Risk issues >

Global financial crisis
The global financial crisis has placed a premium on strong cash flows and liquidity. A general situation of distrust exists in the financial markets with lenders applying stricter lending criteria and carefully reviewing existing lines of credit. Financing will also be at less favourable rates and no doubt will be further compromised with downgrades from global ratings agencies.

Exchange rates
The second half of the financial year and the period subsequent to year-end, have seen great volatility in the value of the rand. The currency has weakened sharply, especially in the last two months with acceleration in global risk aversion significantly enhancing the value of the US dollar against most currencies, and in particular emerging markets. To date the rand has lost more than 30% of its value to the US dollar in 2008, reaching its lowest levels in seven years.

On a positive note, South Africa has largely been protected from the global financial crisis, mainly due to exchange controls. To protect the group from exchange rate volatility, imports are covered by means of forward exchange contracts. Significant exports are covered on an individual basis. Exports at R791,3 million, representing 7,3% of revenue, increased by 27,8% from exports in 2007, at R619,0 million.

Furthermore the group has well established procurement and distribution channels which are less susceptible to short-term oscillations.

With a weaker rand in 2009, focus must be to grow international market share. The Reutech division has large existing export orders and successful delivery of these will have a profound effect on profitability and liquidity.

Commodities
Lower levels of economic activity are expected in a deteriorating global and domestic macro-economic environment, placing downward pressure on commodity prices.

The CBI-electric plants use copper as a main component in product manufacturing and this commodity has a material effect on the price of production. Copper hedges are used to protect the group from short-term price fluctuations.

To enhance sustainable production, our copper and component supplier base has been expanded. Various site improvements to security and controls have been implemented to combat theft and shrinkage/wastage.

Business cycle
At the time of writing this report South Africa has, to a certain degree, been sheltered from the global turmoil. Inflation has risen to well above targeted levels, whilst interest rates have consistently risen and are currently at a level last seen in the nineties. Consumers in all segments are exposed to high levels of debt with a marked increase in late or defaulting payments. A weak currency would also delay possible rate cuts which are currently foreseen in early 2009.

A major concern is South Africa’s large current account deficit, which was at over 7% of GDP for 2007, with no sign of improvement in 2008. This is at its highest level since 1971. Growth forecast for the current year is between 3% and 4%, down from the average of over 5% for the previous four years. Further pressure on emerging markets could easily have a further negative impact and a shift to a possibility of recession.

With enhanced credit policies, risk management procedures and innovative products and offerings, the group aims to limit its exposure to the downturn.

Corporate activity >

Reunert acquisitions in the financial year amounted to R484 million and include the following businesses:

The following capital expenditure was incurred in respect of property, plant and equipment:

Reunert shares continued to trade actively on the JSE during the past year. Fund managers and investors still have an active interest in the group, mainly due to its exposure to the infrastructure spending through its electrical operations. Approximately 130 million shares were traded in over 67 000 transactions. The total value of shares traded amounted to R8 billion resulting in over 78% of the market capitalisation of the company being traded during the year.

The majority of shares are held by pension funds, unit trusts and mutual funds. On 26 September 2008 the offshore shareholding was just under 11%.

Because of a change of ownership internationally of our associate company NSN, a revised shareholder agreement was concluded. The income from the investment arises out of commission on sales which has been included in other income and operating profit.

Operating profit increased by 10% before including the income from NSN.

The income from associates now excludes the equity accounted income from NSN.

Reunert has large market shares in most of the markets in which it operates. Growth over the last number of years has mostly been organic with smaller ‘bolt on’ acquisitions which have added product or distribution to existing operations.

With the economic environment deteriorating, opportunities for meeting the group’s investment criteria could increase. Sellers will be more realistic in their price expectations. Cash balances are increasing and, excluding RCCF assets and borrowings, the balance sheet is ungeared. The group is in a favourable position to consider a sizeable deal.

Reunert will continue to control costs and improve working capital during these uncertain economic times.

David Rawlinson
Financial director

Sandton
5 December 2008