mr Stewart Millman as a non-Executive Director. Mr Millman
has been appointed Chairman of Decillion"s Audit Committee.
Ms Sindi Zilwa has resigned as a non-Executive Director. The Board thanks Ms
Zilwa for her contribution.
By order of the Board
12 March 2003
Directors: AJN Smit (CEO), JF Marais* (Chairman), TJ Davis, U Meyer, AP Nkuna*,
WF Spruyt*,
Prof NI Morgan*, SI Millman* (*non-executive)
Transfer secretaries: Computershare Investor Services Limited, 70 Marshall
Street, Johannesburg, 2001
Registered office: 26 Sturdee Avenue, Rosebank, 2196 Telephone: +27 11 328 1000
Facsimile: +27 11 442 4456 Company secretary email: laurindad@decillion.net
Results on internet: www.decillion.net
