The current reporting period was another exciting
year in Basil Read’s history, not least because the
group acquired two sizeable acquisitions, the
Gerolemou/Mvela and TWP groups, and raised
R225 million through our domestic medium-term
note programme. All of this corporate activity meant
a significant amount of additional work for the finance
team in a year already challenging due to the prevailing
financial environment. As we continue the process of
bedding down the enlarged group, financial discipline
remains a key objective.
Financial results
The group reported steady growth with revenue up by 34% and an
increase in net profit before tax of 39%. While operating margins
remained fairly consistent, divisional results were mixed, with healthy
margin increases in the roads and opencast mining divisions and the
remaining divisions reporting tighter margins. We remain optimistic
about the foreseeable future of the construction industry but given the
inherent uncertainty in global financial markets and the resultant effect
on most industries, our focus in the coming months will be on cost
control and containment.
The results of the group were adversely affected by a higher tax charge,
largely as a result of non-taxable items which contributed to the
increased effective tax rate of 34%. Secondary taxation on companies
and tax paid in foreign countries at higher tax rates made up the
remaining difference. In the coming year, we will be looking at ways to
optimise the group’s tax rate to ensure that it more closely
approximates the promulgated company tax rate of 28%.
Higher cash balances and a greater emphasis on cash management led
to net interest received of R3 million compared to net finance costs of
R12,3 million in the prior reporting period. In the current low interest
rate environment, the group will continue to look for ways to maximise
returns generated by cash holdings, while managing the increased risk in
financial markets due to liquidity constraints.
The balance sheet grew significantly, bolstered by the acquisitions of
the Gerolemou/Mvela and TWP groups, with total assets increasing
by 69% to R4,2 billion. The group has made a sizeable investment in
development land due to its ongoing property developments at the
Klipriver Business Park in the south of Johannesburg and the St Micheil’s
International Leisure Estate outside Dullstroom in Mpumalanga. Sales at
these developments have been adversely affected by the downturn in
the economy but are expected to gain momentum as the recovery
of the economy gains traction.
Cash on hand currently stands at R1,2 billion and the group’s net gearing
ratio is 0%. Included in cash balances are advance payments totalling
R485,9 million. Cash flow from operating activities was satisfactory
and was adversely affected by the increased investment in working
capital, specifically debtors and development land, and a sizeable amount
of taxation paid. The increase in tax paid is due to the utilisation of
tax losses in prior years and the change in legislation relating to
provisional taxes.
Corporate activity
On 1 March 2009, the group acquired the remaining 66,67% of Sunset
Bay Trading 282 (Pty) Limited, thereby increasing its effective holding to
100%. Sunset Bay is responsible for the development of the St Micheil’s
International Leisure Estate outside Dullstroom in Mpumalanga.
Previously disclosed as an associate, Sunset Bay has been consolidated
from date of acquisition. The acquisition gave rise to the recognition of
a contract-based intangible asset of R8,6 million, of which R0,7 million
was amortised in the review period.
On 1 July 2009, the group bought out one of its empowerment partners
in Newport Construction (Pty) Limited, thereby increasing its stake to
70% (2008: 55%). The transaction resulted in the recognition of a loss on
transactions with minorities of R0,1 million. If a suitable additional
empowerment partner is found, the group may consider increasing the
empowerment shareholding in the company.
The acquisition of the Gerolemou/Mvela group, comprising P Gerolemou
Construction (Pty) Limited, Mvela Phanda Construction (Pty) Limited
and Contract Plumbing and Sanitation (Pty) Limited, was successfully
completed during the 2009 financial year and their results have been
consolidated from 1 September 2009. The total purchase consideration
of R351,5 million was settled through a cash payment of R245,7 million
and the recognition of a deferred payment liability of R105,8 million.
The acquisition gave rise to the recognition of a contract-based
intangible asset of R32,2 million and goodwill of R170,0 million.
An amount of R10,8 million relating to the amortisation of the intangible
asset was recognised in the income statement in the year under review.
The deferred payment liability will be settled in two equal instalments
of R60 million each, payable on 1 July 2010 and 1 July 2011. R25,8 million
of each instalment is conditional on the company meeting certain profit
warranties. The deferred payment liability has been discounted at 10%
per annum to reflect its fair value of R105,8 million. Notional interest
of R3,4 million has been recognised in the income statement in the
2009 financial year.
The group completed the acquisition of the TWP group on
21 December 2009 and has consolidated from that date. The total
purchase consideration of R721,3 million is payable in two instalments.
The first instalment was settled on 21 December 2009 through the
issue of 37,3 million shares and a cash payment of R178,9 million. The
remaining R59,9 million is conditional on the TWP group meeting its
profit warranty for the financial year ended 31 December 2010 and if
met, is expected to be paid during the first half of 2011. Due to the high
level of uncertainty surrounding TWP’s results for the 2010 financial year,
this deferred payment has not been provided for. Management will
reassess this position throughout the coming year and may provide for
this liability in the 2010 financial year.
The acquisition gave rise to the recognition of intangible assets totalling
R68,4 million and goodwill of R320,6 million. The trading results of
TWP had no effect on the trading results of Basil Read for the year
to December 2009.
To aid with our transformation goals, the group disposed of 80% of
BR-Tsima Construction (Pty) Limited to two emerging contractors
for no consideration, effective from 1 January 2009. The loss on the
transaction was R0,1 million and has been included in the results to
December 2009. Basil Read will continue to exercise significant influence
over the operations of BR-Tsima, through management support and
mentoring to ensure that the black-owned entity will be successful.
The performance of Stone and Allied Industries Limited, an operator
in the aggregate business with static crushers erected on mine dumps
mainly in the Free State and North West provinces, remained
disappointing and Basil Read disposed of the loss-making operation on
1 July 2009. Impairments relating to the disposal amount to R11,5 million
in the period under review, with no further loss on disposal reported.
Domestic medium-term note programme
Basil Read listed a R1 billion domestic medium-term note programme
on the Bond Exchange of South Africa in the prior year. During the 2009
financial year, the group raised R225 million through this programme to
fund the first instalment due for the Gerolemou/Mvela group.
On 6 August 2009, the group raised R125 million under this programme.
The note was listed on the Bond Exchange of South Africa on 12 August
2009 and bears interest at the three-month ZAR-JIBAR-SAFEX rate
plus 3%. Interest is payable quarterly and the capital sum is payable on
11 February 2011. The interest rate applicable at year end was 10,154%.
On 7 August 2009, the group raised R100 million under this programme.
The note was listed on the Bond Exchange of South Africa on 13 August
2009 and bears interest at the three-month ZAR-JIBAR-SAFEX rate
plus 2,9%. Interest is payable quarterly and the capital sum is payable on
12 August 2010. The interest rate applicable at year end was 10,046%.
Share-based payment
During the year under review the group expensed R9,7 million relating
to costs pertaining to the employee share scheme under IFRS 2.
A further 1,7 million options were issued during the year and the
remaining charge relating to all issued options amounts to R7,2 million.
This charge will be amortised over the next four years according to the
options’ respective vesting periods.
Dividends
The group is currently investigating an appropriate formal policy with
respect to dividends which will take cognisance of shareholders’
expectations, industry trends and the group’s growth targets. The
dividend declared in respect of the current year of 42 cents per share
appears conservative at a level of 7,6 times when compared to the
group’s earnings of 317,15 cents per share. However, given that the
group issued 37,3 million shares at the end of the review period, the
total dividend to be paid amounts to R52 million, which results in
dividend cover of 5,3 times when compared to earnings. Dividend cover
is reviewed annually and an appropriate level decided on once all factors
have been taken into account.
In closing
2009 was a year of significant corporate activity for Basil Read and I wish
to thank the members of the finance and accounting teams for their
support and input into the acquisitive process. While no significant
corporate activity is planned for the coming financial year, the hard
work of bedding down the recent acquisitions will continue.
On a more personal note, I would like to thank Lester, Marius and the
rest of the board for their guidance and support as I formally assume
the responsibility of financial custodian of the group.
As part of our continuous improvement project with regards
to communication and disclosure to all stakeholders, we would
welcome your views and suggestions. Feedback can be sent to communications@basilread.co.za.
Donny Gouveia
Financial director |
