Business overview
Mvelaphanda Group (“Mvela Group” or “Group”) reported during its interim period the significant progress made on its value unlocking strategy with the unbundling of its investments in Life Healthcare Limited (“Life Healthcare”) and Mvelaserve Limited (“Mvelaserve”) to shareholders. Since then, Mvela Group continues to explore avenues that will unlock value in the most efficient way for shareholders.
Mvela Group continues to generate income from investments, which will in future be its only source of income. Consequently, Mvela Group’s sector listing on the JSE was moved from the Business Support Services Sector to the Investment Instruments Sector.
Economic environment
The South African economy grew by 2,8% for the calendar year ended 2010. The first quarter of 2011 reported a GDP growth of 4,8%. Despite the deterioration in the inflation outlook, the interest rates have been kept at their low levels which, together with the positive growth rate, are beneficial to the value of the Group’s remaining investments.
Financial overview
Financial performance
The results for the year ended 30 June 2011 include revenue of R1 886 million from Mvelaserve for five months prior to it’s unbundling on 6 December 2010 compared to R4 199 million for the full twelve months the previous year. Operating profit for the year amounted to R115 million which excludes R85 million of exceptional items incurred for the listing and unbundling of Mvelaserve and the unbundling of Life Healthcare to shareholders.
Net interest expense for the year decreased to R45 million from R108 million the previous year mainly as a result of settling non-current liabilities during the year.
Mvela Group received dividend income of R72 million (2010: R170 million) during the year, of which R57 million was received from Life Healthcare.
Net fair value adjustments and profit and loss from investments amounted to a net loss of R230 million against a gain of R408 million the previous year which comprises a net gain from fair value adjustments on investments of R197 million (2010: R609 million), an unbundling fair value adjustment loss of R284 million, and R143 million (2010: R201 million) in net realised loss from disposal of investments. The net fair value adjustment of investments of R197 million includes R237 million fair value gain from the Group’s indirect investment in Absa Group Limited (“Absa”) offset by R72 million fair value loss from the Group’s investment in Group Five Limited (“Group Five”).
The net loss from associates amounted to R4 million against a loss of R23 million the previous year. The Group’s interest in Avusa Limited (“Avusa”) contributed R8 million of the aforementioned R4 million loss, being the Group’s share of Avusa’s comprehensive income for the year ended 31 March 2011 of R42 million (2010: R40 million) offset by an impairment on the Group’s investment in Avusa of R50 million (2010: R69 million).
Costs relating to a portion of the 124 425 055 redeemable option-holding shares (“BEE shares”) that are amortised to the statement of comprehensive income in accordance with AC503, Accounting for Black Economic Empowerment (BEE) transactions have vested in full with the final cost of R16 million amortised during the year.
Tax credit of R119 million (2010: R136 million) was charged to the statement of comprehensive income during the year of which R144 million relates to the over provision of deferred tax provided for in respect of the Group’s indirect investment in Absa, R47 million capital gains tax (“CGT”) incurred from the sale of Life Healthcare shares and secondary tax on companies (“STC”) of R6 million.
Dividends paid to ordinary shareholders of R2 456 million results mainly from the unbundling of Life Healthcare and Mvelaserve. As the unbundling transactions qualified for roll-over relief as set out in section 46 of the Income tax Act 58 of 1962, no STC was payable by the Company.
Intrinsic net asset value
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Financial position
The 2011 investment in associates comprises the Group’s investment in Avusa amounting to R635 million (2010: R674 million) after equity accounting for the Group’s share in Avusa’s comprehensive income of R42 million (2010: R40 million) less an impairment in the amount of R50 million (2010: R69 million).
Investments decreased to R2 016 million at 30 June 2011 from R4 065 million the previous year, mainly attributable to the Life Healthcare unbundling of R1 892 million. As part of the unbundling of Life Healthcare and Mvelaserve, the Group received shares to the value of R270 million in lieu of its 35 765 285 Mvela Group treasury shares held. Investments with a carrying value of R631 million were disposed of during the year, which includes Health Strategic Investments Limited shares received on unbundling. The proceeds received from disposal of investments were mostly used to settle the Group’s interest-bearing liabilities.
The Group’s net cash position decreased to R64 million, including a R24 million overdraft at 30 June 2011, from R526 million at 30 June 2010 mainly from the unbundling of Mvelaserve and from the reduction of interest-bearing liabilities.
Total interest-bearing liabilities at 30 June 2011 decreased to R333 million from R1 358 million at 30 June 2010 mainly attributable to repayments of R609 million and R435 million debt being disposed of via the Mvelaserve unbundling.
Capital structure
The issued ordinary share capital of the Company increased by 121 999 596 shares to 565 473 650 ordinary shares following the conversion of 53 995 906 preference shares as mentioned below. The ordinary shares held as treasury shares remained unchanged at 35 765 285 shares.
The issued preference shares decreased to 265 362 convertible perpetual cumulative preference shares following the conversion of the 53 995 906 preference shares. The conversion price of the convertible perpetual cumulative preference shares was changed on 23 August 2010 to R4,50 from R9,30 following the distribution of Life Healthcare to ordinary shareholders. Preference shareholders had until 4 November 2010 to convert and the remaining 265 362 convertible perpetual cumulative preference shares have now become perpetual preference shares at a dividend rate of 80% of the ruling prime overdraft rate, redeemable at the instance of the issuer. The preference shareholders earned dividends at a rate of 5,5% per annum up to 4 November 2010 and at 80% of the ruling prime overdraft rate from 5 November 2010 until 30 June 2011.
BEE shareholders were not able to participate in the unbundling of Life Healthcare or Mvelaserve. As compensation, and to enhance and secure Mvela Group’s BEE shareholding credentials, additional BEE shares were created and allotted, increasing the issued number of BEE shares to 276 223 624 at 30 June 2011 from 124 425 056 at 30 June 2010. Similarly, the minimum strike price of R17,50 was adjusted to R9,18 per Mvela Group ordinary share.
Intrinsic net asset value
The Group’s intrinsic net asset value per share decreased to R3,65 from R11,36 at 30 June 2010 mainly due to the unbundling of Life Healthcare and Mvelaserve.
The intrinsic net asset value per ordinary share net of capital gains tax and debt is set out in the table above.
Based on Mvela Group’s ordinary share price listed on the JSE of R3,28 on 30 June 2011, the ordinary shares were trading at a discount of 11% to the Group’s intrinsic net asset value per ordinary share of R3,65 at that date.
Investment overview
Absa
The Absa intrinsic net asset value of R1,99 per Mvela Group share was based on the Absa share price of R134,81 per share at 30 June 2011 compared to R1,96 per Mvela Group share which was based on an Absa share price of R121,49 per share at 30 June 2010. The Group’s investment in Absa comprises 54% of the Group’s intrinsic net asset value at 30 June 2011.
Avusa
The Group’s interest of 26 474 000 ordinary shares in Avusa was diluted to 22% at 30 June 2011 from 25,5% at 30 June 2010 following an issue of ordinary shares by Avusa as part settlement for an acquisition during the period under review. Based on a closing price at 30 June 2011 of R24 (2010: R19,10), the intrinsic net asset value amounted to R0,57 per Mvela Group share compared to a negative R0,74 per Mvela Group share at 30 June 2010. The aforementioned improvement was mainly as a result of a R518 million repayment of debt. Mvela Group’s 22% investment in Avusa comprises 15% of Mvela Group’s intrinsic net asset value at 30 June 2011.
Avusa reported a 13% increase in revenue, 30% increase in operating profit and an 18% year-on-year increase in headline earnings for the period ended 31 March 2010. Avusa will continue to focus on its strategy to maximise value and extract cash from all contemporary physical businesses. Avusa expects, in the coming year, to see the benefits from annualised contribution from its retail solutions from the current positive indications of improving advertising support for its media business.
Group Five
Mvela Group’s interest in Group Five is valued using an option-pricing model. Based on a share price of R29,90 at 30 June 2011 (2010: R34,50), the intrinsic net asset value amounted to R0,15 per Mvela Group share compared to an intrinsic net asset value of R0,37 per Mvela Group share at 30 June 2010. Mvela Group’s 12,7% investment in Group Five comprises 4% of the Group’s intrinsic net asset value at 30 June 2011.
Life Healthcare
Life Healthcare, which was listed in the previous financial year, was unbundled to shareholders on 20 August 2010 via shares in a newly listed subsidiary, Health Strategic Investments Limited (“Health”). Each Health share represented one Life Healthcare share and was unbundled to shareholders in a ratio of 33,455 Health shares for every 100 Mvela Group ordinary shares held, resulting in Mvela Group, through its 35 765 285 treasury shares held by a subsidiary, receiving 11 964 686 Health ordinary shares. Health unbundled its Life Healthcare shares to its shareholders on 17 December 2010 in a ratio of 1:1.
Apart from the above, Mvela Group owned a direct interest of 44 305 618 shares in Life Healthcare of which 9 920 338 were sold pursuant to the overallotment after the listing of Life Healthcare. A further 16 935 377 Life Healthcare shares were sold during the year bringing the Group’s interest in Life Healthcare to 17 449 903 or 1,67%.
The Life Healthcare share price at 30 June 2011 amounted to R17,59 per share which translated to a net intrinsic value of R0,51 per Mvela Group share compared to R5,46 per Mvela Group share at 30 June 2010. The decrease was mainly due to the unbundling effect of R4,72 per Life Healthcare share, partially offset against the increase in the Life Healthcare share price from R13,50 to R17,59 per share. Life Healthcare comprises 14% of Mvela Group’s intrinsic net asset value at 30 June 2011.
Life Healthcare reported a 12,7% increase in revenue, a 20,1% increase in operating profit and a 30,2% increase in cash generated from operations for the six-month period to 31 March 2011. Life Healthcare reported that it will invest in future bed capacity across its acute hospitals, mental health and acute rehabilitation facilities to meet higher demand due to the increasing disease burden, ageing population, the increase in private insured lives and the preferred network arrangements negotiated with the funders. Life Healthcare will continue to focus on improving it’s occupancy and efficiency and cost savings programmes to ensure continued real growth in normalised earnings.
Financial returns
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Mvelaserve
Mvelaserve was listed on the JSE on 29 November 2010 after which the Group unbundled its total interest to shareholders on 6 December 2010. As part of the unbundling, the Group received 8 953 481 Mvelaserve shares in lieu of its holding of 35 765 285 Mvela Group treasury shares.
The share price of Mvelaserve on the JSE at 30 June 2011 was R12,00 which translates to R0,18 per Mvela Group share at 30 June 2011 compared to R3,70 per Mvela Group share at 30 June 2010. Mvelaserve comprises 5% of the Group’s intrinsic net asset value at 30 June 2011.
Vox Telecom Limited (“Vox Telecom”)
The intrinsic net asset value of Mvela Group’s 12% investment in Vox Telecom amounts to R0,09 per Mvela Group share based on the closing price of R0,35 per share at 30 June 2011 compared to a negative R0,46 per Mvela Group share at 30 June 2010. The aforementioned improvement was mainly as a result of a R256 million redemption in debt. Mvela Group’s 12% interest in Vox Telecom comprises 2% of the Group’s intrinsic net asset value at 30 June 2011.
Vox Telecom reported an 11% decline in revenue, a 2% increase in EBITDA and a 15% increase in cash balance for the six-month period ending 28 February 2011. Vox Telecom reported that, amongst other factors, a deflationary environment impacted its revenue growth.
Financial Returns
The financial returns for the year ended 30 June 2011 are set out in the table above.
Changes to board of directors
As at 30 June 2011, the board comprised five members of whom two are executive members and three are independent non-executive members. Ms Cuba resigned as chief executive officer (“CEO”) with effect from 31 December 2010. The board wishes to thank Ms Cuba for her invaluable contributions while she was at the Company. In view of the Group’s unbundling strategy, the JSE approved that the position of CEO remains vacant for a period of 18 months from 30 March 2011.
Black economic empowerment (“BEE”)
Mvela Group has an inclusive philosophy towards BEE and believes that broad-based community and employee participation in Mvela Group is critical to its future success. Subsequent to the issue of 124 425 055 BEE shares to strategic BEE groupings, women’s groupings and charitable organisations and the employees and senior management of the Group (“BEE trusts”) in June 2007, Mvela Group unbundled its investment in Health and at that time was in the process of obtaining approval for the proposed implementation of the listing and subsequent unbundling of Mvela Group’s investment in Mvelaserve. The BEE trusts did not participate in the unbundling of Health and will not have been able to participate in the Mvelaserve unbundling either. Therefore, the Group with the intention of compensating the BEE trusts as well as to enhance and secure Mvela Group’s BEE shareholding, allotted and issued a further 151 798 568 BEE shares. The option strike price has been adjusted to R9,18 per Mvela Group share from R17,50 per Mvela Group share.
Our broad-based BEE status has been assessed during the year as a level two provider.
Governance
Mvela Group is committed to sound corporate governance and the building of a sustainable business. Mvela Group strives to maintain the highest standards of corporate governance and recognises that corporate governance is a developing process. For this reason compliance with the applicable code is reviewed on an ongoing basis. During the year Mvela Group worked towards incorporating King III. A full report on corporate governance is set out here.
Restructuring
Mvela Group will continue to focus on its value unlocking strategy and remains committed to realising value for shareholders in the most efficient manner.
Acknowledgements
Sincere thanks and appreciation goes out to all the directors, executives and employees of the Group.