Our excellent financial results for the 2016 financial year are testament to the resilience of AEEI with its diverse portfolio of investments in a challenging economic environment.
KEY FINANCIAL HIGHLIGHTS
overview of the 2016 financial year
The AEEI Group is pleased to report another year of record financial results in its first year of Vision 2020 vision, and delivered an excellent performance due to
- organic earnings growth of its core operations in the technology and food and fishing sectors; and
- strong returns and growth in its strategic investments.
Our first strategic priority was to leverage the investment portfolio to drive growth through acquisitions. In doing so, AEEI increased its equity stake in Saab Grintek Defence (Saab) to 25% plus one share, as well as acquiring an interest in Sygnia Ltd. The impact on the Group was an increase of 28% in financial assets.
The second strategic priority for the Group was to maintain gross margins from its underlying operations and retain Group margins within the targeted range of 30% to 35%. The Group maintained its 34% margin by improving operational efficiencies through more efficient vessel scheduling and planning, as well as maximising its relationships in the supply chain to ensure better pricing.
“Predicting the future with any degree of certainty is impossible. The key is to react accordingly to any situation as it arises.”
Improving the social, transformation and environmental impacts on our business was the third strategic priority to secure long-term growth for the Group. As a Top Most Empowered Company, it is important that we continue to strengthen relationships with all key stakeholders to deliver improvements in governance, social upliftment, environmental impact and transformation. Refer to our stakeholder engagement for further details.
We continued to create substantial value for our stakeholders as follows:
- Revenue grew by 12% to R752m
- Headline earnings growth of 39% to R212m from R152m
- Total assets increased by 26% to R1,7bn
- Net asset value per share increased by 29% from 144.93c to 186.52c per share
- Dividend declared of 3.30c per share – an increase of 32% over the prior year
Despite a volatile macroeconomic environment and slow economic growth in South Africa, the Group delivered strong financial performance. Operating profit increased by 53% compared to the prior year, mainly due to the excellent operational performance and the fair-value gains on our strategic investments. Most of the divisions in the Group delivered against their strategic targets for the 2016 financial year. Refer to our key performance indicators for more details.
The Group’s earnings increased by 42% to R215m which was driven by the Groups’ diversified asset portfolio which provided a significant increase in fair value and dividends return from the strategic investments as well as a strong operational performance in the fishing and technology divisions. As a result, earnings per share increased from 31.12c to 44.09c compared to the prior year.
AEEI’s headline earnings per share increased by 39% from 31.06c to 43.13c with earnings per share increasing from 31.12c to 44.09c compared to the prior year.
The Group’s balance sheet is well positioned for future growth with a strong asset base and robust cash generation. Net asset value increased from 144.93c to 186.52c per share which is a strong indicator of our strengthened financial position.
GROUP FINANCIAL PERFORMANCE
Revenue growth of 12% (2015: 8%) bolstered by the higher-than-expected performance from most of the sectors in the food and fishing division of 15%, and a 30% increase from the events and tourism division. The business units under the events and tourism all reported greater revenue generation from a low base compared to prior year.
Operating profit was R285m, an increase of 53% over the prior year. All the operational divisions, with the exception of the health and biotherapeutics division contributed positively to the operating profit growth for the year.
The food and fishing division produced an excellent operating profit of R75m (2015: R68m) with a 19% operating margin driven from improved catch costs, greater sales volumes and better pricing. The technology division generated higher than expected margins of 16% as a result of the completion of a major health information system contract. The events and tourism division achieved greater revenue with lower margins, while the health and biotherapeutics division incurred a R5m operating loss from continuing operations to the Group in comparison with a prior year loss of R21m.
Operating expenses increased by 17% from R151m to R177m as a result of a full year’s operating costs of R9m for Magic 828, the radio station, as well as the 10% increase of R17m from the food and fishing division due to variable costs of commission and freight, repairs and maintenance in correlation with the 15% organic revenue growth.
Investment income of R33m included interest of R3m and a dividend of R30m, (2015: R14,6m) was received from the strategic investment portfolio. Finance costs increased by 33% compared to the prior year mainly due to the increased costs of the preference share financing of the equity in Saab.
Taxation amounted to R80,5m which included income tax of R20m and deferred tax of R60m. The effective tax rate was 27.5% mainly due to the inclusion of the capital gains from the increased fair value of strategic investments. The capital rate changed from 66.6% to 80% which impacted the taxation amount by R14m.
GROUP FINANCIAL POSITION
Total assets of the Group increased by 26% to R1,7bn mainly due to a significant increase in the financial assets from R525m to R857m and the increase of R34m in current assets to R263m. The increase in fair value of strategic investments of R331m was mainly due to the addition of the investment in Saab and the increased fair value of the investment in British Telecoms South Africa (BT).
Current assets increased as a result of the organic growth in inventory and cash and cash equivalents as well as the additional biological assets held at the abalone farm.
Cash and cash equivalents increased from R32m to R64,8m at year-end due to working capital previously held in current assets being converted into cash from the technology and food and fishing divisions. As a result thereof, the current ratio increased to 2.02 (2015: 1.23) which indicates a great improvement in working capital management.
Total liabilities excluding the deferred tax liability increased to R391m (2015: R302m) due to the acquisition of the additional financial assets during the year. The Group maintained a low gearing ratio of 9% (2015: 6%) and the net debt to EBITDA ratio improved to 0.19 times. The financing of the equity in Saab increased the liabilities by R101m and this has already decreased in the current year through dividends paid out by Saab.
The Group’s net asset value growth of 29% was driven by the strong performance of all the underlying investments as well as the increase in the financial assets and current assets. The return on equity increased from 19% to 23% due to the strong earnings growth and strengthened financial position achieved during the year.
Net cash flows increased at year-end due to the strong operational performance with less investment in working capital which decreased from R35m to R24m over the comparative prior year. Operational cash flows in the Group increased from R51m to R72m mainly as a result of greater cash generated from the operations of R16m, increased dividends from strategic investments of R15m, which was offset by higher finance cost charge of R6m and additional taxation paid of R3,8m.
MATERIAL ISSUES THAT AFFECT OUR PERFORMANCE
RESPONSIBLE USE OF CAPITAL GENERATED
The Group incurred R12m (2015: R37m) in capital investments with the replacement of assets of which R9m was invested in the food and fishing division to maintain organic growth. The return on assets increased from 11% to 13%.
Working capital was reinvested into the food and fishing, technology and biotechnology divisions to support strategic initiatives to grow product portfolios and increase income-generating activities. With the strategic plans for expansion of the abalone farm, further capital expenditure is being incurred through a phased operational plan.
Capital was used to reduce our overall debt commitments, ensuring returns from investments exceeded the cost of debt and in turn produced a consistent low gearing ratio. Dividend returns from strategic investments were used to repay debt commitments. Asset efficiency ratios were used to monitor performance on investment returns and these ratios and payback periods were assessed when making investment decisions for growth opportunities.
INVESTMENT IN BUSINESS OPERATIONS
Through its health information systems, the technology division proved itself as a successful system implementer by showcasing its reference site in the Western Cape. This division continues to expand into Africa in line with its strategy by obtaining business in Ghana and Tanzania, in addition to a recent contract concluded in Dubai.
Patent and licence costs were incurred to enhance the product portfolio in the health and biotherapeutics division as the trial phase was completed and the registration of these products have commenced. These costs were capitalised in the intangible assets which grew our organic operating asset base.
The health care division finalised agreements with a key principal and distributor to enable local manufacturing of products to commence in the final quarter of the current year. These strategic initiatives will reduce losses, improve the Group’s operating margins as well as increase turnover for this division in the next financial year.
Following eleven months of live broadcasting for Magic 828, the capital investment into the mast and studio installation is showing tangible results. Management’s key focus is to increase listenership and brand awareness to bolster advertising income. Working capital was invested into this business with a financial objective to break even by the next financial year.
Working capital was invested in the biotechnology division to continue with research and development activities by advancing the dendritic cell vaccine project to clinical trial phase and to enable more efficient production methods under good manufacturing practice standards. This will ensure the commencement of validation production runs in the next financial year.
GROWTH THROUGH STRATEGIC INVESTMENTS
Total assets increased through acquisitive growth strategy by leveraging the existing investments and initiating further growth. The investment in Saab is an example of how the Group implemented this strategy during this year.
AEEI’s investment in Saab continues to perform well and is gaining traction in the export business with international contracts being awarded. We expect future growth in the medium term with a dividend policy of 20% of earnings providing sustainable returns from this investment.
AEEI’s investment in BT continues to grow substantially within the Group’s asset portfolio. It delivered solid financial results that exceeded our expectations and provided us with a platform to seek complimentary technology businesses to build our operating asset base in the technology division.
Pioneer Foods experienced a year of volatility in its share price despite an increase in earnings. We anticipate that the decline in the share price is temporary and expect a steady increase in the value of this investment.
AEEI’s investment in Sygnia, acquired in October 2015, has already returned a maiden dividend in the first year of ownership.
The dividend return for all the strategic investments increased from R15m to R30m and we expect this to be sustainable.
The AEEI Group’s portfolio continues to grow in terms of one of its long-term objectives, with total financial assets increasing to R857m this year. Interactive engagement with our key stakeholders strengthened the synergy between AEEI and our various business divisions as well as our strategic investments, enabling long-term growth and value creation.
EXTERNAL FACTORS THAT IMPACT THE GROUP’S PERFORMANCE
The challenging macroeconomic environment with higher fuel prices, volatile exchange rates, increasing electricity prices and higher interest costs meant that we should continue to actively manage the factors within our control. The Group’s cost structure and margins were managed by monitoring monthly operating expenditure. Executive management kept a vigilant eye on operating margins from the various business divisions which are reported on through governance structures and key decisions were taken to ensure that it remains within our approved budgeted plans.
A large portion of revenue and operating costs were materially impacted by the weakening of the rand. Due to the volatile nature of the rand/dollar exchange rate, the cost of imported products and services escalated which had a material effect on the technology, food and fishing, health care and events and tourism divisions. A net foreign loss of R1,6m impacted the 2016 financial results. Management in the various divisions responded by finding alternate costs saving measures to reduce the overall impact on their profits by renegotiating pricing and cost structures.
However, the impact of the rising cost of importation of inventory in the health care division caused us to enter into agreements with key principals to enable local manufacturing in South Africa and with this progressive solution provided a reduction in the cost of finished products.
The slow growth in the South Africa economy as well as the political instability in our local economic environment lent itself to exploring opportunities outside of South Africa. We continued to invest in Africa as part of our strategic expansion plans in our technology division to mitigate the slow customer demand for our product offering locally.
The environmental impacts from the adverse weather conditions in the food and fishing division and the drought stricken farming areas affected the health care division which in turn limited revenue and operating profits. Due to the diversification of its business units, they were able to reduce any material impact in the food and fishing division and management continues to expand its product offering in the health and biotherapeutics division.
We return value to our shareholders in the form of dividends and share price appreciation. The share price appreciated during the year with a closing price at 2.95c and we expect this to further increase as we progress with our Vision 2020 Vision strategic plans.
The Board approved a final dividend of 3.3c per shares, an increase of 32% over the prior year. This is the third dividend payment to AEEI shareholders as we continue to deliver on our commitment to pay regular dividends to our shareholders while continuing to grow the Group in terms of Vision 2020 Vision.
In 2017, the uncertainty of the political environment, the potential risk of an investment downgrade and the volatile economic outlook in South Africa remains a business challenge. This has increased our focus and efforts to continue to build a strong diversified asset base and to produce sustainable returns as well as secure long-term growth in order to deliver on our Vision 2020 Vision strategy.
Our balance sheet remains strong with sufficient leverage to enable us to execute on our growth plans. We continue to benefit from our existing investment portfolio and diversify through acquisitive growth. Post year-end, the Group acquired two technology companies with a combined equity value of R63m on 1 September and 1 October respectively. This will further enhance our financial performance and financial position to meet our acquisition strategy.
Our financial objective is to maintain gross margins within our targeted range by improving operating efficiencies, monitoring our cost base and implementing innovative solutions to overcome the rising costs in the current environment.
I would like to thank the financial teams across the AEEI Group for their hard work, continued support and commitment during a demanding year. We as a team have overcome the challenges presented to us through determination and integrity to deliver quality financial information for our stakeholders.
We appreciate the strategic guidance and support received from the board of directors and the executive management teams that enabled us to strengthen our efforts and to focus on delivering on our Vision 2020 Vision.
I am pleased to report that the Group’s financial objective to deliver excellent returns to our shareholders was achieved during the year through the delivery of excellent financial results and a strengthened financial position. We believe the year ahead promises exciting opportunities and challenges as we continue to build on our solid foundation for future success.
Chantelle Ah Sing
Chief financial officer
For further information on investing in our staff refer to investing in our staff.
For further information on innovating for our clients refer to clients.
For further information on engaging our regulators refer to engaging with our regulators.
For further information on delivering value through a commitment to our communities and the environment refer to the social and ethics committee report.