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  ANNUAL REPORT 2007  
LETTER to shareholders   cont.  
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The South African economic environment is characterised by efforts to curb consumer spending on the one hand and promises to invest vast amounts on improving infrastructure on the other.
 
 
REUTECH

Reutech, our defence business, had an excellent year and contributed 7% to operating profit after improving from R30 million to R109 million. Revenue increased by 55% to R490 million.

A year ago, we placed Reutech on the market, but terminated our disposal efforts after receiving pedestrian offers.

Indications are that future demand from the South African National Defence Force for Reutech’s products will ensure viability. Products developed over the past five years are now nearing the production phase and will soon contribute meaningfully.

Exports of airborne radios and electronic fuses remained brisk. We are confident that existing markets will provide a reasonable base going forward.

Our Stellenbosch radar business, RRS, developed a product that detects moving slope walls in open-pit mines. Given a premium on safety in mining, prospects for this type of product are excellent. To date we have supplied mining surveillance radars in South Africa, Australia and South America.

 
ASSOCIATES

Our investments in Quince and NSN in their current form are both new.

Quince, our initiative with PSG into asset-backed financial services became effective on 1 May 2007. The business consists of our Nashua financing activity (formerly RCCF), ZS Rationale (a bridging financier) and Scripfin (lending against securities).

ZS Rationale and Scripfin are new businesses with good growth prospects. RCCF is an established business with a valuable customer base. With fast, efficient service, these businesses should be able to demand a premium with relatively low risk.

The book now exceeds R1,5 billion and we initiated a securitisation project to fund the book. This process should be completed shortly, ensuring access to sufficient funds for the immediate future.

As expected, the contribution from Quince was dilutive compared to the wholly owned RCCF. This may continue while Quince has excess capital but we expect that position to reverse in the new year.

NSN had a superb year. Operating profit increased by 50% to R532 million, while revenue grew by 33%. Order intake from all customers (cellular and wire-line operators in South Africa) was strong. Exports to neighbouring countries remained more or less constant.

During the year, Siemens AG merged its telecommunications business with the network operations of Nokia Oyj to form Nokia Siemens Networks effective 1 April 2007.

In world terms, Nokia Siemens Networks ranks with Ericsson and Alcatel-Lucent. Furthermore, Huawei from China is increasingly making its presence felt. Overall, this will be a very competitive environment with resulting pressure on margins.

Unlike Siemens AG, Nokia Siemens Networks is organised regionally. South Africa forms part of the sub-region managed from Dubai. This is a global business and we have to question our future involvement. We will be addressing that issue as we go forward.

 
THE FUTURE

The South African economic environment is characterised by efforts to curb consumer spending on the one hand and promises to invest vast amounts on improving infrastructure on the other.

Rising interest rates, food and oil prices, coupled with the requirements of the National Credit Act to access finance, are definitely slowing consumer spending. The overall effect is to reduce demand, thus slowing growth. Margin pressure is inevitable.

On the fixed investment side, construction is booming with the exception of residential property. The Gautrain project is going ahead on schedule. Airport expansion and stadium construction projects are all underway. Eskom announced plans and, in certain cases, indeed issued tenders to increase capacity — so did Transnet. The mining industry, especially platinum, continues to expand.

We are well positioned to benefit from these developments. In particular, our low-voltage and cable businesses are well entrenched as suppliers and our electrical businesses have the products and capacity to meet increased demand.

On balance, we believe infrastructural investments will more than offset slower consumer spending, helping Reunert achieve real earnings growth.

We thank all our customers and staff for their support and loyalty. Equally, our strong and experienced board is a great asset.

 
 
 
Martin Shaw   Gerrit Pretorius
Chairman   Chief executive
 
Sandton
6 December 2007
 
 
     
 
LETTER to shareholders   cont.  
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