| Tue 14 Jun 2005, 9:52 | | Decillion - Reviewed provisional results for the y |
|
Decillion - Reviewed provisional results for the year ended 28 February 2005
Decillion Limited
Registration number 1998/011692/06
Share code: DEC
ISIN: ZAE000017612
REVIEWED PROVISIONAL RESULTS FOR THE YEAR ENDED 28 FEBRUARY 2005
KEY FEATURES
* Decillion`s financial year-end was changed to end-February in 2004 and the
comparative results for these 12 months are therefore the results for the 14
months to 29 February 2004;
* Decrease in diluted headline earnings per share to a loss of 66,3 cents per
share;
* Restructuring initiatives undertaken with regard to the group`s proprietary
trading operations include:
- The creation of Special Purpose Vehicles (SPVs) to house all long-dated
trading positions and their corresponding hedges in a bi-lateral agreement
with a counter-party;
- Phased exit from all remaining proprietary trading activities;
- Conservative revision of estimates with regard to carrying values of
investments and trading positions;
* Downscaling the group`s operations in South Africa to focus only on business
areas, which are profitable with a proven track record. The areas being retained
are:
- The group`s hedge fund operations;
- Niche financial services operations, with a significantly lower risk
profile than the existing businesses;
* Progress has been made in rebuilding the international business with the
hiring of new brokers in Switzerland and the United Kingdom and the replacement
by and large of lost revenue earners;
* Notwithstanding its operating results and restructuring initiatives, the group
has managed to increase cash resources from R77,5 million at 29 February 2004 to
R93,9 million at 28 February 2005.
FINANCIAL REVIEW
Reviewed Audited
12 months 14 months
28 Feb 2005 29 Feb 2004
Income statement
- Net loss before taxation R`m (119,7) (68,7)
- Headline (loss)/earnings R`m (109,7) 22,6
- Attributable loss R`m (119,0) (72,6)
- Diluted headline (loss)/earnings per share cents (66,3) 14,0
- Diluted loss per share cents (71,9) (44,9)
- Headline return on average tangible % (129,0) 11,7
shareholders` funds (annualised)
Capital
- Total share capital and reserves R`m 36,5 161,3
- Tangible share capital and reserves R`m 30,7 139,4
- Diluted tangible NAV per share cents 18,6 84,2
- Market capitalisation R`m 66,2 140,6
Share statistics
- Share price cents 40 85
- Number of shares million 165,4 165,5
- Diluted number of shares million 165,4 165,5
- Diluted weighted number of shares million 165,4 161,5
- Price earnings ratio (historical) times (0,6) (1,9)
* The 2005 financial year has been marked by a repositioning of the group in
order to ensure its future viability and profitability. Despite the group`s
headline loss of R109,7 million (2004: R22,6 million profit), it has managed to
maintain cash balances at high levels. This is mainly due to the fact that a
large part of the loss for the year is attributable to provisions and
adjustments outside the normal course of business that did not have a cash flow
impact.
* The results include AC133 provisions against the historical trading book of
R40,9 million, a write-off of upfront payments of R8,4 million as well as the
impairment of an investment in structured notes of R24,7 million.
* A further R27,5 million of the loss was attributable to the overseas business,
which suffered a severe setback due to the resignation of brokers in Switzerland
at the beginning of 2004 to join a competitor. This business has since been
rebuilt and operated above break-even levels towards the end of the financial
year.
* Operating expenses were well below those of the previous year, mainly as a
result of cost cutting and the impact of the exchange rate.
* The continued strength of the Rand resulted in a further 3,7 cents per share
decrease in the tangible net asset value through the non-distributable reserves.
GROUP RESTRUCTURING AND STRATEGIC INITIATIVES
Given the current performance and the impact the introduction of AC133
(Financial Instruments: Recognition and Measurement) has had on the
profitability of the group, management has embarked on a major restructuring of
the group to ensure its future viability and profitability. The group believes
that it will benefit in the medium to longer term from the repositioning of the
business.
The effect of the restructuring initiatives, had they all been implemented as at
1 March 2004 (and excluding the once-off provisions against historical exposures
that have no bearing on the operating results for the year), is as follows:
All Excluded Remaining
operations operation operations
s
Capital Markets - local (45 021) (39 955) (5 066)
CIF (639) (7 865) 7 226
Capital Markets - international (34 437) (8 089) (26 348)
Funds Management (3 168) (3 111) (57)
Head Office (25 016) (27 784) 2 768
Operating loss before
tax and goodwill (108 281) (86 804) (21 477)
Less
- taxation 94 (382) 476
- goodwill amortisation (11 406) - (11 406)
- outside shareholders 601 - 601
Total attributable loss (118 992) (87 186) (31 806)
1st half 2nd half Total year
Capital Markets - local (5 436) 371 (5 065)
CIF 4 751 2 475 7 226
Capital Markets - international (19 149) (7 199) (26 348)
Funds Management (2 584) 2 527 (57)
Head Office 1 456 1 311 2 767
Operating profit before
tax and goodwill (20 962) (515) (21 477)
Less
- taxation (1 794) 2 270 476
- goodwill amortisation (5 703) (5 703) (11 406)
- outside shareholders 601 - 601
Total attributable loss (27 858) (3 948) (31 806)
The only operating loss on the analysis above in the second half of the year is
that of the international operations, which reached break-even levels towards
the end of the financial year. Goodwill amortisation comprises the amortisation
of goodwill on continuing operations.
An outline of the strategic initiatives is as follows:
* As part of a phased approach to exit proprietary trading, the following
strategy with regard to the trading operations is being implemented:
- All the long-dated structured finance swaps and their corresponding
hedges have been ring-fenced in a separate SPV (Decab I). This vehicle was
created to address a difference in valuation of these positions between a
counter-party (marked-to-BESA) and Decillion (marked-to-model), of R80
million. Through the creation of Decab I, the counter-party effectively
provided Decillion with a seven-year facility over which the difference in
valuation must be repaid. Decillion has taken a R54 million adjustment in
its financial statements in 2004 through the AC133 transitional adjustment
and a further R13 million in the current financial year.
- Decillion and the counter-party have concluded agreements to create a
similar insolvency remote SPV to house the difference in the valuation of
cross-currency swaps of R23 million as well as the remainder of the counter
party portfolio, on an identical basis to the Decab I vehicle. Both
vehicles will be `managed out` as static portfolios over the next three to
seven years;
- As part of the strategy to exit all other forms of proprietary trading,
other than managing the two SPVs, a process is being followed to assign all
remaining trades to the two Decab portfolios. This will reduce the current
number of trading counter-parties. Decillion Limited has provided
guarantees on the performance of Decab I and Decab II to the counter-party.
The performance of these vehicles will therefore continue to be
consolidated into the future results of Decillion but will be reported
separately to ensure the correct reporting on ongoing operations;
- All other forms of proprietary trading resulting in the assumption of
market risk will be discontinued.
* Decillion Fund Management has built a good track record on its Big Rock,
Headland, Granite and Fairtree hedge fund products over the last six years,
which positions it amongst the leading hedge fund management businesses in South
Africa. The group decided during the first half to close two of its smaller
funds (Kingstone and Pebble) that were unable to attract sufficient third party
funds under management. As an expansion strategy the division is launching an
international emerging and commodities market fund. The back office operations
of this fund will be performed by the South African support team in order to
contain costs while certain members of the investment team are located in New
Zealand.
* Following the loss of its revenue earners in its international broking
operation, the group has been able to rebuild the business and achieve critical
mass towards the end of the financial year. The business was recapitalised
during the financial year on the basis that the operations are being ring-fenced
from the group with any further capital required for the business to be subject
to shareholders` approval and all see-through risk to Decillion Limited being
reduced.
* Over the last few years the group has been successful in its corporate and
institutional finance business. Decillion acted as advisor to Kermas in its
acquisition of Samancor Chrome, which transaction was finalised after year-end.
It is the intention to build on these successes and to further grow this
business.
The provisional financial statements have been reviewed, but not audited, by the
company`s auditors Deloitte & Touche. Their unqualified review opinion is
available for inspection at the registered office. The review opinion has been
modified, with an emphasis of matter, discussed under the heading reviewed
results below, which draws attention to the successful implementation of the
restructuring and strategic initiatives described above.
SEGMENTAL ANALYSIS
12 months to 14 months to
28 Feb 2005 29 Feb 2004
R000`s % R000`s %
Capital Markets (79 458) 71,9 (5 293) (20,1)
Funds Management (3 168) 2,9 14 243 54,2
Corporate and Institutional Finance (639) 0,6 16 614 63,2
Head Office and Investments (27 145) 24,6 706 2,7
Net (loss)/income before disposals (110 410) 100,0 26 270 100,0
and goodwill
Onshore (74 658) 67,6 8 529 32,5
Offshore (35 752) 32,4 17 741 67,5
Net (loss)/income before disposals (110 410) 100,0 26 270 100,0
and goodwill
REVIEW OF OPERATIONS
Capital Markets
The Capital Markets division comprises all of the group`s trading and securities
distribution activities in the domestic and offshore markets. The division
incurred an operating loss of R79,5 million (2004: R5,3 million).
International broking operations
The loss in this division is mainly attributable to the loss incurred in the
Swiss operations, which suffered a setback during the first quarter of the 2004
calendar year due to the resignation of a number of senior brokers. As
previously reported, the process of rebuilding the operations in Switzerland had
a negative impact on profitability for the current financial year. Significant
progress was made during the year in rebuilding the business with encouraging
revenues being generated in the last quarter. It is expected that this trend
will continue. All upfront costs associated with acquiring new staff were
expensed during the year under review.
While the broking operation in London has operated above break-even for the
year, the business experienced an unusually quiet year as trading volumes and
volatility in fixed interest products were depressed. Subsequent to year-end the
business was diversified with the acquisition of an equity derivatives team as
part of a strategy to expand into this market. The business will in future be
contained to its profitable elements and selective employment of experienced
brokers with a good track record will be pursued.
Local operations
Proprietary trading activities incurred an operating loss of R37,3 million for
the year. The loss is attributable in its entirety to the historical long-dated
trading positions where the division incurred a negative mark-to-market
adjustment of R23,8 million in its cross-currency portfolio, a negative
adjustment as a result of a change in estimate on the forward curve of R4,1
million and a negative adjustment as a result of a change in estimate on the
swap curve of R13,1 million. The cross-currency trading portfolio has now also
been ring-fenced in an SPV (Decab II) and the group has further limited the risk
as far as possible in order to reduce the volatility of the trading revenue.
Prior to the above-mentioned adjustments the division made an operating profit
of R3,7 million. The group has nevertheless decided to embark upon a phased exit
from all forms of proprietary trading due to the underlying volatility on its
income statement that arises from such activities.
Sales activities, comprising fixed income derivatives, agricultural products and
foreign exchange execution, incurred a loss of R7,7 million for the year. R7,2
million of the loss arose in the first half of the year as a result of a drop in
revenue from fixed income derivatives, as well as proprietary trading losses on
agricultural commodities. The sales teams have since shifted their focus to debt
origination during the second half of the year and incurred a small operating
loss of R0,5 million. All agricultural commodity trading was discontinued in the
first half of the year and the division is currently focusing on the funding and
broking of `milldoor` contracts.
Funds Management
The Funds Management division did not perform to expectations, contributing an
operating loss of R3,2 million (2004: profit of R14,2 million).
Although the three core products of the division performed below budgeted levels
during the period under review, they still achieved a good return to investors
net of performance and management fees. The Big Rock Capital Fund (equity market
neutral fund) achieved a net return of 10,3% to investors (after performance and
management fees), while the Headland Fund (equity long/short fund) returned
12,33% to investors for the year and the Granite Fund (fixed income) realised a
net return to investors of 6,93%. The smaller Fairtree Fund (equity market
neutral fund) that launched in November 2003 returned 16,4% to investors during
the year, which was above the budgeted return. However, the Fairtree team was
not able to raise the budgeted amount of investors` funds and hence the team
incurred a loss for the year. Total funds under management have declined by
21,6% during the year, largely as a result of the withdrawal of one single
investor from the Granite Fund and the termination of the long-only portfolio
mandate.
The Kingstone and Pebble Funds were closed during the year due to limited new
flows into the funds. The loss incurred by these teams during the year totalled
R1,1 million. The long portfolio mandate was terminated during the current year,
with the loss incurred during the year of R0,8 million.
Due to the limited opportunity set for the hedge fund industry in South Africa
to significantly grow assets under management, the division has opened an office
in New Zealand and has hired an experienced investment professional with a
strong commodity background to assist in the offshore drive to penetrate the
international hedge fund market through the creation of a new fund focusing on
emerging and commodity markets. The support operations of the new fund will be
undertaken by the South African support team in order to contain costs. Progress
with this initiative should start bearing fruit in the forthcoming year.
The group`s investment in the hedge funds at the end of the year amounted to R28
million.
Corporate and Institutional Finance
The division contributed an operating loss of R0,6 million (2004: profit of
R16,6 million).
The CIF team contributed an operating profit of R7,1 million. This unit remains
focused on servicing the corporate and the institutional sectors. Transactions
concluded during the period comprised solutions including equity-linked notes
and debt placements.
Included in the operating results are the expenses relating to two co-operation
and consultancy arrangements with third parties that have not borne fruit and
have since been discontinued.
The division has formed a special projects unit, which has acted as advisor to
Kermas in the acquisition of Samancor Chrome. The transaction was finalised
after year-end.
Head Office and Investments
Head Office and Investments realised an operating loss of R27,1 million (2004:
profit of R0,7 million). Of this amount R24,7 million relates to the impairment
of the group`s investment in structured notes, and the balance of the loss is
attributable to overhead expenses that are not being recovered from operating
divisions.
Disposals
Disposals comprise the selling of a subsidiary of the group, Harcourt Partners,
at a profit of R2,1 million.
INCOME STATEMENT
year ended 28 February 2005
Reviewed Audited
12 months to 14 months to
28 Feb 05 29 Feb 04
R000`s R000`s
Revenue 176 454 376 067
Operating (loss)/income: Proprietary returns (19 319) 7 307
Operating expenses:
Fair value provisions, impairments and write- (74 700) -
offs
Other operating expenses (192 632) (357 853)
Operating (loss)/income (110 197) 25 521
Finance income 58 151 59 574
Finance expense (58 364) (58 825)
Net (loss)/income before disposals (110 410) 26 270
Disposal of subsidiary undertakings 2 129 (3 721)
Net (loss)/income after disposals (108 281) 22 549
Goodwill amortised, impaired and change in (11 406) (91 282)
estimate
Net loss before taxation (119 687) (68 733)
Taxation 94 (2 709)
Net loss after taxation (119 593) (71 442)
Attributable to outside shareholders 601 (1 121)
Attributable loss (118 992) (72 563)
Headline (loss)/earnings (109 716) 22 620
Loss on disposal of property, plant and 1 (180)
equipment
Goodwill amortised, impaired and change in (11 406) (91 282)
estimate
Disposal of subsidiary undertakings 2 129 (3 721)
Weighted number of shares in issue 165 413 161 539
Basic loss per share (cents) (71,9) (44,9)
Headline (loss)/earnings per share (cents) (66,3) 14,0
Diluted weighted number of shares 165 413 161 539
Diluted loss per share (cents) (71,9) (44,9)
Diluted headline (loss)/earnings per share (66,3) 14,0
(cents)
BALANCE SHEET
as at 28 February 2005
Reviewed Audited
28 Feb 05 29 Feb 04
R000`s R000`s
ASSETS
Non-current assets 45 887 195 710
Investments 32 567 164 307
Property, plant and equipment 6 369 8 477
Deferred taxation 1 227 1 002
Goodwill 5 724 9 705
Intangible assets - 12 219
Current assets 917 785 1 606 833
Cash 93 929 86 510
Tradable securities 50 121 53 989
Accounts receivable 771 213 1 458 661
Taxation 2 522 7 673
963 672 1 802 543
EQUITY AND LIABILITIES
Capital and reserves
Share capital 1 655 1 655
Share premium 149 932 149 598
Non-distributable reserves (15 184) (8 884)
Distributable reserves (99 942) 18 950
Total shareholders` funds 36 461 161 319
Outside shareholders` interest - 601
36 461 161 920
Non-current liabilities 72 077 24 153
Long-term liability 12 077 24 153
Tradable securities 60 000 -
Current liabilities 855 134 1 616 470
Accounts payable 789 341 1 507 666
Tradable securities 65 126 96 031
Bank overdraft - 9 000
Taxation 667 3 773
963 672 1 802 543
Actual number of shares (`000) 165 413 165 463
Net asset value per share (cents) 22,0 97,5
Tangible net asset value per share (cents) 18,6 84,2
Diluted number of shares in issue (`000) 165 413 165 463
Diluted net asset value per share (cents) 22,0 97,5
Diluted tangible net asset value per share 18,6 84,2
(cents)
CASH FLOW STATEMENT
year ended 28 February 2005
Reviewed Audited
12 months to 14 months to
28 Feb 05 29 Feb 04
R000`s R000`s
Operating (loss)/income (110 197) 25 521
Elimination of non-cash items 45 501 12 814
Decrease/(increase) in working capital 75 766 (53 703)
Cash flows from operating activities 11 070 (15 368)
Finance income 58 151 59 574
Finance expense (58 364) (58 825)
Dividends paid - (4 875)
Taxation received/(paid) 1 857 (8 902)
Net cash inflow/(outflow) from operating 12 714 (28 396)
activities
Cash flows from investing activities
Additions to property, plant and equipment (2 064) (7 192)
Proceeds on disposal of property, plant and 19 -
equipment
Additions to goodwill (7 425) (15 975)
Additions to intangible assets (2 171) (11 089)
Disposal of investments 17 672 29 783
Net cash inflow on disposal of subsidiaries 1 967 189
Net cash inflow/(outflow) from investing 7 998 (4 284)
activities
Cash flows from financing activities
Decrease in long-term liabilities - (6 000)
Increase in long-term liabilities - 11 849
Issue of treasury shares - 381
Purchase of treasury shares (25) (8 572)
Net cash outflow from financing activities (25) (2 342)
Net increase/(decrease) in cash and cash 20 687 (35 022)
equivalents
Effects of exchange rate changes (4 268) (9 543)
Cash and cash equivalents at the beginning of 77 510 122 075
the period
Cash and cash equivalents at the end of the 93 929 77 510
period
STATEMENT OF CHANGES IN EQUITY
year ended 28 February 2005
Reviewed Audited
12 months to 14 months to
28 Feb 05 29 Feb 04
R000`s R000`s
Share capital
Opening balance 1 655 1 642
Treasury shares - 13
Closing balance 1 655 1 655
Share premium
Opening balance 149 598 147 325
Treasury shares 334 2 273
Closing balance 149 932 149 598
Non-distributable reserves
Opening balance (8 884) 13 490
Transfer to distributable reserves (100) (600)
Currency translation differences (6 200) (21 774)
Closing balance (15 184) (8 884)
Distributable reserves
Opening balance 18 950 173 381
AC133 transitional adjustment - (77 593)
Dividends paid - (4 875)
Transfer from non-distributable reserves 100 600
Attributable loss for the period (118 992) (72 563)
Closing balance (99 942) 18 950
Total shareholders` funds
Opening balance 161 319 335 838
Changes in equity (124 858) (174 519)
Closing balance 36 461 161 319
ACCOUNTING POLICIES
Accounting policies adopted for purposes of this reporting period comply with
South African Statements of Generally Accepted Accounting Practice as well as
with applicable legislation. The accounting policies are consistent with those
adopted in the prior financial year.
REVIEWED RESULTS
The unqualified review opinion of Decillion`s auditors, Deloitte & Touche,
Chartered Accountants (SA), on the provisional results is available for
inspection at Decillion`s registered office. The following emphasis of matter
paragraph has been included in their unqualified review opinion:
`Without qualifying our opinion above, we draw attention to the fact that the
Group incurred a loss after taxation and before goodwill amortisation of R108,2
million during the year ended 28 February 2005 (2004: R19,8 million profit) and
that, as of that date, the Group`s total shareholders` funds were R36,5 million
(2004: R161,3 million). The Group`s future viability and profitability is
dependent on the successful outcome of the restructuring initiatives implemented
by management and outlined in the `Group restructuring and strategic
initiatives` section of the provisional results for the year ended 28 February
2005.`
By order of the board
14 June 2005
Directors: JF Marais* (Chairman), AJN Smit (CEO), TJ Davis, Dr M Mostert, WF
Spruyt*, Prof NI Morgan*, J Molobela* (*non-executive)
Transfer secretaries: Computershare Investor Services 2004 (Pty) Limited, 70
Marshall Street, Johannesburg, 2001
Registered office: 1st Floor, ABN AMRO House, 2 Exchange Square, 85 Maude
Street, Sandton, 2196
Company registration: Decillion Limited, 1998/011692/06 Share code: DEC
ISIN: ZAE000017612
Telephone: +27 11 217 9000
Facsimile: +27 11 883 0165
Company Secretary: Laurinda da Camara
e-mail: laurindad@decillion.net
