Corporate Administration

Transcription

1 CONTENTS 2. Corporate Administration 3. Group Financial Highlights 4. Board of Directors 6. Report of Chairman and Chief Executive Officer 8. Operational Review 18. Business Segments 20. Shareholders Information 22. Corporate Governance 23. Certification by Company Secretary 23. Statement of Responsibility by Board of Directors 24. Independent Auditor s Report 25. Directors Report 31. Income Statements 32. Balance Sheets 34. Statements of Changes In Equity 36. Cash Flow Statements 37. Accounting Policies 51. Notes to the Financial Statements 105. Interests in Principle Subsidiary Companies 108. Notice to Members

2 Corporate Administration DIRECTORS Executive Directors WEBSITE ADDRESS Marcel Jonathan Anthony Golding (Chairman) Block B, Longkloof Studios Darters Road, Gardens Cape Town, 8001 John Anthony Copelyn (Chief Executive Officer) Block B, Longkloof Studios Darters Road, Gardens, Cape Town, 8001 Theventheran Govindsamy Govender (Financial Director) Block B, Longkloof Studios Darters Road, Gardens Cape Town, 8001 Non Executive Directors Virginia Mary Engel * Block A, Longkloof Studios Darters Road, Gardens Cape Town, 8001 Rakesh Sanjee Garach # Block B, Longkloof Studios Darters Road, Gardens Cape Town, 8001 Mimi Freddie Magugu * Block B, Longkloof Studios Darters Road, Gardens Cape Town, 8001 Dr Moretlo Lynette Molefi # Block B, Longkloof Studios Darters Road, Gardens Cape Town, 8001 Jabulani Geffrey Ngcobo # Block B, Longkloof Studios Darters Road, Gardens Cape Town, 8001 Yunis Shaik # 52 Troon Road Greenside, 2193 * Non-executive # Independent non-executive COMPANY REGISTRATION NUMBER 1973/007111/06 SHARE CODE HCI ISIN: ZAE COMPANY SECRETARY AND REGISTERED OFFICE HCI Managerial Services (Pty) Limited Block B, Longkloof Studios Darters Road, Gardens, Cape Town, 8001 Telephone: (021) Telefax: (021) P O Box 5251 Cape Town, 8000 AUDITORS PKF (Jhb) Inc Registration number 1994/001166/21 42 Wierda Road West, Wierda Valley, Johannesburg, 2196 Private Bag X10046, Sandton 2146 BANKERS First National Bank of Southern Africa Limited SPONSOR Investec Bank Limited 100 Grayston Drive Sandton, Sandown, 2196 TRANSFER SECRETARIES Computershare Investor Services Ltd 70 Marshall Street Johannesburg, 2001 PO Box 61051, Marshalltown,

3 Group Financial Highlights FINANCIAL HIGHLIGHTS FOR THE YEAR Dividend per share - cents Share price - high - cents low - cents at year end - cents FIVE YEAR REVIEW Group Revenue ( Rm) Net asset carrying value per share cents Shares in issue ( 000) (net of treasury) average at year end GROUP REVENUE NET ASSET CARRYING VALUE PER SHARE R million Cents

4 board of Directors EXECUTIVE DIRECTORS John Copelyn Chief Executive Officer B.A. [Hons B.Proc) John joined HCI as chief executive officer in He was general secretary of various unions in the clothing and textile industry from 1974 before becoming a member of parliament in He holds various directorships and is nonexecutive chairman of e.tv and Tsogo Sun Holdings. Marcel Golding Executive Chairman B.A. [Hons] Marcel joined HCI as chairman in Prior to this he was a member of parliament and deputy general secretary of the National Union of Mine workers. He is also chief executive officer of e.tv; chairman of Johnnic Holdings Limited and holds directorships in numerous companies. Kevin Govender Financial Director B.Comm (Hons) B.Compt (Hons) Kevin is the financial director of HCI. He joined the HCI group in 1997 where he has also held the position of group secretary and chief financial officer from He holds directorships in several HCI subsidiaries and is a trustee of the HCI Foundation. He was appointed to the HCI Board as an executive director in June NON-EXECUTIVE DIRECTORS Virginia Engel Non-Executive Director Jabu Ngcobo Independent Non-Executive Director Freddie Magugu Non-Executive Director Virginia is chief executive officer of the HCI Foundation. Previous to this she was the co-ordinator of the SACTWU Welfare Trust and private secretary to Nelson Mandela during the last two years of his presidency. She holds a nonexecutive directorship in Golden Arrow Bus Services (Pty) Limited and was appointed to the Board of HCI as non-executive director in January Jabu was the regional secretary for Africa of the International Textile Garment and Leather Workers Federation. Prior to this appointment he held the position of general secretary of the Southern African Clothing and Textile Workers Union for 6 years Jabu was appointed to the board of HCI as a non-executive director in October Freddie worked for the Southern African Clothing and Textile Workers Union, reaching the position of national organising secretary. He was appointed to the board of HCI as a non-executive director in April

5 Rakesh Garach Independent Non-Executive Director B.Comm CA (SA) Rakesh was appointed as chief operating officer for Deutsche Bank S.A in April 2005 as part of a BEE transaction completed with Utajiri Investments, of which he is a founding shareholder. He left in July Prior to this appointment he was a senior partner and industry leader for the financial services group at Ernst & Young. He was appointed to the HCI Board in March Moretlo Molefi Independent Non-Executive Director BSc MBChB Telemed dip SMP Moretlo is a businesswoman with interests in the health sector. Prior to this she was the director of the Telemedicine program at the Medical Research Council of SA; consultant for Aspen Pharmacare and COO of Safika Health. She currently serves on the World Health Organisation Global Observatory on e-health and the European Union Telemedicine Task Force. She was appointed to the board of HCI in December Yunis Shaik Independent Non-Executive Director B.Proc Yunis is an attorney of the High Court and presently in private practice. He is a former deputy general secretary of the Southern African Clothing and Textile Workers Union and a director of Workers College and has served as the senior commissioner to the CCMA in KwaZulu Natal. He was appointed to the board of HCI as a non-executive director in August

6 REPORT OF CHAIRMAN and CHIEF EXECUTIVE OFFICER Financial 2009 was a watershed year in the history of HCI. Its share price fell to about half of its previous level. In some ways this may not be surprising given the fact that the entire world economy around us plunged into one of the most severe contractions known in several decades. Nevertheless, it is disappointing as the group had, until this year, been one of the fastest growing companies on the JSE and this was the first time since 2002 when the group bought back some 73% of its shares that its market capitalisation had declined. What made the plummeting share even more disappointing is that the group s primary businesses held up exceptionally well despite the difficult trading conditions in which all economic activity took place. Our largest asset, representing perhaps 50% of the value underlying HCI, namely Tsogo Sun, produced fairly flat but inherently solid results, growing its EBITDA by 2% on its previous record-breaking 2008 year. The second largest of our assets, namely e.tv together with other media businesses, representing some 25% of the underlying value in the group, grew their market share, their revenue and their EBITDA more significantly. To add insult to injury, one of the very few analysts writing reports on HCI came to the view that it was time to double the discount that should be placed on our shares because we had bought an asset in the clothing industry and this showed a complete lack of focus by management. Without wanting to sound too defensive it must be said that the quality of assets you own is best tested in a downturn and your directors are confident the assets we have amassed in HCI are topclass assets that anyone should be proud to own. Nevertheless, it must be readily acknowledged that some substantial challenges were encountered during this year. The biggest by far was the loss of the puts of natural gas held against Lehmann Brothers which went bankrupt. These puts had been at prices around $US8/ MMBTU. When we wistfully think back to the puts we had, from the current prices of below $US4/MMBTU, we have a strong sense of it having been an annus horribilis. The collapse of the automotive component sector caused Formex to retrench some 400 workers and still to be scratching for work with terrible consequences for its bottom line. Likewise the fall of the Gold Reef City share price, after we had purchased 5% of its shares at the commencement of building up a strategic stake in that company, had to be marked down though our income statement since it was not being equity accounted. Thankfully the bulk of these issues are 2009 confined and should not have any significance for the future. Adversity brings opportunity. Ours came with the demise of the Seardel Group. Its problems resulted in an opportunity to take over control of the oldest and largest listed clothing and textile group in the country with an annual turnover of close to R4 billion, employees and a net asset value of some R2 per share, for some 50c per share. The opportunity is essentially a turn-around opportunity in a notoriously difficult industry. We have hedged our exposure to a R50m downside and 80% of the upside on 500 million 6

7 shares. While others feel this represents a lack of focus, it is not. HCI is a private equity holding company. Its focus is taking controlling stakes in significant businesses with their own management. Our responsibility is to put together key elements of a management team and to develop with them a vision for the company that might inform its development and inspire its management and other stakeholders associated with it. We believe we have put together the most dynamic new leadership for that group that will transform it into a world-class manufacturing operation that will do us all proud. We believe we will return most of the operations of the group to profitability during financial We have taken the most painful decision to close a major part of its textile division that was making ghastly losses and seemed set to continue to do so as far as we dared look. The effect has been to force us to retrench some 10% of the Seardel labour force which rocked relations with our major shareholder, SACTWU, but still seemed unavoidable to us. Now we are deeply engaged in transforming the production in continuing operations to meet world standards of efficiency, transforming the speed at which we are able to respond to orders from local retailers, and participating proactively in the cleaning up of the industry. These are very exciting developments and with time it ought to be a significant source of new profit contribution to HCI. The year under review brought some significant developments in several of the Group s operations. Syntell won an important contract to operate cameras controlling traffic in the city of Cape Town. Vukani won a licence to operate in the Gauteng Region, the sixth region in which it has been awarded a licence. We launched our 24-hour news channel on satellite TV and opened several new hotels both inside and outside of South Africa. Subsequent to year-end, through Tsogo Sun, we also acquired a much larger stake in Gold Reef City and further acquired ownership of the Newcastle and Caledon casinos. All these developments will, with time, bring added earnings to HCI. The group also took the decision to limit the extent of debt at its centre by disposing, to Tsogo Sun, of its minority interest in the Sun Coast Casino. This has both strengthened the balance sheet of Tsogo Sun, allowing it to pursue its own growth strategies more vigorously, and limited HCI debt to levels we considered prudent in the current environment. Surviving this current period without a major hiccup, as we hope to do, will leave us with a strong base upon which to build in the future. Accordingly we have set conservative growth targets for the businesses in our group, where our collective priority is to ensure that our group can deal with any potential further deterioration in market conditions. Finally I would like to thank a number of people who served on our board and who stood down from it this year. A change in the JSE rules obliged us to appoint our chief financial officer as an executive director and our take-over of the Seardel Group obliged us to reclassify Amon Ntuli as an executive director rather than as a non-executive. Together these changes unfortunately increased the number of executives on our board to a point where they greatly exceeded the number of non-executives and it was accordingly agreed that all executives other than the chief executive officer, chairperson and financial officer would resign from the board in order to comply with the primary direction of corporate governance pressures on listed companies, namely to promote clear nonexecutive majorities on such boards. Each of these people plays a key executive role in subsidiaries of the group and is a central part of the team that built HCI and maintains its success. They will continue to play this role in the group but their contribution will regrettably in future be from outside the board in order to comply with the King Report. In particular we would like to extend our thanks and ongoing appreciation to Elias Mphande, Amon Ntuli, Jabu Mabuza and Andre van der Veen in this regard. Likewise we welcome Kevin Govender, who has long been the chief financial officer of HCI, to the board. 7

8 operational REVIEW Gaming Hotels and Leisure TSOGO SUN GROUP (PTY) LIMITED [ TSH ] Despite the economic slowdown impacting hotels and gaming and the rebasing of the Montecasino market share in Gauteng as a result of the opening of Silverstar casino on the West Rand of Johannesburg, the financial results for the year under review represents a solid performance with TSH revenue 8% above the prior year and a 5% growth in EBITDAR. A segmental analysis of the Tsogo Sun Group s revenue and EBITDAR is as follows : revenue EBITDAR * Revenue EBITDAR * Montecasino Suncoast Other Gaming Tsogo Sun Gaming Southern Sun Hotels : SA Southern Sun Hotels : Offshore Corporate Office ** (37) (5) (30) (24) * Pre exceptional items ** Includes inter-group eliminations In addition to major maintenance and refurbishment capital expenditure, TSH has undertaken a number of corporate activities which will position the group to benefit substantially from the economic recovery, in due course. These activities include: The addition of five hotels to the portfolio, namely StayEasy Rustenburg, StayEasy Witbank and Southern Sun Ikoyi in Lagos Nigeria, which have all opened and the Southern Sun Hyde Park and Southern Sun Montecasino which are under construction; The acquisition of the Caledon Hotel, Spa and Casino and Century Casino Newcastle operations; The acquisition of the 25.2% (34.8% voting as at 24 March 2009) interest in Gold Reef Resorts. The Pivot, a mixed use development which is under construction, includes offices, retail and parking as well as the Southern Sun Hotel mentioned above; and Redevelopment and expansion of The Ridge casino including a new Privé, Cinemas and the StayEasy hotel. The Tsogo Sun Group remains focused on a growth strategy and will continue to pursue opportunities to develop and enhance its core Hotels and Gaming businesses. The Tsogo Sun Gaming division continues to outperform other operators in South Africa in terms of EBITDAR margin. This is a function of both the superb location of the Group s casinos and the conservative operating philosophy relating to expenditure in the division. In South Africa, different markets have experienced differing results in the last financial year with the Western and Eastern Cape most severely impacted. Footfall drivers remain a key strategy for Gaming, which includes property based events, VIP services and active marketing to the database. Montecasino has successfully hosted numerous high profile events at the Teatro and the Outdoor Events Arena, including Disney s Beauty and the Beast and High School Musical after the hugely successful Lion King, the SA Open Tennis, Boktown and the inaugural SA Tattoo amongst others. The KZN market has held up reasonably well during the year under review, with Suncoast casino further benefiting from improved trading at the Suncoast Hotel and Towers. Additional slots and parking facilities have been added at this unit to assist peak period capacity. In July 2009, HCI and Tsogo announced the conclusion of an agreement in terms of which Tsogo will purchase the 30% indirect stake in the Suncoast Casino and Entertainment world from Johnnic. The transaction aims to simplify the HCI group structure and provides a single entry point to its gaming operations. The purchase price will be financed by Tsogo Sun Gaming through an issue of preference shares to Johnnic and SABSA, a wholly owned subsidiary of SABMiller PLC, and internal resources. This transaction is expected to become unconditional in the second half of TSH s other casino interests in Nelspruit, Witbank and East London have performed satisfactorily during the year, with the Emnotweni casino in Nelspruit achieving double digit growth in casino win. Inter-group management fees and Gaming related long term incentive payments are included in Other Gaming. The contraction in the local economy has pressurised the South African tourism and hospitality industry in the second half of the financial year. After a number of years of unprecedented growth in room rates and rooms sold, demand in the key corporate, Government, leisure and Special Tour Operators (STO) markets has declined significantly. To date, the Group and Conference and Sports segments have performed well. International arrivals (including Africa by air) have recorded growth of 1.5% for calendar 2008 over 2007, with the August to December months all being negative. This has particularly impacted the Cape Town market. Hotels South Africa has recorded revenue growth of 21% and an 18% EBITDAR growth. This was assisted by the 8

9 operational REVIEW consolidation of the Cullinan Hotel (Pty) Ltd properties, which are owned in conjunction with Liberty Properties, for the first time in (This investment was previously equity accounted). Excluding this accounting change the division recorded revenue growth of 10% and growth in EBITDAR of 7%. Importantly, the three major sporting events in the first half of 2009, including the IPL cricket tournament, the British and Irish Lions Tour and the Confederations Cup have assisted occupancies and will ensure TSH is well prepared for the 2010 FIFA World Cup. The Hotels Offshore division, which currently operates in seven counties in Africa and the Middle East, achieved 33% growth in revenue and 25% growth in EBITDAR over the prior year assisted by strong trading in the first half of the year, and weaker average Rand / US$ and Rand / Euro translation rates during the year. The Offshore division is involved in developments in Abu Dhabi and Saudi Arabia, which should assist future years growth through additional management fee income. The various African markets in which the division trades have proven resilient in the last year, particularly Maputo, although some pressure from new competitors is being experienced in Dar es Salaam and Lusaka. VUKANI GAMING CORPORATION (PTY) LIMITED ( VUKANI ) Vukani is the largest limited payout route operator in South Africa and the only one licenced in all six provinces that have thus far approved a route operator. During the year under review Vukani was awarded a Gauteng license permitting it to roll-out 1,000 machines. First submissions for site licenses in Gauteng have already been submitted and two approved. Vukani is now licensed to roll-out 7,000 machines nationwide. The Limited Payout Machine roll-out has been disappointingly slow for all operators and, although the government has set a maximum of 50,000 machines for South Africa, it will take many years for the industry to reach this number. During the 2009 financial year Vukani rolled out over 560 new machines, giving a total installed machine base of 2972 machines. Gross gaming revenues ( GGR ) per machine continued to improve in each province by an average of 4 % and this is a key focus for management in the current year. The global economic slowdown has had a major impact on SME s and many of Vukani s site owners have been impacted by loss of income, especially on the sale of food and beverage, which is their primary business. Vukani has recently introduced a range of value-added products and services to the site owners. We believe that this should increase the customers at the sites leading to growth in the sites food and beverages sales and Vukani s gaming revenue. Vukani has also strengthened the head office support structure with group appointments in human resources, finance and marketing. Some exciting projects are planned to be introduced in 2010 including an accelerated training schedule for all employees, a sophisticated contact centre, nationwide promotions and the first phase roll out of the loyalty program initiative. Given the perpetually slow process to licence sites by the respective gaming boards, Vukani is aiming to increase its GGR at existing sites in Our value-added products and the new loyalty program are the first steps in this initiative. We will also continue to focus on the maximum roll-out at of new machines. 9

10 operational REVIEW Media and Broadcasting e.tv (PTY) LIMITED ( e.tv ) e.tv celebrated ten years on air in October This was an important milestone for the channel which has developed into a thriving business after a difficult start. In the year under review, e.tv s performance again exceeded expectations despite the economic recession which compounded the growth slump in annual television advertising also saw the launch of the e.news channel on the DStv Compact and Premium Bouquets under the brand of e.tv s sister company, e.sat TV. The e.news channel is South Africa s first independent 24-hour news channel and, since its launch, it has ranked as the highest news channel performer on the DStv bouquets. e.news is now available on three platforms on e.tv s terrestrial service, on DStv and on Vodacom s 3G mobile service. In terms of its agreement with Multichoice, e.sat TV will launch a further four channels on DStv over the next seven years. The free-to-air e.tv channel remains the most important contributor to the group. It is still the most-watched Englishmedium television channel in South Africa and the second largest channel overall. During 2008 its audience again grew year-on-year to an average 24-hour audience share of 22.7% and a prime time audience share of 21.9%. Programme production and distribution have performed well with wildlife programming, in particular, enjoying significant overseas interest in licensing and co-production opportunities. All of these developments are consistent with the vision of the Group to become a multichannel, multi-platform and multi-territory business. The critical issues facing e.tv over the next year are the global recession and the launch of multichannel free-toair television. Decline in advertising growth coupled with increasing fragmentation of audiences and advertising over a multitude of platforms challenge the traditional business model of free-to-air television. However, e.tv s strong position in the market has enabled management s strong drive to diversify the business across multiple channels, multiple platforms and in multiple territories. As a result, e.tv has grown, over ten years, from a single channel into a diverse media group that is benefiting from new revenue sources and which continues to deliver value to shareholders. Local programming continued to be a key factor in e.tv s audience ratings during the period under review. Rhythm City, e.tv s daily youth drama, rivals the performance of Hollywood blockbusters and remains the most-watched English drama in this highly competitive slot. Rhythm City s ratings are followed closely in prime time by another locallyproduced daily drama Scandal. Viewership for e.news prime time also grew significantly during the period and e.news remains the highest-rated English-medium news in the country. Weekday prime time ratings have also been given a boost by the addition of new WWE programmes to Monday and Tuesday nights. Hollywood movies continue to perform well as a result of a consistent scheduling strategy which is attractive to audiences and advertisers alike. At the end of calender year 2008, e.tv once again reported full compliance with its licence conditions. As South Africa begins the process of migrating analogue terrestrial channels to digital, e.tv has been at the forefront of policy-making for digital terrestrial television. e.tv will be granted additional digital channels during the migration process which will position the business as a multi-channel free-to-air operator. e.tv s investment in Botswana s GBC has not performed as planned, primarily owing to widespread piracy in the region. e.tv has taken concrete steps to address this piracy ahead of its pan-african expansion plans which are due to roll out in mid

11 operational REVIEW Transport GOLDEN ARROW BUS SERVICES (PTY) LIMITED ( GABS ) During the year under review, the public demand for the services provided by GABS continued its upward trend. Passenger numbers increased by 9,2% year-on-year, due to urbanisation and commuters abandoning private car usage due to burgeoning fuel costs. Notwithstanding increased passenger numbers and operating revenue, the unusually high price of diesel fuel resulted in a 13,0% decline in operating profits. In an industry in which fuel is a major input cost and fleet recapitalisation a strategic imperative, the price volatility of crude oil during the past year coupled with a weakened rand wreaked havoc with operating and capital costs to the point where profit margins were significantly eroded. The cost of diesel fuel escalated by some 46% during the period under review and the rand reached its weakest levels against the US$ in over six years. The escalations in the fuel price resulted in GABS expending R75 million more for diesel than it had during the previous year with a resultant increase of 27.5% in operating costs. The company has, since HCI acquired GABS in 2004, purchased 374 new buses and refurbished 132 buses at a total cost of R464 million. It is HCI s intention to continue modernising the fleet as part of its commitment to the upgrading of the bus service in Cape Town and reaffirming GABS s status as the primary supplier of scheduled bus transportation in the city for the foreseeable future. During the past twelve months, 95 new buses and 19 South African Bureau of Standard- approved refurbished buses were added to the fleet at a cost of R138 million. This includes the acquisition of five MAN Lion Explorer Bus Trains, which have 64% more carrying capacity than the standard single deck commuter bus. These latest additions to the fleet improve the company s capacity to respond to the growing demand for bus services in Cape Town. The company currently deploys a total of 1116 buses during the peaks to convey, on average, passengers each working day. The most significant issue facing the commuter bus industry, including GABS, at the present time is the intention to change the regulatory framework governing passenger subsidies including the replacement of the existing passenger-based system with a kilometre-based contract system. The issue recently came to the fore when the Department of Transport informed the industry of a significant shortage in funding and attempted to avoid its contractual commitments. GABS was, regretfully, left with no alternative but to protect its interests through legal recourse to the High Court. The High Court found in the company s favour and ordered the Transport Authorities to comply with their contractual obligations. While the Department of Transport has complied with the Court Order for the fiscal year ended March 2009, there are worrying indications that insufficient funding has been budgeted by the State for the 2009/10 fiscal year. This shortage of funds will, undoubtedly, have a very negative impact on the Department of Transport s ability to meet its existing contractual obligations and is likely to put further pressure on the company s cash flow and services. The plan to implement the Integrated Rapid Transport (IRT) System in the face of vehement opposition from the taxi industry looms as a formidable challenge facing operators and the local authority. The composition of the proposed consortia of existing bus and taxi operators to manage the IRT system has emerged as a major stumbling block in the negotiation process. In addition, the envisaged business model underpinning the IRT is also at variance with those of the respective operators. Issues regarding revenue streams and operating margins would need to be clarified and quantified in order to gain acceptance by the prospective parties. The participation of the taxi industry in the proposed system will, in particular, require a radical paradigm shift with short-term cost/benefit horizons possibly inhibiting objective judgment. The FIFA World Cup scheduled to take place during June/July 2010 in South Africa will require imaginative solutions in the transport field. Whilst it is still unclear exactly what role GABS will play, the company is participating in processes which will culminate in detailed plans during the course of the year. Despite the many and complex problems that the company is likely to face during the coming year, GABS is confident that it will be able to rise to the challenge, meet growing passenger demand and successfully navigate the changing institutional landscape. 11

12 operational REVIEW Food and Beverages CLOVER INDUSTRIES LIMITED ( CLOVER ) The loss Clover reported for the 6 months ended 31 December 2008 was R13m compared to a profit of R96 million for the comparable period in the previous year was in line with HCI s expectations when we released our interim results. At interim HCI had equity accounted a loss of R11 million and in the full year results HCI has equity accounted a loss of R14,9 million. The losses in Clover relate to the dairy business which in the Clover interim financial statements had recorded a loss of R50.6 million as opposed to the branded business (under Clover Beverages) recording a profit of R37 million (up from R28 million in the comparable period). The losses in the dairy business are stated after the consolidation of profits from the Danone Clover joint venture. Principally, the losses in the dairy business are caused by a raw milk surplus, the slow down in retail sales and a depressed international dairy market. The losses were further compounded by a business model which is predicated on volume in order to amortise Clover s significant fixed costs. A further effect of the losses in the dairy business and the lower than expected sales, is an increase in working capital, which necessitated an increase in borrowings. The higher inventory levels were funded through a dedicated inventory financing structure which should reduce when demand and prices improve. Debt service costs have increased concomitantly. are shielded from unfair competition if food security remains a government priority. An improvement in efficiency requires capital investment. This investment remains constrained by the lack of progress in recapitalisation. As previously advised, the Competition Commission has referred certain complaints against seven dairy processors, including Clover, to the Competition Tribunal for determination. One processor, Lancewood (Pty) Ltd, has reached a settlement with the Commission. Clover s objections regarding the late referral of the complaints, the duplication of complaints, and procedural unfairness have been dismissed by the Courts. In the interim, Clover has lodged an application for designation of the Dairy Industry with the Minister of Trade and Industry. The application for designation is made in terms of the Competition Act, which stipulates that an industry may be granted exemption if the Minister of Trade and Industry, in consultation with the Minister responsible for that specific industry, grants such designation in order to ensure the economic stability of such an industry. Clover argues that the stability of the Dairy Industry is under threat because of the intrinsic instability of dairy incomes, the greater ease of farmer exit, and unfair competition from subsidised imports. We remain concerned about the ability of Clover to raise additional capital given the historical constraints and delays in the restructuring process. An improvement at Clover is dependent on improved dairy prices, increased demand and improved operational efficiencies. While the local market has shown signs of demand and price recovery there are worrying signs that subsidies paid by foreign countries to support their dairy industries will artificially stimulate demand and depress prices for longer than necessary. As is the case in the clothing and textile industry, it is imperative that the authorities recognise the dangers facing the dairy industry in South Africa and while there is no expectation of direct support it is essential that we 12

13 operational REVIEW Industrial FORMEX INDUSTRIES (PTY) LIMITED ( FORMEX ) The significant downturn in the international automotive market and its effect on the local industry has seen many local automotive component suppliers either going out of business or incurring significant losses. More worrying, the expectation that it will take a considerable time for the industry to reach previous record sale levels, which are required in order to support and amortise capital investment decisions. Consequently Formex was forced to retrench several hundred staff and downsize the group in order to survive the challenging market conditions and restrained outlook. The door module business in Port Elizabeth was sold to the licensor of the door modules and the pulley business was consolidated into the Garankua facility with the tubing division. Plans are underway to sell or close the pulley division and to further reduce costs across the group through consolidation of functions. The success of the business is dependent on its ability to grow revenues in the pressings and tubing divisions where Formex has a significant presence and where capital costs are amortised by the current order book. The two divisions are complimentary, share material suppliers and sell to the same client base. Current indications are that the smaller vehicle platforms are beginning to show volume growth while sales of components that are supplied to larger vehicles and trucks remain depressed. The tubing division has a significant exposure in the large vehicle and truck market while the pressings division has a more diversified order book. JOHNSON ACCESS (PTY) LIMITED ( JA ) Over the last six months of the year under review, the impact of the international credit crisis has become apparent with sales of new access platforms from Hi-Reach Manlift, a subsidiary of Johnson Access, dropping off by almost 80%. This was largely due to three factors being price increases imposed by Genie Industries (our international supplier), tightening of credit by the financial institutions in response to the world economic situation as well as the weakening of the South African currency against the US$. During the year the division acquired a property in Alrode, Alberton where all its future Gauteng operations will be based. On the rental side however, conditions in the construction industry remained fairly positive with bigger booms being in short supply. Unfortunately this leaves a situation where a gap is left for competitors to get into the market at a time when little capital investment is possible for JA. Market conditions over the last few years have seen increased competition, especially by operators with second-hand fleets and where price-cutting is their primary marketing strategy. The company is, however, aware of these issues and has adapted pricing and procurement strategies where required. 13

14 operational REVIEW Services and Technology SYNTELL (PTY) LIMITED Syntell is the leading supplier of Traffic Management, Road Safety and Revenue Collection Services to municipalities throughout Southern Africa and selected export markets. The company achieved it s budgeted profit levels for the financial year notwithstanding some operational challenges with some key contracts. The company was also successful in winning a significant contract with the City of Cape Town for the provision of road safety services. The company has further entrenched as South Africa s leading online fine viewing and payment system and grew its subscriber base by 75% to 700,000 during the year. The company has strengthened it s competitive position in all of its business areas and good prospects should consolidate its position in key market segments. BUSINESS SYSTEMS GROUP (AFRICA) (PTY) LIMITED ( BSG ) BSG has had its most successful year in its 12 year history from both a financial and employee retention perspective. The company showed an increase in gross profit in tough market conditions and due to customer demand, successfully launched two new business units. BSG was awarded two prestigious accolades; the 2008 Deloitte Best Company to Work for Awards in the Company and Information Systems Industry categories as well as Service of the Year at the Proudly South African Homegrown Awards in the Corporate category. These awards symbolise BSG s ability to both attract and retain top talent and produce solutions of extremely high standards according to stringent quality control procedures. Additionally, BSG has become a Microsoft Gold Certified Partner. The BSG brand was elevated in the eye of the general public through the signing by BSG of a four year term as the co-title sponsor of the BSG Energade Triathlon Series (a nationally based seven race series) together with Tiger Brands. The main aim of the BSG participation is to promote healthier living amongst its employees and clients as well as use triathlon sport as a platform to drive an element of BSG s corporate social responsibility programs. Property and Exhibitions GALLAGHER ESTATES (PTY) LIMITED ( GALLAGHER ) The results for the year under review reflect the combination of the traditional conference, exhibition and banqueting business, and the remnants of the Johnnic property division. In the conference and exhibitions business, the results are lower than anticipated, with revenue from conferencing and exhibitions decreasing by 9% compared to the prior year. The decline of revenues is largely anticipated given current economic conditions. Office rentals grew by 14%. The demand for office rentals has been largely unaffected by the recession due to the profile of leases and good credit management. The construction of a new Pan African Parliament has commenced but appears to be behind schedule. We are in discussion with the relevant government department to extend the lease. While the exhibition and conference industry is extremely competitive, Gallagher remains a venue of choice. The quality of staff that Gallagher develop assists the company in maintaining the high standards it has become known for. The industry has become characterised by the shortening of booking lead times, resulting in a great deal of difficulty from a forecasting point of view. The impact of potential power outages has been mitigated by the installation of large generators producing enough capacity to carry the electricity load for the estate. Gallagher s corporate social responsibility initiative consists of an in-house training programme for local unemployed people, and resulted in the graduation of 80 service personnel both for Gallagher s needs and for the needs of the hospitality industry in general. The training programme is one of the most highly regarded in the industry and trainees are recognised for their service excellence. 14

15 operational REVIEW Energy MONTAUK ENERGY CAPITAL LLC ( MONTAUK ) The natural gas market in the USA remains very volatile and gas prices have touched 7 year lows. Gas price increases appear to be constrained by: Reduced demand due to the unfavourable economic conditions in the USA; Increased supply (or potential supply) due to increased production from shale gas field and LNG imports in the USA; Very high gas storage levels. Following the demise of Lehman Brothers, which was a counter-party to various gas price put agreements, Montauk has remained substantially unhedged due to the low gas prices. A renegotiated five year contract to supply electricity from the Monmouth operation will however result in the doubling of electricity sale price from July. We have settled US$20 million of debt with our external debt providers which leaves Montauk with US$23 million in external funding. The covenants relating to this debt were relaxed during refinancing and with covenant step-up s commencing in Operational efforts are currently focused on increasing the supply of gas at our key sites and improving plant operation and maintenance practises. A team of South African engineers has been seconded to the USA to assist in local management. While the future gas curve, US drill rig data and the pricing discrepancy between oil and natural gas indicates that gas prices should recover, the gas market has shown its ability to surprise in the last 12 months. Our view is that an economic recovery in the USA will ultimately lead to increased gas prices but that the price recovery, when it happens, could be disproportionate to the economic recovery. It is expected that the federal and state initiatives to promote and regulate green energy, and to cap emissions, will create opportunities for Montauk to sell the green attributes of its gas and electricity at favourable prices. 15

16 operational REVIEW Mining HCI KHUSELA COAL (PTY) LIMITED ( HKC ) HCI Khusela Coal was granted mining rights by the Department of Minerals & Energy ( DME ) on 26 June 2008 in respect of the Palesa and Mbali mines. Following the replacement of the project management company the development costs of the Palesa and Mbali mines were reassessed and increased to R550 million in aggregate, which represents a significant increase from previous estimates. At the end of July HCI had invested R360 million. Palesa has started to deliver raw coal to Eskom under its current contract, with current deliveries averaging tons per month. The completion of the wash plant will increase the mine s capacity to saleable tons per month - it is expected that the wash plant will be fully operational in the second half of the financial year. In addition to the plant completion, a reduction in the cost per saleable ton and the extension of the Eskom agreement are key priorities. In the case of Mbali the inexplicable granting of a key portion of the prospecting right to African Exploration Mining and Finance Corporation (Pty) Ltd (a wholly owned subsidiary of the Central Energy Fund), despite our prospecting right, has resulted in us having to redesign mine infrastructure and amend the environmental approvals before mining can commence. We have taken the decision of the DME to withhold the portion concerned on review. Accordingly, management ceased construction of the mining infrastructure, other than the wash plant, pending the outcome of the review application and the requisite environmental approvals. Resource/Reserve data are updated as additional boreholes are drilled, after taking into consideration geological, mining and plant efficiency losses. The current status is as follows: RUN OF MINE TONS PALESA COAL MBALI COAL TOTAL Mineral reserve: proven Mineral reserve: probable Mineral resource: indicated The Mbali tonnages reflected above exclude Portion 17 which were included in the 2008 resource and reserve statement. We have completed the prospecting on the Nokuhle property and shall be lodging a mining right application in the near future. The mineral resources at Nokuhle is made up of 23 million gross in situ tons and 28 million inferred tons. 16

17 operational REVIEW Clothing and Textiles SEARDEL INVESTMENT CORPORATION LIMITED ( SEARDEL ) Seardel is South Africa s largest textile and clothing manufacturer employing over people. The period under review was significant in the life of Seardel. In June of 2008, the pressures brought to bear on the group resulted in it breaching its funding covenants. To save itself from almost inevitable liquidation, a recapitalisation was required. A rights issue was concluded in October 2008 which saw HCI become the controlling shareholder with a 71% shareholding. As a result of the successful conclusion of the rights issue and the provision of security, Seardel s commercial funders, who have combined facilities in excess of R750 million, agreed to leave their facilities in place until 30 June 2010 provided that the Group does not breach any of its facility terms. Since HCI has taken control, significant changes have been made to the senior management ranks, the board has been reconstituted and Seardel has commenced with an extensive turnaround program which involves a fundamental shift in existing business practices and ethos. In April 2009, Seardel announced its intention to close certain divisions within the Frame Textile Group s vertical pipeline, namely the spinning, weaving, finishing and denim divisions. After having spent a number of months evaluating the current performance, considering the prospects of these divisions and stress testing a number of restructuring alternatives, it became clear that there was little that could be done, within management s control, to return these divisions to profitability. These divisions have been significant loss makers for a number of years and continuing to operate them would have threatened the entire group. Subsequent to this announcement, Government spearheaded an effort to save this industrial capacity through collaboration between the Industrial Development Corporation, the National Empowerment Fund, the KwaZulu- Natal provincial government and the Group. Regrettably, despite the best efforts of all parties concerned, there has been no positive outcome from these deliberations. It is recognised that there are no quick fixes to a group of this size and that losses are anticipated until the benefits of turnaround come to fruition. Indeed, given the costs relating to the closure of the affected divisions, the Seardel group will almost certainly record a further loss for the 12 months to 31 March A significant amount of work is still required to be done to effect a turnaround and we remain pragmatic in our views of the industry and the current economic climate. However, we are pleased with the progress made to date and remain optimistic that a turnaround will be achieved. 17

18 Business Segments as at 21 August 2009 GAMING, HOTELS AND LEISURE MEDIA AND BROADCASTING TRANSPORT FOOD AND BEVERAGES INDUSTRIAL SERVICES AND TECHNOLOGY PROPERTY AND EXHIBITIONS ENERGY MINING CLOTHING AND TEXTILE 18

19 Tsogo Investment Holding Tsogo Investment Company Holding 74.7% Company 74.7% Vukani Gaming Vukani Corporation Gaming Corporation 100% 100% e.tv e.tv 64% 63% Yired Yired 64% 63% e sat.tv Communications sat.tv Communications 64% 63% Golden Arrow Golden Bus Service Arrow Bus 100% Service 100% Clover Clover 44% 44% Formex Engineering Formex Engineering 90% 90% Johnson Access Johnson 84% Access 85% Business Systems Business Group (Africa) Systems Group 40% (Africa) 40% Syntell Syntell 55% 55% Isilumko Isilumko 30.1% 30.1% Limtech Limtech 58.9% 58.9% Gallagher Gallagher 100% 100% Montauk Energy Capital 91.5% HCI Khusela Coal 80% Seardel Investment Corporation 70.6% 19

20 shareholders information ANALYSIS OF SHAREHOLDERS Listed below is an analysis of shareholdings extracted from the register of ordinary shareholders at 31 March Number of % of total Number of shares % of total shareholders shares , , shares , , shares 112 7, , shares 57 3, ,15 Over shares 23 1, , , ,0 Type of shareholder Number of % of current Number of shares % of issued shareholders shareholders 000 capital Public companies 3 0, ,73 Banks 30 1, ,30 Close corporations 17 1, ,03 Individuals , ,57 Nominees and trusts 120 7, ,93 Other corporations , ,48 Pension funds 105 6, ,90 Private companies 51 3, ,52 Share Trust 1 0, , , ,0 SHAREHOLDERS DIARY Financial year end 31 March Annual general meeting october Reports - Preliminary report June - Interim report at 30 September november - Annual financial statements september STOCK EXCHANGE PERFORMANCE 31 March 2009 Total number of shares traded (000 s) Total value of shares traded (R 000) Market price (cents per share) - Closing High Low Market capitalisation (R 000)