David Rawlinson - Financial Director

Revenue and operating profit decreased for the first time in nine years, with the group’s operations unable to counter the effects of the economic downturn. Revenue decreased by 6% to R10,3 billion, while operating profits decreased by 28% to R1,1 billion. The defence operations enjoyed the benefits of export orders which were the highlight of a difficult year.

Normalised headline earnings

The group has disclosed normalised headline earnings per share for a number of years to provide shareholders and other users of the financial statements with the group’s sustainable earnings. These numbers are comparable with prior years.

The adjustments are charges of R10 million in 2009 and R39 million in 2008 for the BEE minority shareholder’s interest in the group’s cable operations. In terms of IFRS, the BEE minority interest may not be recognised while there are amounts owing by the BEE shareholders on the transaction.

The remaining adjustment of R299 million is the non-cash mark- to-market profit on the put option that Reunert has in respect of its investment in NSN.

Dividends

Reunert has continued with its policy of paying generous dividends with the dividend adjusting in line with the group’s earnings. A two-times dividend cover is maintained, based on normalised earnings, to exclude dividends being paid on non-cash accounting income.

Cash flow

Cash flow excluding dividends and share buy-backs
Reunert’s profit is underpinned by strong cash flow. This year, despite the decrease in profit, cash flow has been very pleasing due mainly to the decrease in working capital. During these difficult trading conditions it is pleasing to note the decrease in working capital in line with business activity.

The cash flow for RCCF has been excluded from the cash flow figures as finance is raised on the rental debtors book. Currently the cash accumulated in the group is deposited with RCCF for most of the financial year. This policy results in the group achieving retail interest rates for its cash. The group’s exposure to RCCF in the past has been limited, but the global financial crisis has resulted in providers of capital requiring Reunert to underwrite certain of the borrowings.

The rental book has been reduced this year as the credit markets have contracted.

Cash accumulation

Cash is being accumulated currently as the board believes that meaningful acquisition targets will arise in these stressed economic times. This will provide the group with additional growth opportunities.

Risk issues

Global financial crisis

The challenging economic conditions are expected to continue and conditions remain clouded in the short term. South Africa experienced a delayed effect in the onset of the credit crunch and the slowdown in business activities is forecast to continue longer than was expected.

Consumer buying power has been severely depleted with free cash and credit facilities curtailed. This predominantly affects our CBI-electric division where, despite the rise in performance indices, volumes remain under pressure.

Credit remains more difficult and costly to obtain although the major banks have started to ease lending criteria slightly.

Our Nashua division experienced high levels of bad debts. Improved credit approval policies and focused credit management has brought bad debt levels under control.