| Mon 15 Nov 2004, 10:55 | | Financial results for the six months ended 30 Sep |
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Alexander Forbes - Unaudited financial results for the six months ended 30
September 2004
Alexander Forbes Limited
(Incorporated in the Republic of South Africa)
(Registration number 1958/001974/06)
ISIN: ZAE000018230
Share code: AFB
(`Alexander Forbes` or `the Company`)
Unaudited financial results for the six months ended 30 September 2004
- Headline earnings per share up 16%
- R1,6 billion of debt repaid
- Investment Solutions - global assets exceed R76 billion
Review of operations
Overview
Alexander Forbes has significantly strengthened its financial position since the
previous financial year-end, having:
- settled R1,6 billion of offshore borrowings and exchangeable bond debt;
- removed any uncertainty regarding the potential dilutory impact of equity
conversion rights previously applicable under the exchangeable bonds; and
- recorded headline earnings per share growth of 16% for the period under
review.
The six months of trading to 30 September 2004 have been characterised by:
- strong operational performances across all the South African businesses;
- reduced profits from the International Risk Services business;
- continued growth and progress in International Financial Services; and
- continued strong growth in the assets of Investment Solutions - global
assets now exceed R76 billion.
Review of operations
Africa (principally South Africa)
The African operations produced strong organic growth with revenue and operating
profit increasing by 11% and 15% respectively.
- Financial Services
The Financial Services business recorded strong growth in operating profit on
the back of improved profits in the Health Care and Financial Planning
Consulting businesses as well as good revenue gains in the core Actuarial
Consulting and Administration business. Overall, operating profit increased 11%
to R89 million during the period under review.
- Risk Services
The Risk Services (corporate insurance broking), Personal Services (personal
lines insurance) and Guardrisk (cell captive insurance facilities) businesses
have again delivered a strong combined performance with operating profit growing
by 13% to R104 million. This increases to R128 million after including
operational interest income. The core corporate insurance broking business
achieved modest growth building on strong prior years` results. The operating
results were enhanced by success achieved in delivering innovative new products
and services through the research and development unit CRE-8 as well as
Guardrisk. The Personal Services business again produced strong profit growth.
- Investment Solutions
Investment Solutions recorded strong growth in operating profit which increased
by 20% to R89 million. This was achieved through further net inflows of assets
under management of R2,7 billion during the six months to September 2004 and the
impact of favourable market conditions. This resulted in South African assets
under management reaching R72,7 billion at 30 September (R76,3 billion combined
with the UK business).
International (principally United Kingdom)
The international operations contributed GBP11,6 million to the group`s
operating profit, reflecting a decrease of 26%.
- Financial Services
The Financial Services business recorded a 4% growth in operating profit to
GBP2,5 million. The AFFS business recorded revenue growth of 21% with operating
profit increasing by 67% to GBP1,0 million. The Lane Clark & Peacock (LCP)
business recorded 17% revenue growth, largely through the acquisition of
actuarial consulting businesses in Belgium and Switzerland. LCP continues to
make client gains, however operating results were adversely affected by changing
market conditions in the United Kingdom, one-off costs incurred in the first
quarter of the financial year and timing issues relating to the Switzerland
acquisition. This resulted in the operating profit of LCP declining by 17%.
In accordance with the group`s accounting policies, intra-group profits are
eliminated when preparing the consolidated results. This has resulted in GBP0,4
million of net commissions earned by the AFFS business (in respect of sales of
Investment Solutions products) being excluded from the current year`s results.
The results are reflected net of this amount.
- Risk Services
The Risk Services business generated revenues GBP58,5 million, 5% behind prior
year. The business was negatively impacted by softening property and casualty
insurance rates and the continued impact of the weaker dollar on US$ denominated
brokerage. This was partly offset by further gains in the professional indemnity
business. However, the overall results declined by 26% to GBP7,3 million. After
including operational interest income, this increases to GBP8,5 million.
Operating profits were impacted by cost pressures (including costs incurred in
preparing the business for Financial Services Authority regulation in January
2005) and the closure of the Argentina business at the end of the previous
financial year.
- Investment Solutions
The UK Investment Solutions business recorded further new business gains with
assets under management increasing from GBP196 million to GBP313 million during
the six months to September 2004. The operating loss of GBP0,9 million should be
viewed in the context of the economic value of the client base and assets that
have been created during this start-up period.
- Direct Marketing
The operating profit of the Direct Marketing business has decreased in line with
expectations to GBP3,1 million for the period under review. The business
continues to operate profitably but on a smaller scale.
Financing
The group has significantly strengthened its financial position since the
previous financial year-end having made capital repayments on term loan debt,
fully settled the Merrill Lynch loan debt in the United Kingdom and repurchased
the exchangeable bonds held by VenFin. The total debt repaid during the period
under review amounts to R1,6 billion and has been funded through the proceeds of
the R1,159 billion equity issue of 114,8 million new ordinary shares to VenFin,
the release of the matching Merrill Lynch deposit in South Africa of R227
million and the balance from internal cash resources. This has resulted in a
materially stronger Alexander Forbes balance sheet and has removed uncertainty
for the group and its shareholders regarding the potential dilutionary effect of
equity conversion rights previously applicable under the exchangeable bonds.
The strengthening of the group balance sheet is reflected in the net gearing
ratio of the group, which has reduced to 17% (31 March 2004: 51%).
During the period under review, net interest costs (including operational
interest income) decreased from R39 million to R10 million as a result of
interest earnings on retained profits and the reduction in interest paid
following the purchase of the exchangeable bonds approved by shareholders on 6
September 2004. The decrease in operational interest income, resulting from
interest rate cuts in South Africa, has been offset by decreased borrowing costs
on term loan borrowings in South Africa and increased deposit rates in the
United Kingdom.
The pro-forma financial effects of the repurchase of the exchangeable bonds and
equity issued to VenFin were disclosed in the SENS announcement dated 20 July
2004.
Earnings per share
Attributable headline earnings increased by 21% to R279 million. The equity
issue referred to above resulted in relatively lower growth in headline earnings
per share, increasing by 16% to 77,7 cents per share. Excluding the non-trading
currency gain and loss from both the current and prior periods, headline
earnings per share increased by 7%.
Insurance broking industry development
As advised to shareholders in our SENS announcement of 28 October 2004, we
initiated a review of commission arrangements in our United Kingdom and Africa
insurance broking businesses. In line with the approach being adopted in the
global insurance broking industry, we will cease arrangements amounting to
approximately GBP2,5 million in revenue per annum. This is less than 1,5% of
annual revenues from our Risk Services businesses and relates primarily to our
United Kingdom insurance broking business. These arrangements are legal and have
been common industry practice.
Developments and prospects
Our South African businesses continue to focus on further growth, building on
the good results achieved in the first half of the financial year. At the same
time, significant progress has been made in the transformation of these
businesses. Our empowerment shareholders, headed by Shanduka (formerly MCI),
continued to play an important role in the development of our South African
businesses.
The decline in the profits of our International Risk Services business has been
a cause for concern and we are undertaking a comprehensive review to ensure that
the operations are optimally placed to deliver organic growth in the future.
There may be one-off costs associated with actions required in the short-term
and, therefore, the international results are likely to remain under pressure
for the remainder of the financial year. These actions are aimed at providing
the strong operational platform required in order to deliver organic growth and
make further acquisitions in future.
For and on behalf of the board
PL Heinamann RI Gordon
Chairman Group Chief Executive
15 November 2004
Income statement
30 30 31 March
September September
2004 2003 2004
Rm % Rm Rm
Revenue from operations 2 265 3 2 202 4 436
Other revenue 16 14 13
Total revenue 2 281 3 2 216 4 449
Operating expenses (1 866) (1 789) (3 663)
Operating profit 415 (3) 427 786
Net interest costs (10) (39) (84)
Associates` profits 5 3 9
Profit before non-trading items 410 5 391 711
Non-trading currency gain/(loss) 5 (27) 6
Headline profit before tax 415 14 364 717
Goodwill written off and other capital (11) (9) (27)
items
Profit before taxation 404 14 355 690
Taxation (116) (113) (211)
Profit after taxation 288 19 242 479
Outside shareholders` interests (20) (20) (40)
Attributable profit 268 21 222 439
EARNINGS PER SHARE
- Headline (cents) 77,7 16 67,0 135,1
- Attributable (cents) 74,7 16 64,3 127,2
DILUTED EARNINGS PER SHARE
- Headline (cents) 76,9 16 66,4 132,8
- Attributable (cents) 73,8 16 63,8 125,1
Number of shares (millions)
- issued (net of treasury shares) 460 345 345
- weighted average 359 345 345
- diluted weighted average 363 348 351
Net asset value per share (cents) 511 278 330
Balance sheet
30 30 31 March
September September
2004 2003 2004
Rm Rm Rm
Total assets of investment and insurance 73 145 51 443 64 890
operations
Property, plant and equipment 296 303 289
Goodwill 2 149 1 913 2 004
Investments in associates 104 112 103
Investments and loans receivable
- interest-bearing 138 629 103
- non-interest-bearing 10 11 46
Total non-current assets 2 697 2 968 2 545
Cash and cash equivalents 1 940 2 399 2 137
Interest-bearing current receivables 222 240 313
Other current assets 1 779 1 410 1 804
Total current assets 3 941 4 049 4 254
Total assets 79 783 58 460 71 689
Total liabilities of investment and insurance 73 145 51 443 64 890
operations
Ordinary shareholders` funds 2 352 962 1 140
Outside shareholders` interests 133 95 107
Total shareholders` funds 2 485 1 057 1 247
Long-term liabilities
- interest-bearing 510 2 365 1 826
- non-interest-bearing - 6 3
Deferred tax balances (66) (32) (64)
Provision for post-retirement benefits 158 178 170
Total non-current liabilities 602 2 517 1 935
Interest-bearing current payables 196 166 309
Other current liabilities and provisions 3 355 3 277 3 308
Total current liabilities 3 551 3 443 3 617
Total equity and liabilities 79 783 58 460 71 689
Segmental analysis
Revenue Operating profit
30 30 30 30
Sept Sept Sept Sept
2004 % 2003 2004 % 2003
International (GBPm)
Risk Services 58,5 (5) 61,6 7,3 (26) 9,8
Financial Services 31,1 19 26,2 2,5 4 2,4
Lane Clark & Peacock 16,9 17 14,5 1,5 (17) 1,8
AFFS 14,2 21 11,7 1,0 67 0,6
Investment Solutions 1,8 - 1,8 (0,9) (50) (0,6)
Intra-group profit elimination (0,6) - - (0,4) - -
Direct Marketing 4,8 (19) 5,9 3,1 (23) 4,0
Total international (GBPm) 95,6 - 95,5 11,6 (26) 15,6
Total international (Rm) 1 117 (4) 1 165 133 (27) 181
Africa (Rm)
Risk Services 417 8 385 104 13 92
Financial Services 452 9 415 89 11 80
Investment Solutions 279 18 237 89 20 74
Total Africa (Rm) 1 148 11 1 037 282 15 246
Total Group (Rm) 2 265 3 2 202 415 (3) 427
International Africa Total
30 30 30 30 30 30
Sept Sept Sept Sept Sept Sept
2004 2003 2004 2003 2004 2003
Operating profit 133 181 282 246 415 427
Net interest costs (36) (60) 26 21 (10) (39)
Operational interest income 13 13 24 40 37 53
Net finance costs (49) (73) 2 (19) (47) (92)
Associates` profits 5 2 - 1 5 3
Profit before non-trading items 102 123 308 268 410 391
Non-trading currency gain/(loss) 5 (27) - - 5 (27)
Headline profit before tax 107 96 308 268 415 364
Taxation on headline profit (33) (30) (83) (83) (116) (113)
Outside shareholders` interests (10) (13) (10) (7) (20) (20)
Headline earnings 64 53 215 178 279 231
Abridged cash flow statement
30 30 31 March
September September
2004 2003 2004
Rm Rm Rm
Cash from operating activities
Cash generated from operations 495 482 934
Increased investment in working capital (10) (15) (28)
Taxation and dividend payments (362) (329) (439)
Net cash inflow from operating activities 123 138 467
Cash flows from fiduciary activities
Movements in insurer balances 103 285 (106)
Refund of vendor loan notes (2) (42) (50)
Net cash inflow/(outflow) from fiduciary 101 243 (156)
activities
Cash flows from investing activities
Subsidiaries and associates acquired (119) (19) (79)
Fixed assets acquired (81) (127) (170)
Other net movements (11) 91 78
Net cash outflow from investing activities (211) (55) (171)
Cash flows from financing activities
Proceeds of shares issued 1 160 10 19
Repayment of debt (1 569) (72) (496)
Acquisition financing raised 113 5 10
Withdrawal of matching deposit 227 - 280
Funding of premium finance receivables (126) (76) 67
Other net movements (15) (67) (77)
Net cash outflow from financing activities (210) (200) (197)
Net cash flows (197) 126 (57)
Foreign subsidiaries` translation adjustment - (121) (201)
on cash and cash equivalents
Net movement in cash balances (197) 5 (258)
Statement of changes in equity
Share Treasury
capital share
and
and share Other
share option
premium reserves reserves Total
Rm Rm Rm Rm
At 31 March 2003
- As previously reported 65 (87) 971 949
- Adoption of accounting for share 41 303 (344) -
option costs
Share issues 10 10
Movement in share option reserve 6 22 28
Treasury shares purchased (17) (17)
Translation and other movements 1 1
Attributable profit 222 222
Distribution to shareholders (53) (178) (231)
At 30 September 2003 69 221 672 962
Share issues 9 9
Movement in share option reserve 9 19 28
Treasury shares purchased (7) (7)
Translation and other movements (69) (69)
Attributable profit 217 217
At 31 March 2004 87 214 839 1 140
Share issues 1 160 1 160
Movement in share option reserve 14 14
Translation and other movements (1) (1) 6 4
Attributable profit 268 268
Distribution to shareholders (234) (234)
At 30 September 2004 1 246 213 893 2 352
Notes to the financial statements
1. Basis of accounting
The financial information has been prepared on the historical cost basis in
accordance with South African Statements of Generally Accepted Accounting
Practice. The accounting policies used in preparing the financial information
are consistent with those of the previous year except for the adoption of
accounting for share option costs in accordance with the new accounting standard
AC139 and the change in the basis of accounting for goodwill amortisation in
accordance with the new accounting standard AC140.
- AC139 (IFRS2) requires the costs of share options granted to employees to be
spread over the vesting period of the options and expensed through the income
statement. This standard has been adopted with full retrospective effect which
has resulted in a R344 million decrease in opening reserves and share option
expenses of R14 million and R28 million in the current and prior period
respectively. (The share option expense for the full year ended 31 March 2004 is
R56 million.)
- AC140 (IFRS3) on business combinations requires goodwill balances to be
carried at net book value at implementation date and thereafter at cost. These
carrying balances are subject to an annual impairment assessment, but are no
longer amortised. The group has implemented this change with effect from 31
March 2003 as permitted by AC140 and, accordingly, comparative figures have been
restated to remove goodwill amortisation charges from this date. As a result,
attributable earnings have increased by R65 million for the period ended 30
September 2003 and by R143 million for the year ended 31 March 2004. There was
no effect on headline earnings as previously reported.
30 30 31 March
September September
2004 2003 2004
Rm Rm Rm
2. Exchange rates
The income statements and balance sheets of
foreign subsidiaries have been translated to
rand as follows:
- Weighted average R: GBP rate 11,7 11,9 12,1
- Closing rate R: GBP rate 11,6 11,7 11,6
3. Net interest costs
Interest received
Operational interest income 37 53 88
Loan swap deposit 12 18 24
Other net deposits 19 36 32
68 107 144
Interest paid
Loan swap liability (12) (18) (24)
Bank borrowings (26) (70) (78)
Exchangeable bond (40) (58) (126)
(78) (146) (228)
Net interest costs (10) (39) (84)
4. Reconciliation of headline earnings per
share
Attributable profit 268 222 439
Add: Goodwill written off and other capital 11 9 27
items
Headline earnings 279 231 466
Weighted average number of shares 359 345 345
Headline earnings per share (cents) 77,7 67,0 135,1
5. Associates
Carrying value in the balance sheet 104 112 103
Directors` valuation of associates 163 172 141
6. Capital expenditure and commitments
Depreciation for the period 77 54 112
Capital expenditure for the period 81 127 170
Operating lease commitments
- Due within one year 199 160 197
- Thereafter 913 1 134 1 270
1 112 1 294 1 467
Directors
PL Heinamann (Chairman), JVH Robins* (Deputy chairman),
RI Gordon (Group chief executive), J Percy-Davis* (Deputy chief executive), MG
Ilsley (Group finance director), TRT Bohlmann, JJ Durand, MP Nicholls*, MC
Ramaphosa, GGH Todd, PJJ van der Walt
* British
TRANSFER SECRETARIES
Computershare Investor Services 2004 (Pty) Limited
(Registration number 2000/006082/06)
Ground Floor, 70 Marshall Street, Johannesburg, 2001
PO Box 61051, Marshalltown, 2107
REGISTERED OFFICE
Alexander Forbes Place
61 Katherine Street, Sandown, 2196,
South Africa
Group company secretary: JE Abraham
www.alexanderforbes.com
