AEEI continues to deliver on its vision to create superior value through a healthy balance sheet and sterling financial results.
OVERVIEW OF THE 2018 FINANCIAL YEAR
During the 2018 financial year, we continued with our Vision 2020 journey by unlocking shareholder value through the unbundling of the technology division in the AEEI Group and increasing our investment portfolio in the fishing and brands division.
In our third year of Vision 2020 Vision, we succeeded in meeting our strategic objectives against the macro-economic backdrop of low economic growth and socio-political uncertainty. We concluded the raising of equity capital to acquire more technology businesses and utilising the capital from the fishing and brands listing to expand their businesses. Capital allocation became crucial to ensure that it was spent wisely to produce excellent shareholder returns.
Our first strategic priority to leverage the investment portfolio – through driving growth through acquisitions – was met. With the conclusion of the acquisition of Talhado Fishing Enterprises (Pty) Ltd in the fishing and brands division on 30 November 2017 and our other core investment in technology being listed on the JSE on 21 December 2017, we achieved our objective to increase our capital structure and boost our investment portfolio.
The second strategic priority for the Group is to maintain gross margins from our underlying operations and retain the Group’s margins within the targeted range of 30% to 35%. After the prior year was restated to exclude the technology division, the Group’s gross margin remains in line with restated prior year at 41%. This margin exceeded the range due to operational efficiencies from the fishing and brands division and change in product and business mix in the health and beauty division.
Our third strategic priority is to improve social, governance and financial sustainability in our business in order to secure long-term growth and value creation for the Group. The investment in an early childhood development classroom for Where Rainbows Meet Training and Development will create a social impact and uplift the community in Vrygrond, Western Cape in the future.
Transformation targets were met in AEEI as we worked towards improving our previous B-BBEE status from the prior year and achieved a Level 1 status. Refer to page 20 of the online sustainability report for more details.
We believe that we have created superior value and delivered sterling financial results for our stakeholders in 2018 as the financial position strengthened with total assets accelerating from R2.8bn to R7.4bn and increasing shareholder equity.
GROUP FINANCIAL PERFORMANCE
The 2018 financial results were impacted by some significant once-off items and impairments as we maintained the sustainability of our underlying businesses. A significant event occurred in the current year, where at listing date of AYO Technology Solutions Ltd (AYO), our shareholding dropped to 49.36% from 80.01% as well as the change in control of the AYO Board. This resulted in AEEI no longer unilaterally directing the activities in the technology division. The deconsolidation in our Group’s accounts from 24 August 2018 meant that the realisation of an extraordinary gain of R6 049m on the deemed disposal of AYO as a controlled subsidiary and its profits are now disclosed as a discontinued operation. This event led to the reclassification of the technology division and resulted in AYO being an equity accounted associate.
Profit from equity accounted investments includes a full year of our share of profits of R57m in BT Communication Services South Africa (Pty) Ltd (BT). Due to poor future cash flows and a muted outlook, we adopted a prudent approach to impair the potential value in the biopharmaceutical intangible assets in the biotechnology division. The statement of profit and loss includes a R140m impairment charge. A moderate fair value loss of R5.4m was accounted for in comparison to a prior year once-off non-recurring fair value gain of R535m.
After taking into consideration the above-mentioned once-off gains and impairments, the profit before tax accelerated to R6bn. The ordinary earnings attributable to AEEI shareholders escalated from R477m to almost R4 942m, which translates to 1016.01 cents per share. The normalised headline earnings, which is adjusted for fair value adjustments, impairments and once-off charges, is R123m against the prior year’s R51m earnings. An increase of 142% in comparison to the prior year reflects the excellent growth in the operational performance of the subsidiaries.
GROUP FINANCIAL POSITION
The most significant movement in the balance sheet was the deconsolidation of the assets and liabilities of the AYO Group of companies and the net revenue and expenses of the technology division being reclassified as profits from discontinued operations in the income statement as a result thereof. This investment is now accounted for as an investment of associate at fair value of R4.8bn. A deferred tax liability had to be raised which increased the non-current liabilities from R461m to R1 487m. The change in control in the subsidiary, the investment in property, plant and equipment in the fishing and brands division, as well as the inclusion of the newly acquired assets of Talhado are the major reasons for the 161% increase in the total assets from R2.822m to R7 362m.
AEEI’s investment in BT as an associate increased through strong earnings growth with our share of the carrying value of the investment being accounted for at R820m. Financial assets consist of investments in public companies of R238m and private companies of R181m which is detailed below under Material Matters – Growth in Strategic Investments.
Cash and cash equivalents decreased substantially from R625m to R363m at year-end, which is largely attributable to the cash excluded from the technology division, the balance of capital unutilised from the listing of Premier Fishing and Brands Ltd as well as reserved cash on hand from all subsidiaries in the Group.
The total liabilities, excluding the deferred tax liability of R1.1m, decreased by 27% from R573m to R419m, which demonstrates the low gearing of 8% for the Group as the acquisitions and growth expansion plans of the Group utilised equity funding and no debt funding. We are committed to reducing our debt exposure by repayment of our financial obligations and settled debt funding related to acquisitions during the year.
The net asset value of the Group grew by 284% over the year from R1 277m to R4 910m. This growth is underpinned by a greater fair value in the investment in associates, inclusion of additional value from the acquisition in the fishing and brands division, as well as the increased equity from the statement of comprehensive income.
Net cash generated from operating activities increased by 64% from R80m to R131m. Additional interest income affected the operating activities of subsidiary operations. Cash generated from these operations is R174m which includes AYO as a discontinued operation.
The disposal amount of R4 300m resulting from the reduced shareholding in AYO affected both investing and financing activities as a cash outflow and inflow respectively. The additions made to property, plant and equipment of R37m for the existing fishing operations, and R79m to expand the fishing operations in line with growth plans, play a significant part in our future growth and vision.
Shareholders were paid dividends amounting to R72m during the current year compared to R32m from the prior year, which reflects our commitment to increase our returns to our shareholders.
AEEI returns value to its shareholders in the form of dividends and share price appreciation. The share price traded well with a closing price of 400 cents and we expect this to increase further as the Group meets its strategic objectives.
We continue to reward our shareholders in line with our earnings growth, and accordingly increased our total gross dividend per share to 15.30 cents per share, a 104% increase from the prior year’s 7.50 cents per share. The Board declared a final gross dividend of 12 cents per share for the year ended 31 August 2018 from income reserves.
MATERIAL MATTERS THAT AFFECT OUR PERFORMANCE
RESPONSIBLE USE OF CAPITAL GENERATED
The AEEI Group incurred R117m (2017: R27m) in capital expenditure, which included R45m for existing operations and R71m for expansion plans. Since the fishing division’s listing in March 2017, the fishing and brands division acquired 50.3% in Talhado – the largest squid company in South Africa – and owns twelve squid vessels as well as property, plant and equipment which were consolidated into the Group’s balance sheet.
The listing of AYO unlocked R4.8bn of value for AEEI shareholders. This alone has more than doubled the non-current assets to R6 705m. We move closer to the investment entity model after the change of control to one of significant influence. After two years of strategic focus, AEEI has met its objective to unbundle its two core assets with equity funding for future acquisitions and growth.
INVESTMENT IN BUSINESS OPERATIONS
Investments of R37m were made into the existing infrastructure to maintain vessels and production facilities to sustain our existing fishing operations. The expansion of the abalone farm is progressing well with an investment being made to increase the farm’s capacity by 40 tons so far, as well as the building of a hatchery facility to grow more animals and hold more stock. The stock holding increased by 19 tons, from 126 tons to 145 tons, in preparation for the construction of the pipeline for the larger farm.
Further working capital was invested in Magic 828 (Pty) Ltd and Opispex (Pty) Ltd to increase the resources at the radio station and to enhance revenue to obtain tangible returns in the short to medium term.
espAfrika (Pty) Ltd’s management expanded its footprint and now has three company-owned events, the latest being in Limpopo where they will manage a music festival in collaboration with the Limpopo Department of Arts and Culture, which will promote the social development of this rural area.
A further investment was made in the biotechnology division to continue with its progress by building an accredited ‘clean room’ facility in collaboration with the University of Cape Town. Phase 1 human trials will commence next year and we believe that this exciting dendritic cell vaccine project will advance the immunotherapy field in cancer treatment.
GROWTH THROUGH STRATEGIC INVESTMENTS
The Group’s strategic investment in Saab Grintek Defence (Pty) Ltd, an unlisted private company, continues to grow in value, delivering strong financial results with consistent and sustainable dividends which is used to reduce and repay the preference share liabilities.
AEEI expects a recovery in its listed investment in Pioneer Foods Group Ltd in the medium to long-term as it continues to experience a year of share price volatility and the dividend returns increased marginally. With our additional shareholding in Sygnia Ltd, the dividend returns increased substantially during the current year. Our minority shareholding in an unlisted public company, African Legend Investments Ltd, is starting to gain traction as it delivers consistent growth in earnings and dividend returns over the past two years.
EXTERNAL FACTORS THAT IMPACT THE GROUP’S PERFORMANCE
The external environment with its financial market volatility, socio-political uncertainties and greater scrutiny of various industry leaders and government associations, which is out of our control, continues to have an impact on our ability to increase stakeholder value.
Volatile currencies reduced our revenue generation in the fishing and brands division marginally, as the greater sale volumes and better pricing outweigh the exchange loss incurred of R3.2m. The operational management team continually reviewed their margins after the rand to dollar conversion rate strengthened in the first ten months of the year but weakened thereafter, with an average rate of 12.94 (2017: 13.25) achieved in the current year. Some of the cost structures are dependent on foreign suppliers in the technology and health and beauty divisions, but these had marginal effects on the operating margin.
The adverse weather conditions continue to impact the number of seaworthy days and catch rates in the fishing and brands division. This led to changing the vessel planning and scheduling to increase fishing earlier in the year so that, by year-end, 100% of the division’s lobster quota was caught. The pelagic division did not perform as well as in the prior year, which is an industry-wide norm. The diversification strategy to acquire a new company in the squid sector offset the lower financial performance in the pelagic division.
Political uncertainties related to the fishing rights allocation process may impact larger fishing companies as well as certain fishing communities; the outcome remains unknown until the process is completed. Operational management continues to manage this area within their control and continues to engage with outside quota holders to increase our catch allocation in the west coast lobster division.
In this exciting time of change, where innovative and agile work practices are required to keep up with the digital transformation, we explored our available digital options and will continue to invest in a robust IT infrastructure system to consolidate our investments and have information easily available to drive effectiveness and efficiency.
As scrutiny into government associations, corporate South Africa and professional audit firms continue, we hold ourselves accountable to do the right things. We look ahead to return value to shareholders through acquisitions that make good business sense for AEEI, its subsidiaries and associates.
We remain committed to create superior value for our stakeholders and maintain gross margins within our targeted range by continually refining the cost structure and operating efficiencies, and improving our social, governance and financial impact on society and the economy.
I would like to thank all the financial teams in the companies, subsidiaries and associates across the AEEI Group for their contribution, dedication and commitment to meet the demanding timelines in order to deliver quality financial information to our stakeholders. I express my appreciation to our Board and executive management team for their unwavering support and guidance during the challenging times.
AEEI is well positioned to continue to meet its strategic objectives and will focus on improving its profitability and delivering superior value to its shareholders. Our balance sheet is healthy to affect future acquisitions and growth. A disciplined approach in our investment philosophy is followed to ensure good returns from our capital investments.
Chantelle Ah Sing
Group Chief financial officer