| Thu 25 Aug 2005, 8:19 | | Massmart - Reviewed consolidated results for the 5 |
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Massmart - Reviewed consolidated results for the 52 weeks ended June 2005
Massmart Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number 1940/014066/06)
(Share code: MSM)
(ISIN: ZAE000029534)
(`Massmart` or `the company`)
Dedicated to Value
Reviewed consolidated results for the 52 weeks ended June 2005
Massmart is a unique, managed portfolio of 12 wholesale or retail chains, each
focused on high-volume, low margin, low cost distribution of mainly branded
consumer goods for cash, in 10 countries in sub-Saharan Africa. The Group is the
third largest distributor of consumer goods in Africa and the leader in general
merchandise, home improvement, wholesale food and liquor.
Sales increase
12%
to R26 561 million
Trading profit increases
19%
to R1 009 million
Headline earnings increase
16%
to R679 million
Headline earnings before acquisitions increase
12%
to R642 million
Headline EPS increases
16%
to 341,0 cents
Cash flow from trading increases
13%
to R1 151 million
Dividend increases
15%
to 183 cents per share
Overview
We are pleased to record yet another year of improved sales and earnings. These
results mark Massmart`s 33rd consecutive half year of real sales growth over 8%
and our 14th consecutive half year of headline earnings per share growth, which
has compounded annually at 34,8% over the past five years, to increase 345,8%
since the Group`s listing on the JSE Limited on 4 July 2000.
The highlights of the year were:
- Sales exceeded R26 billion, 5,8% of which was from 17 foreign stores
- In real terms, comparable store and comparable member sales grew 7,5% and
sales before acquisitions grew 11,5%, with estimated average deflation of 2,2%
- 44% of the year`s growth was organic
- Trading profit exceeded R1 billion for the first time
- Pre and post interest trading profit margins increased to 3,80% and 3,72%
respectively
- Full year cash flow from operations exceeded R1,2 billion
- Return on equity increased from 42,8% to 44,6%
- The store network was increased to 219 (867 624 m2) with the acquisition and
opening of 62 new stores with estimated annual sales of R2,6 billion
- Federated Timbers, De La Rey and Servistar were acquired with effect from 1
June 2005
- The executive management team was strengthened through a number of new
internal and external appointments.
Strategic overview and progress
The management of Massmart continues to implement the three pillar strategy,
which has been at the heart of the Group`s progress for 17 years: aggressive
organic and acquisitive growth; value-adding collaboration between focused
trading entities; and incentivisation for alignment.
Medium term performance is guided by our `Vision for Growth,` a rolling three-
year internal financial target resulting from the implementation of the above
strategies, given effect through specific plans and objectives for: continued
real sales growth from existing outlets; expansion into new categories and
formats; new outlets; the relocation, enlargement and refurbishment of selected
outlets, selected acquisitions that conform to Massmart`s strategic and
financial criteria and continued net margin growth.
The `Vision for Growth 2007` announced last August called for the opening of 50
stores, which would generate sales of R5 billion by June 2007. Excellent
progress towards this objective was made during the reporting period with nine
new stores opened and 53 acquired with combined estimated sales of R3,8 billion
by 2007. New plans have been put in place to mitigate the effect of lower than
forecast inflation and targets have been revised to adjust for the effects of
lease smoothing and IFRS.
This year`s annual review resulted in Vision 2008, which will see a number of
strategic and operational performance improvements emphasising growth in
Massmart`s higher margin businesses, including the opening of 35 additional new
stores between July 2005 and June 2008 with estimated sales of R3,2 billion.
Performance
This year`s performance was shaped by five major factors.
The first, a buoyant middle to upper income consumer market, which provided the
foundation for an excellent performance from the Massdiscounters and
Masswarehouse divisions targeted at that market.
The second, deflation in imported or dollar-priced products, which undermined
sales growth and profitability, particularly in Masscash, whose wholesale
customers` response to promotional activity was muted by their reluctance to
increase inventories in a climate of falling inflation.
The third, the parlous economic state of the lowest income consumers,
particularly those in rural areas, who purchase basic food from the retailers
and wholesalers served by Masscash. The impact of this poverty is difficult for
shareholders to gauge as no other public company wholesales into this market
place.
The fourth was the underperformance of the previous Masstrade division
comprising Shield and Furnex, which returned to profitability in the second
half, but produced a result well below the previous year and our medium term
targets.
The final factor was the clarification by the South African Institute of
Chartered Accountants on 2 August 2005, requiring South African companies to
adopt the international interpretation of International Accounting Standards
regarding the treatment of operating leases. Although there is no cash impact,
the adoption of this interpretation depressed headline earnings by R54 million
(R51 million in 2004) most of which was attributable to Masswarehouse which, by
virtue of Makro`s 20-year leases and the aggressive organic development of
Builders Warehouse, has a newer average lease profile than the other divisions.
Unless stated otherwise, these results and the restated 2004 accounts reflect
the new interpretation.
Massmart`s sales growth declined in the second half as we implemented the policy
announced in February, to curtail sales growth in low return business of higher
risk. Sales growth before acquisitions was 9,3%. Acquisitions, comprising
Trident for a full year, Cell-Shack, one cash and carry outlet and one month`s
contribution from the Federated Timbers, De La Rey and Servistar acquisitions
contributed sales of R988 million. Comparable store and member growth of 5,3%
was depressed by an increase in deflation and the impact of the stronger Rand on
foreign sales. General merchandise, including home improvement, grew 17,8% and
food and liquor 6,9%. Massmart`s 2,2% estimated average deflation on selling
prices was the weighted average of 4,9% deflation in general merchandise and
0,2% inflation in food and liquor.
Trading profit before interest and acquisitions grew by 15,4% to R967 million.
Headline earnings per share before acquisitions grew by 11,8% to 322,8 cents per
share.
Industry statistics and the reported sales of competitors indicate that Massmart
gained market share, particularly in home improvement and wholesale food.
Operational review
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. Divisional comparable store sales grew by 3,6% with
estimated deflation of 4,3%.
Game South Africa and Dion enjoyed good comparable store growth with growth in
the core categories of appliances, home electronics and computers well ahead of
those reported by competitors. Foreign Game stores performed well in local
currency. Five new stores with estimated annual sales of R312 million were
opened during the year, adding 17 688 m2 to the division. Despite the negative
effects of legislated lower finance charges from September 2004, and the impact
of the operating lease adjustment, exceptional control of margin and working
capital resulted in Massdiscounters exceeding its medium term annual profit
before tax return on sales target (revised upwards to 6% last year), moving
closer to our 7,4% international benchmark.
Masswarehouse - comprises the 12-store Makro warehouse club trading in food,
general merchandise and liquor, 12 Builders Warehouse outlets trading in DIY and
builders hardware and eight Tile Warehouse outlets trading in tiles and
sanitaryware, all in the major metropolitan areas of South Africa. Divisional
comparable store sales grew 14,6% with estimated deflation of 1,8%.
As Makro stabilised in the second half, following the re-opening of the Strubens
Valley store and the relocation of the Pretoria West store to Wonderboom, the
chain demonstrated its unique capabilities as South Africa`s leading warehouse
club, by almost doubling the rate of sales growth on the first half. The
creative recruitment of new cardholders and innovative merchandising produced
quality sales that translated into profit growth well ahead of sales growth for
the full year as a result of sound control of margin and working capital.
The Builders Warehouse and Tile Warehouse chains made solid progress with the
implementation of their strategies and plans, to register the highest levels of
sales growth, comparable sales growth and profit growth in the Group. Investment
in new stores (two were acquired, two were opened and one relocated), systems
and people has positioned the chain for fast growth and the assumption of a
leading position in Massmart`s home improvement portfolio.
Further to our stated strategic objective to become a major participant in the
national distribution of home improvement products, Federated Timbers, De La Rey
and Servistar were acquired to augment our growing footprint in the sector.
Following approval by The Competition Commission, the acquisitions were included
in these results from 1 June 2005 contributing sales of R138 million and profits
before tax of R6 million.
Although profits were subdued by the new operating lease interpretation,
Masswarehouse made progress towards its profit before tax return on sales
target, revised upwards to 5% last year, the result of a weighted application of
international benchmarks.
Masscash - comprises 58 CBW and seven Jumbo wholesale cash and carry outlets
trading in South Africa, Lesotho, Namibia, and Botswana, and voluntary buying
organisations, Shield (serving 885 independent food outlets) and Furnex (serving
830 independent furniture and appliance outlets). Divisional comparable store
and member sales decreased by 0,5% with estimated deflation of 1,3%.
The last quarter saw a reversal of the steady decline in CBW`s sales growth
resulting from deflation and the move away from low return, high risk business.
CBW`s profits for the year were eroded by a decline in trading margin, largely
attributable to deflation of over 10% in commodities which constitute 27% of the
chain`s sales.
While Jumbo enjoyed a pleasing rate of sales growth, profits were depressed by
aggressive trading activity and a performance below expectations by the Devland
and Nelspruit stores. Under an entirely new management team a pleasing start has
been made to the refurbishment of the flagship Crown Mines store and the
repositioning of the chain.
Following the restructuring announced in August 2004, the emphasis in Shield and
Furnex (previously Masstrade - see note 5) throughout the reporting period has
been on the reinstatement of the structures, people, processes and controls
necessary to mitigate risk and provide a platform for the growth of quality
returns. This approach resulted in a substantial decline in sales but an
improvement in profits and the state of the debtor`s book in the second half.
These companies will make steady progress towards producing acceptable returns
over the coming year.
The Masscash profit before tax return on sales declined relative to its 3%
target.
Restated As
previously
(note 6) reported
June 2005 June 2004 June 2004
(Reviewed) (Reviewed) % (Audited)
Rm Rm change Rm
Sales 26 561,4 23 787,7 11,7 23 787,7
Massdiscounters 7 396,6 6 783,5 9,0 6 783,5
Masswarehouse 8 575,9 7 066,5 21,4 7 066,5
Masscash (note 5) 10 588,9 9 937,7 6,6 9 937,7
Trading profit before 1 009,4 850,8 923,5
interest and tax
As a % of sales 3,8% 3,6% 3,9%
Massdiscounters 488,2 344,1 41,9 356,6
Masswarehouse 321,3 223,3 43,9 277,8
Masscash (note 5) 199,9 283,4 (29,5) 289,1
Trading profit before 1 030,2 871,6 944,3
tax*
As a % of sales 3,9% 3,7% 4,0%
Massdiscounters 487,2 327,7 48,7 340,2
Masswarehouse 345,7 249,3 38,7 303,9
Masscash (note 5) 197,3 294,6 (33,0) 300,2
* Trading profit before tax is before corporate interest paid of R41,8 million
(2004: R28,0 million), goodwill impairment/amortisation and exceptional items.
Acquisitions
Further to the announcement of 26 April 2005, we advise that all conditions
related to the R403,8 million acquisition of 84,1% of the 42 store Moresport
sporting speciality group have been fulfilled, other than the approval by The
Competition Commission which is expected before the end of September 2005.
Acquisition funding
Subsequent to the financial year-end, Massmart entered into two medium-term
amortising loans of R250 million each. This loan funding was required for the
purchase considerations, all paid in June 2005, for three acquisitions in the
building and home improvement sector. It is Massmart`s intention to raise a
further R500 million through the issue of permanent preference shares to finance
the Moresport acquisition. In the event that The Competition Commission approves
this transaction, the capital raising process will commence during September
2005 based on documentation which will be sent to shareholders shortly. If the
acquisition is declined by The Competition Commission the Board may not proceed
with this capital raising.
Divisional structure
In order to facilitate more focused management, relevant collaboration and
clearer understanding by stakeholders, Massmart will comprise four divisions
from 1 July 2005, each containing those chains with similar target markets and
business models.
The divisions will be:
- The retail discount division Massdiscounters, which will house Game, Dion and,
if approved by The Competition Commission, Moresport;
- The home improvement division Massbuild, which will house Builders Warehouse,
Federated Timbers, Servistar, De La Rey and Tile Warehouse;
- The warehouse club division Masswarehouse, which will house Makro; and
- The mainly food wholesale division Masscash, which will house CBW, Jumbo,
Shield, Furnex and Cell-Shack.
In terms of sales, profitability and branding, each of these divisions will
enjoy Southern African leadership in their business model.
Board and Executive Committee changes
Arising from the past and planned growth of Massmart and in anticipation of the
divisional structure described above, Executive Committee members Grant Pattison
and Fanus Nothnagel have been appointed to the Board as Deputy Chief Executive
Officer and Chief Operating Officer respectively and the Executive Committee has
been enlarged with the appointments of Aubrey Cimring as Deputy Chief Financial
Officer, and Richard Potash and Kevin Vyvyan-Day as Divisional CEOs.
Massmart`s people
There are now 21 859 Massmart employees whose diverse expertise and
extraordinary talent translates ideas into a value proposition for all
stakeholders. Their commitment and loyalty is exemplified by their 4 039
colleagues who have been associated with the Massmart entity that employs them
for 10 years or more.
We thank them all for their part in these results and welcome those who chose to
become part of Massmart over the last year.
Prospects
For five years South African retail has enjoyed the buoyancy of middle to upper
income consumer markets. Driven by structural factors (including education,
employability, employment equity, Black Economic Empowerment, the re-rating of
domestic property prices and government spending) and cyclical factors
(including the strong Rand, low inflation and low interest rates), consumer
confidence peaked during 2004 at the highest levels since these statistics have
been recorded.
While there has been a gradual downward trend in retail sales growth as reported
by Stats SA since October 2004, Massmart`s strategies and budgets have been
founded on the belief that the South African economy is being irrevocably
transformed and that good retail growth will persist for some time, in the
absence of a marked deterioration in exogenous factors - the oil price being of
particular concern at present.
Our confidence in our country and our company is evident in a record R495
million capital expenditure programme planned for the current year, planned to
add at least 147 388 m2, in support of budgeted sales exceeding R30 billion.
For the eight weeks to 21 August 2005, total sales grew by 16,2%, sales before
acquisitions grew 9,0% and comparable store sales grew 8,0%, with profit growth
significantly ahead of sales growth and last year.
Dividend and distribution 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.
This final dividend has however, been calculated using headline earnings before
the lease adjustment referred to in Note 6. In the next financial year,
dividends will be calculated relative to headline earnings per share after the
lease adjustment.
Notice is hereby given that a final dividend of 72 cents per share in respect of
the period ended 26 June 2005 has been declared payable to the holders of
ordinary shares recorded in the books of the company on Friday, 16 September
2005. The last day to trade cum-dividend will therefore be Friday, 9 September
2005 and Massmart shares will trade ex-dividend from Monday, 12 September 2005.
Payment of the dividend will be made on Monday, 19 September 2005. Share
certificates may not be dematerialised or rematerialised between Monday, 12
September 2005 and Friday, 16 September 2005, both days inclusive.
In terms of the requirements of the Companies Act, the directors confirm that
after the payment of the distribution, Massmart will be able to pay its debts as
they become due in the ordinary course of the business, and its consolidated
assets, fairly valued, will exceed its consolidated liabilities.
On behalf of the board
Mark J Lamberti Guy Hayward
Deputy Chairman and Chief Financial Officer
Chief Executive Officer
24 August 2005
Income statement
Restated As
previously
(note 6) reported
Year ended Year ended Year ended
June 2005 June 2004 June 2004
(Reviewed) (Reviewed) (Audited)
Rm Rm % change Rm
Sales 26 561,4 23 787,7 11,7 23 787,7
Gross profit 3 649,0 3 140,1 16,2 3 140,1
Depreciation (156,9) (133,5) 17,5 (133,5)
Goodwill (72,4) (74,6) (2,9) (74,6)
impairment/
amortisation
Employment costs (1 649,4) (1 416,6) 16,4 (1 416,6)
Occupancy costs (644,2) (563,7) 14,3 (491,0)
(note 6)
Other net operating (189,1) (175,5) 7,7 (175,5)
costs
Operating profit 937,0 776,2 20,7 848,9
Exceptional items - 5,0 5,0
(note 2)
Net interest paid (21,0) (7,2) 191,7 (7,2)
Profit before tax 916,0 774,0 18,3 846,7
Taxation (307,0) (253,9) 20,9 (275,5)
Profit after tax 609,0 520,1 17,1 571,2
Minorities (2,2) (8,9) (8,9)
Net profit for the 606,8 511,2 18,7 562,3
year
Reconciliation of
net profit for the
year to headline
earnings
Net profit for the 606,8 511,2 562,3
year
Exceptional items - (6,0) (6,0)
(note 2)
Goodwill 72,4 74,6 74,6
impairment/
amortisation
(Profit)/loss on (0,6) 3,3 3,3
disposal of fixed
assets
Headline earnings 678,6 583,1 16,4 634,2
Headline EPS 341,0 293,1 16,3 318,8
(cents)
Diluted headline 329,5 282,7 16,6 307,5
EPS (cents)
Attributable EPS 304,9 256,9 18,7 282,6
(cents)
Diluted 294,6 247,9 18,8 272,6
attributable EPS
(cents)
Dividend/distributi
on (cents):
- Interim 111,0 82,0 61,0
- Final 72,0 (26,5) 98,0
- Total 183,0 159,0
Ordinary shares
(000`s):
- In issue 199 641 199 191 199 191
- Weighted-average 199 010 198 951 198 951
- Diluted weighted- 205 944 206 244 206 244
average
Balance sheet
Restated As
previously
(note 6) reported
June 2005 June 2004 June 2004
(Reviewed) (Reviewed) (Audited)
Rm Rm % change Rm
Assets
Property, plant and 918,9 570,1 61,2 570,1
equipment
Goodwill 1 149,4 616,7 614,0
Investments and 283,1 249,7 249,7
loans
Deferred tax 394,2 353,0 146,5
Inventories 2 658,0 2 356,5 12,8 2 356,5
Accounts receivable 1 853,5 1 861,4 1 997,8
and prepayments
Cash and bank 841,1 1 105,8 1 105,8
balances
Total 8 098,2 7 113,2 7 040,4
Equity and
liabilities
Shareholders` 1 616,2 1 429,8 13,0 1 850,2
equity
Minority interests 36,5 31,7 31,7
Long-term 147,1 201,3 201,3
liabilities -
interest bearing
Other long-term 509,5 488,2 34,8
liabilities and
provisions
Deferred tax 97,5 89,1 64,9
Accounts payable 5 166,0 4 713,5 9,6 4 697,9
and accruals
Bank overdraft and 525,4 159,6 159,6
short-term
borrowings
Total 8 098,2 7 113,2 7 040,4
Net asset value per 809,6 717,8 12,8 928,9
share (cents)
Cash flow statement
Year ended Year ended
June 2005 June 2004
(Reviewed) (Audited)
Rm Rm
Cash inflow from trading 1 151,3 1 015,2
Working capital movement 97,9 255,3
Cash flow from operations 1 249,2 1 270,5
Taxation paid (334,4) (124,2)
Net interest paid (21,0) (5,5)
Investment income 35,2 19,0
Dividends paid and share premium (416,4) (218,7)
distribution
Net replacement of fixed assets (253,3) (74,8)
Investment in fixed assets (156,4) (263,3)
Businesses acquired (684,4) (89,9)
Other investing activities (40,6) (7,3)
Net financing activities 0,5 (39,8)
Foreign exchange losses taken to 5,4 (4,2)
statement of changes in equity
Opening cash and cash equivalents 1 025,2 563,4
Closing cash and cash equivalents 409,0 1 025,2
Statement of changes in equity
Opening balance 1 429,8 1 666,1
Prior period adjustment (note 6) - (369,3)
Exchange differences 4,5 (7,8)
Dividends paid and share premium (416,4) (218,7)
distribution
Net profit for the year 606,8 511,2
Shares issued 18,8 12,8
Reduction of deferred tax asset - (94,9)
Net movement of treasury shares 29,5 (29,5)
Share trust loss (56,8) (40,1)
Closing balance 1 616,2 1 429,8
Additional information
Capital expenditure
- Authorised and committed 114,6 41,3
- Authorised not committed 230,5 168,3
Acquisition commitment 480,0 -
Contingent liabilities 1,5 2,2
Operating lease commitments 4 862,1 4 355,8
(2005 - 2022)
US dollar exchange rates 6,73 6,34
- period end
- average 6,21 6,84
Notes
1. Added to trading profit is R6,6 million in net realised and unrealised
foreign exchange translation gains (2004: R19,9 million loss) and a translation
gain on open forward exchange contracts at June 2005 of R23,3 million (2004:
R11,3 million loss).
2. Exceptional items in the prior year comprise a profit on sale of buildings of
R24,2 million in Masscash and a net R19,2 million loss on building due to
destruction by fire in Masswarehouse. These items were 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), the change in definition for segmental reporting
for which the comparatives have been restated (note 5), and the reinterpretation
of AC105- Leases for which comparatives have been restated (note 6).
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 R72,4 million was recorded in Masstrade due to
the reduced profitability of the Furnex business model.
5. For segmental reporting purposes, Masstrade has been included in the Masscash
division. The Masstrade results are:
June 2005
Sales PBIT PBT
Masstrade 3 201,0 21,3 13,8
Restated
June 2004
Sales PBIT PBT
Masstrade 3 288,4 61,7 57,4
As previously reported
June 2004
Sales PBIT PBT
Masstrade 3 288,4 61,4 57,1
6. Following the circular 7/2005 issued by SAICA on 2 August 2005, a
clarification of the reinterpretation of AC105-Leases by South African
companies, has resulted in a reduction to opening retained earnings in 2004 of
R369 million and a decrease of R51 million and R54 million in headline earnings
in 2004 and 2005 respectively. The 2004 income statement and balance sheet have
been restated.
7. Due to Christmas trading, Massmart`s earnings are weighted towards the six
months to December.
8. 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, F Nothnagel*, 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
Sponsor to Massmart:
Deutsche Securities (SA) (Proprietary) Limited
Date: 25/08/2005 07:05:13 AM
Produced by the JSE SENS Department
