| Thu 24 Feb 2005, 9:34 | | massmart reviewed interim results Dec 04 |
|
Massmart - Interim reviewed consolidated results for the 26 weeks ended December
2004
MASSMART HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration Number: 1940/014066/05)
Share code: MSM
ISIN: ZAE000029534
(`Massmart` or `the company`)
Massmart
Dedicated to Value
Interim reviewed consolidated results for the 26 weeks ended December 2004
Massmart is a unique, managed portfolio of nine wholesale or retail chains, each
focused on high-volume, low margin, low cost distribution of mainly branded
consumer goods for cash, in ten countries in Southern Africa. The Group is the
third largest distributor of consumer goods in Southern Africa, the leader in
general merchandise and liquor and the fourth largest in food.
Sales Increase
14%
to R13 929 million
Trading profit Increases
14%
to R620 million
Headline earnings increase
21%
to R443 million
Headline earnings before acquisitions increase
18%
to R427 million
Headline EPS increases
22%
to 223,0 cents
Cash flow from operations increases
7%
to R1 152 million
Distribution to shareholders increases
82%
to 111 cents per share
Overview
Fuelled by an exuberant middle and upper income consumer market, but depressed
by average deflation of 2,3% across all product categories, negligible growth of
basic food consumption among lower income consumers, and the impact of a
stronger Rand on foreign sales, revenue grew by almost R1,7bn to register
Massmart`s 32nd consecutive half-year of real sales growth. Massmart`s headline
earnings per share has now grown consistently for the past 13 half-year
reporting periods.
The complementarity and resilience of the Massmart portfolio was demonstrated by
the Group`s ability to maintain margins in a lower interest rate, deflationary
climate with the excellent performance of Massdiscounters and Masswarehouse,
offsetting a decline in profits in Masscash and Masstrade, the latter
exacerbated by an R18m pre-tax error attributable to prior years.
The highlights of the half-year were:
- Record sales and profits for the period
- Real comparable store and comparable member growth of 10,5%
- Record pre-interest and stable post-interest operating profit margins of 4,45%
and 4,42% respectively
- An improvement in rolling twelve-month return on equity from 32,2% to 36,1%
- Extending the store network to 168 with the acquisition or opening of 11 new
stores with estimated annualised sales of R1,3bn
- Foreign operations contributing 6% of sales
Strategy and implementation
Since 1990, Massmart`s growth and profitability have been reliant on the
achievement of an appropriate balance between two major objectives. The first is
strategically aligned, organic and acquisitive growth, through trading divisions
constituted on the basis of similar target markets and business models. The
second is collaboration between these divisions, which results in profitability
and returns greater than could otherwise be achieved. Despite fundamental
changes to the economic and competitive landscape over the past 15 years, the
successful implementation of this strategy has resulted in a sustained growth of
sales, profits and returns, off an increasingly demanding base.
The management of Massmart remains focused on a Vision for Growth, a rolling
three-year financial forecast resulting from the implementation of clearly
defined strategies over that period. The Vision for Growth 2007 contained
specific plans and objectives for: continued real sales growth from existing
outlets; expansion into new categories and formats; the relocation, enlargement
and refurbishment of selected outlets and the opening or selected acquisition of
at least 50 stores that conform to Massmart`s strategic and financial criteria.
In support of these medium-term objectives, 11 stores were opened or acquired
during the half-year, increasing Massmart`s trading space to 703 200 square
metres and enhancing the quality of the portfolio and the Group`s presence in
under-represented markets.
The internal rate of change is accelerating in Massmart as we align the
organisation to the challenges of managing a large growing group in the context
of new economic conditions, an evolving new consumer market and new competitive
threats and opportunities. This change imposes a demand on all 19 354 of us to
learn and grow without compromising our service to customers and each other.
Without this extraordinary personal learning, growth and service, Massmart would
be an ordinary organisation, and we thank you.
Environment
For some years we have attempted to draw shareholders` attention to two factors
which are now common cause.
The first is the structural adjustment to the segmentation of South African
consumer markets. The transformation of our society, epitomised by the
employment equity plans of every company, are leading to greater expenditure by
our previously disadvantaged fellow citizens, on food and clothing, through home
electronics, appliances and improvements to cars and domestic property.
Recognition of this began with anecdote and is increasingly supported by hard
data. This change to the profile of the middle to upper income consumer group
(LSM 5 to 10+) presents a wide range of opportunity for astute retailers and
will mute the economic cyclicality that would otherwise have occurred. This
segment accounted for 54% of Massmart`s sales and 77% of profits during the half
year.
The second, in contrast, is the fact that half of our population (LSM 1-4) is
far removed from what are considered acceptable living standards by the
developed world. It is they whose lives are fraught with the challenges of poor
education, unemployment and AIDS, notwithstanding substantial government aid in
recent years. Much of the food they consume (estimated at between 42% and 49% of
all food sales) is bought from traders who source their goods predominantly from
formal and independent cash and carry operators. Favourable climatic conditions
and a strong Rand have resulted in low inflation, and substantial deflation in
the staple starches that represent a large proportion of low income earners`
consumption. While this has benefited consumers, it has depressed the sales and
margins of all participants in this channel of the supply chain, leading to
lower inventories and escalating competition, some abetted by the contravention
of employment, tax and import legislation. Massmart is now the only public
company participating in this channel of the supply chain which generated 46% of
the Group`s sales and 23% of profits in the half-year.
Performance
Sales growth before acquisitions was 11,3%. Acquisitions, comprising seven cash
and carry and two home improvement outlets, contributed sales of R421m. Real
comparable store and member growth was 10,5%. Comparable store and member growth
of 8,2% was depressed by average deflation of 2,3% (the weighted average of 5,2%
deflation in general merchandise, 0,7% deflation in food and 7% inflation in
liquor) and the impact of the stronger Rand on foreign sales. General
merchandise grew 18,1%, liquor 22,8% and food 8,2%. Trading profit before
interest and acquisitions grew 10% to R596m. Headline earnings per share before
acquisitions grew 18% to 215 cents per share. Industry statistics and the
reported sales of competitors indicate that Massmart gained market share,
particularly in wholesale food.
December December June
2004 2003 2004
(Reviewed) (Reviewed) (Audited)
Rm Rm % change Rm
Trading profit 624,5 548,1 13,9 944,3
before tax*
As a % of sales 4,5 4,5 4,0
Massdiscounters 310,2 213,9 45,0 340,2
Masswarehouse 215,0 170,3 26,2 303,9
Masscash (note 99,3 163,9 (39,4) 300,2
5)
* Trading profit before tax is before corporate interest paid of R9,4m (2003:
R7,0m), goodwill impairment/amortisation and exceptional items.
Massdiscounters - comprises retail general merchandise discounters Game (61
stores), which trades in South Africa, Namibia, Botswana, Zambia, Uganda,
Mozambique and Mauritius, and Dion (11 stores), which trades in the Gauteng
province of South Africa. Comparable store sales grew 6,5%.
Innovative merchandising and marketing enabled Game South Africa and Dion to
profit from a buoyant durables market, achieving the highest rates of growth
ever recorded in certain product categories and sustaining a high rate of
comparable store growth, despite the impact of deflation which averaged 4,3%,
but reached 50% in selected imported product categories. Foreign comparable
sales in Rands were in line with the previous year. Massdiscounter`s sales for
the month of December exceeded R1bn for the first time.
Notwithstanding a foreign exchange loss of R13m, exceptional control of margin,
expenses, inventory and debtors resulted in Massdiscounters achieving record
half-year pre-tax profits only 9% below its full year performance to June 2004,
substantially exceeding its recently increased medium-term annual profit before
tax return on sales target of 6%.
Masswarehouse - comprises the 12-store Makro warehouse club trading in food,
general merchandise and liquor, 10 Builders Warehouse outlets trading in DIY and
builders hardware and nine Tile Warehouse outlets trading in tiles and
sanitaryware, all in the major metropolitan areas of South Africa. Comparable
store sales grew 14,1%.
The reopening of the Strubens Valley store and the relocation of the old
Pretoria West store to Wonderboom, stimulated staff and consumer enthusiasm in
Makro and dramatically accelerated general merchandise and liquor sales growth
in the second quarter. A less impressive food performance, and one off restraint
payments and pre-opening costs of R13m, constrained the rate of profit growth to
that of sales.
The efficacy of our approach to the burgeoning home improvement market was
demonstrated by the excellent progress and performance of the Builders Warehouse
and Tile Warehouse formats over the period. The tenth Builders Warehouse store
and the ninth Tile Warehouse store were opened in Polokwane, the integration of
the newly acquired Rivonia and Edenvale outlets made good progress, and a number
of additional sites were secured for development in the short-term. Trading
margins were firm, buoyed by the appointment of highly experienced management
and the continued adoption of Massmart`s management, trading and systems
practices.
The acquisitions referred to below will complement these initiatives and rapidly
further our strategic objective of a national footprint in the DIY, home
improvement sector.
The division exceeded its recently increased medium-term annual profit before
tax return on sales target of 5%.
Masscash - comprises 58 CBW and seven Jumbo wholesale cash and carry outlets
trading in South Africa, Lesotho, Namibia and Botswana. Comparable store sales
grew 4,7%.
Weak demand by low income food consumers and food deflation of 2,1% resulted in
a deceleration in both comparable and total sales growth over the period.
Deflation and to a lesser extent, aggressive trading required to maintain market
share, exerted pressure on trading margins resulting in a decline in profits for
the first time in the company`s history. Although CBW has an efficient, well
executed business model reflected in its high return on sales relative to South
African food retailers, the dominance of commodities in the merchandise mix
limits opportunities to compensate for deflation through merchandise mix
management. Furthermore, in a climate where downstream operators are loath to
hold high stocks, any reduction of price through promotional activity results in
a reduction of gross margin which is not compensated for by a concomitant
increase in volume.
Under similar conditions, aided by the relocation of the Durban outlet and the
purchase of a new outlet in Cape Town, Jumbo produced a marginal improvement in
sales and profits, improving its return on sales.
We anticipate that the prevailing trading conditions will improve as poor cash
flows force market participants to behave more rationally, inflation stabilises
and the authorities continue to curtail commercial crime.
For the first time the divisional profit before tax return on sales regressed
relative to its previous medium-term annual target of 4%.
Masstrade - comprises voluntary buying organisations Shield (serving 720
independent food outlets) and Furnex (serving 892 independent furniture and
appliance outlets). Comparable member sales growth was 5,7%.
Arising from unacceptable IT systems, accounting and control standards, the
directorate and senior management of the division was substantially restructured
in July 2004. Since then, under the leadership of Group Commercial Director,
Grant Pattison, the new management team has meticulously reviewed and where
necessary made changes to every aspect of the Masstrade business.
While sales growth was satisfactory, the division experienced the trading margin
pressures from competitive deflationary conditions, the burden of excessive
costs required to reinstate systems and accounting standards, and a lower level
of rebates, referred to below. The result was a profit before tax of R15m for
the period. Despite a pleasing customer response to an improving competitive
offering, the margin and cost pressures in this division are unlikely to abate
in the short-term and the new level of profitability is likely to persist.
With the release of the 2004 results in August, we advised shareholders, on the
basis of information available at the time, that incorrect accounting in the
early stages of the Great Plains systems implementation in Shield and the
subsequent merger of Shield and Furnex, had resulted in an overstatement of the
2003 profits by R25m, which was adjusted as part of the 2004 accounts. At the
Massmart Annual General Meeting in December, we reported on progress towards our
objective of reinstating acceptable standards of accounting and control, and on
the basis of emerging information, cautioned that further provisions and costs
would eliminate Masstrade`s profit potential in the current year.
Earlier this month a comprehensive seven month review of all accounting from
2002 was concluded by the new management team and audited by
Deloitte & Touche. The review revealed an over accrual of rebates and therefore
an overstatement of the profitability of the division by R43,3m over the past
two years. Given the R25m adjustment made to the 2004 result, a second and final
prior year adjustment of R18,3m has been made, reducing this half-year`s trading
profit to a loss of R3,3m. Whilst there was an overstatement of profits, there
has been no loss of cash to the division. The determination of the nature of the
culpability (ie fraud, gross incompetence or misrepresentation) is still under
investigation.
Given Masstrade`s relative size, and the unique characteristics of wholesale
trading systems and control well understood by the leadership of Masscash,
Masstrade`s results will be included in Masscash with immediate effect,
resulting in Massmart reporting on three trading divisions. Because of the
current underperformance of Shield and Furnex, the medium-term profit before tax
target of 4% for the enlarged Masscash will be reduced to 3%.
Acquisitions
It is with satisfaction that we report on the acquisition of Federated Timbers
and De La Rey, subject only to the approval of regulatory authorities not
expected before the end of May, for a total consideration of between R576m and
R660m dependent on performance over the next two years. In the year to June
2006, these businesses are expected to enhance Massmart`s sales by over R1,7bn
at a margin significantly above that currently generated by Masswarehouse, where
the businesses will reside.
The three store, Western Cape based De La Rey has a very similar customer
profile to our Builders Warehouse format - predominantly cash paying retail
customers with a lesser participation by small building contractors who
selectively enjoy short- term credit facilities. Federated Timbers operates 34
stores in nine provinces and is the mirror image of the Builders Warehouse
model, but with building contractors the dominant customer group.
While the businesses will be managed as separate companies within the
Masswarehouse division, we will pursue all mutually beneficial opportunities to
extract commercial value and improve returns, working with leadership of De La
Rey who will retain responsibility for the management and expansion of this
format in the Western Cape and with the leadership of Federated Timbers who will
retain responsibility for the progress of this unique asset in the Massmart
portfolio. We look forward to welcoming the leadership and staff of both
companies into Massmart in the knowledge that their qualifications, expertise
and industry experience will enhance our strategic and operating objectives.
The acquisition of these companies furthers our strategic objective to become a
major participant in the distribution of DIY and home improvement products,
through a national network of distinctly different, complementary formats,
providing a platform for measured organic growth and exceptional local and
international merchandise procurement opportunities. We are confident that the
appropriate deployment of these formats will enable significant and profitable
penetration of the South African DIY and home improvement markets, in an era
when the cyclicality of the building cycle is being muted by extensive housing
development, increasing home ownership by upwardly mobile, previously
disadvantaged citizens, and the re-rating of domestic property values.
Board and Executive Committee changes
Mr Dan Barrett resigned by rotation from the Board in December 2004. We thank
him for his valued contribution to the Group since 1998, during which time he
held the executive positions of Managing Director of Game, Managing Director of
Massdiscounters and Deputy Managing Director of Massmart before becoming a non-
executive director in January 2004.
Mr Grant Pattison, Group Commercial Executive, was appointed to the Board as
Group Commercial Director in November 2004.
Mr Aubrey Cimring, Group Finance Executive and Company Secretary, was appointed
to the Massmart Executive Committee as Deputy Chief Financial Officer earlier
this month.
Prospects
Within the context of our 2007 Vision for Growth, the announcements above
reflect our progress towards market leadership in the distribution of three
major merchandise categories: general merchandise, home improvement and building
supplies and basic foodstuffs. In doing so we will extend our presence in those
market segments and product categories that provide superior growth and returns,
while curtailing sales growth in low return businesses of higher risk.
We caution that second half trading profit is likely to grow at a slower rate
than that of the first half, as a result of the interest savings arising from
the exceptional working capital improvements made by Massdiscounters in the
corresponding period in 2004, and the current underperformance of the newly
constituted Masscash. In addition Secondary Tax on Companies (STC), which was
not applicable in 2004, will add approximately 2,5% to Massmart`s effective rate
of taxation for the year to June 2005.
For the 34 weeks to 20 February 2005, total sales grew 12,6%, sales before
acquisitions grew 10,7% and comparable store sales grew 7,5%.
Distribution and dividend policy
Massmart`s dividend policy is to declare and pay an interim and final dividend
representing a two times dividend cover unless circumstances dictate otherwise.
Notice is hereby given that an interim dividend of 111 cents per share in
respect of the period ended 26 December 2004 has been declared payable to the
holders of ordinary shares recorded in the books of the company on Friday, 18
March 2005. The last date to trade cum-dividend will therefore be Friday, 11
March 2005 and Massmart shares will trade ex-dividend from Monday, 14 March
2005. Payment of the dividend will be made on Tuesday, 22 March 2005. Share
certificates may not be dematerialised or rematerialised between Monday, 14
March 2005 and Friday, 18 March 2005, both days inclusive.
On behalf of the Board
Mark J Lamberti Guy Hayward
Deputy Chairman and Chief Financial Officer
Chief Executive Officer
23 February 2005
Income statement
6 months 6 months Year ended
ended ended
December December June 2004
2004 2003
(Reviewed) (Reviewed) (Audited)
Rm Rm % change Rm
Sales 13 929,2 12 254,7 13,7 23 787,7
Massdiscounters 3 965,6 3 590,0 10,5 6 783,5
Masswarehouse 4 292,4 3 668,7 17,0 7 066,5
Masscash (note 5) 5 671,2 4 996,0 13,5 9 937,7
Trading profit 620,3 544,0 14,0 923,5
before interest
As a % of sales 4,5 4,4 3,9
Massdiscounters 312,4 229,5 36,1 356,6
Masswarehouse 208,3 157,0 32,7 277,8
Masscash (note 5) 99,6 157,5 (36,8) 289,1
Goodwill (46,3) (35,9) (74,6)
impairment/amortisa
tion (note 4)
Exceptional items - 16,5 5,0
(note 2)
Net interest paid (5,2) (3,0) (7,2)
Profit before tax 568,8 521,6 9,0 846,7
Taxation (170,3) (171,8) (0,9) (275,5)
Profit after tax 398,5 349,8 13,9 571,2
Minorities (1,9) (4,3) (8,9)
Net profit for the 396,6 345,5 14,8 562,3
period
Reconciliation of
net profit for the
period to headline
earnings
Net profit for the 396,6 345,5 562,3
period
Exceptional items - (16,5) (6,0)
(note 2)
Goodwill 46,3 35,9 74,6
impairment/amortisa
tion
Loss on sale of 0,5 0,7 3,3
fixed assets
Headline earnings 443,4 365,6 21,3 634,2
Headline EPS 223,0 183,5 21,5 318,8
(cents)
Diluted headline 215,3 176,6 21,9 307,5
EPS (cents)
Attributable EPS 199,5 173,5 15,0 282,6
(cents)
Diluted 192,6 166,9 15,4 272,6
attributable EPS
(cents)
Distribution/divide
nd (cents):
- Interim 111,0 61,0 82,0 61,0
- Final - - 98,0
Ordinary shares
(000`s):
- In issue 199 191 199 191 199 191
- Weighted-average 198 803 199 191 198 951
- Diluted weighted- 205 898 207 068 206 244
average
Balance sheet
December December June
2004 2003 2004
(Reviewed) (Reviewed) (Audited)
Rm Rm Rm
Assets
Property, plant and 768,8 604,3 570,1
equipment
Goodwill 631,0 604,1 614,0
Investments and loans 241,8 240,2 249,7
Deferred tax 170,7 115,5 146,5
Inventories 3 263,2 2 753,2 2 356,5
Accounts receivable and 2 268,0 1 919,2 1 997,8
prepayments
Cash and bank balances 1 512,9 1 433,7 1 105,8
Total 8 856,4 7 670,2 7 040,4
Equity and liabilities
Shareholders` equity 2 047,9 1 899,0 1 850,2
Minority interests 6,8 27,4 31,7
Long-term liabilities - 166,5 246,6 202,1
interest bearing
Other long-term 36,0 34,0 34,0
liabilities and provisions
Deferred tax 71,0 29,5 64,9
Accounts payable and 6 402,9 5 109,1 4 697,9
accruals
Bank overdraft and short- 125,3 324,6 159,6
term borrowings
Total 8 856,4 7 670,2 7 040,4
Net asset value per share 1 028,1 953,4 928,9
(cents)
Cash flow statement
6 months 6 months Year
ended ended ended
December December June 2004
2004 2003
(Reviewed) (Reviewed) (Audited)
Rm Rm Rm
Cash inflow from 658,9 596,9 1 015,2
trading
Working capital 492,6 481,0 255,3
movement
Cash flow from 1 151,5 1 077,9 1 270,5
operations
Taxation paid (134,4) (93,4) (124,2)
Net interest paid (4,4) (3,0) (5,5)
Investment income 10,4 10,6 19,0
Dividends paid and (195,2) (97,5) (218,7)
share premium
distribution
Net replacement of (128,6) (52,2) (74,8)
fixed assets
Investment in fixed (148,2) (148,2) (263,3)
assets
Businesses acquired (77,2) (102,4) (89,9)
Other investing (44,3) (15,5) (7,3)
activities
Net financing 15,0 37,7 (39,8)
activities
Foreign exchange losses (4,1) (2,7) (4,2)
taken to statement of
changes in equity
Opening cash and cash 1 025,2 563,4 563,4
equivalents
Closing cash and cash 1 465,7 1 174,7 1 025,2
equivalents
Statement of changes in equity
Opening balance 1 850,2 1 666,1 1 666,1
Exchange differences (1,3) (2,7) (7,9)
Dividends paid and (195,2) (97,5) (218,8)
share premium
distribution
Net profit for the 396,6 345,5 562,3
period
Shares issued/converted - 12,8 12,8
Reduction of deferred - - (94,8)
tax asset
Net movement of 29,4 - (29,4)
treasury shares
Share trust loss (31,8) (25,2) (40,1)
Closing balance 2 047,9 1 899,0 1 850,2
Additional information
Trading profit before 691,4 609,4 1 057,0
items below:
- Depreciation (71,1) (65,4) (133,5)
Trading profit before 620,3 544,0 923,5
interest
Capital expenditure:
- Authorised and 26,1 19,8 41,3
committed
- Authorised not 154,7 132,8 168,3
committed
Contingent liabilities - 8,5 2,2
Operating lease 4 204,9 3 903,8 4 355,8
commitments (2004 -
2013)
US dollar exchange 5,66 6,86 6,34
rates - period end
- average 6,19 7,02 6,84
Notes
1. Deducted from trading profit is R12,1m (2003: R10,0m) in net realised and
unrealised foreign exchange translation losses and a translation loss on open
forward exchange contracts at December 2004 of R3,6m (2003: R7,6m).
2. Exceptional items in the prior period comprise a profit on sale of
buildings of R16,5m in Masscash previously included in trading profit.
3. These financial statements have been prepared in accordance with AC127
(Interim Financial Reporting), using accounting policies that are in line with
South African Statements of Generally Accepted Accounting Practice and on a
basis consistent with prior periods, except for the implementation of AC140
Business Combinations (note 4), and the change in definition for segmental
reporting for which the comparatives have been restated (note 5).
4. AC140 was implemented in the current reporting period. In accordance
with the statement goodwill is no longer amortised and comparatives have not
been restated. All acquisitions since 31 March 2004 have been accounted for in
line with AC140. An impairment loss of R46,3m was recorded in Masstrade due to
the reduced profitability of the business model.
5. For segmental reporting purposes, Masstrade has been included in the
Masscash division. The Masstrade results are:
December 2004
Sales PBIT PBT
Masstrade 1 834,8 - (3,3)
December 2003 June 2004
Sales PBIT PBT Sales PBIT PBT
Masstrade 1 715,7 51,5 46,6 3 288,4 61,4 57,1
6. Due to Christmas trading, Massmart`s earnings are weighted towards the six
months to December.
7. These results have been reviewed by auditors Deloitte & Touche and their
unqualified review opinion is available for inspection at the registered office.
Directorate: CS Seabrooke (Chairman), MJ Lamberti* (Chief Executive and Deputy
Chairman), MD Brand, ZL Combi, GRC Hayward*, JC Hodkinson**, P Langeni, IN
Matthews, P Maw, DNM Mokhobo, G Pattison*, MJ Rubin, *Executive **United
Kingdom
Massmart Holdings Limited JSE code - MSM ISIN - ZAE000029534 Company
registration number: 1940/014066/06
Registered office: Massmart House, 16 Peltier Drive, Sunninghill Ext 6, 2157
Company secretary: A Cimring Auditors: Deloitte & Touche
For more information: www.massmart.co.za
Johannesburg
23 February 2005
Sponsor
Deutsche Securities (SA) (Pty) Ltd
Date: 24/02/2005 07:00:18 AM
Produced by the JSE SENS Department
