Financial director's report

Hafiz Mahomed

Hafiz Mahomed Financial director

STRONG FOCUS WAS PLACED ON CASH AND LIQUIDITY MANAGEMENT DURING THE YEAR WITH GREAT SUCCESS, AS EVIDENCED BY THE SIGNIFICANT REDUCTION IN NET DEBT AND THE EXTENT OF UNUTILISED FACILITIES.

Review of income statement

Revenue at R52,2 billion and operating profit at R2 453 million were 7% and 16% lower respectively, reflecting declining profits in the predominantly motor vehicle-retailing divisions, Dealerships and Distributorships, which combined returned a 13% decline in revenue and a 34% decline in operating profit. Revenue in the rest of the group rose by 3% and operating profit declined by 4%.

Revenue from our services activities grew to R21,7 billion which constitutes 42% of total revenue, demonstrating the magnitude of this important part of our operations.

The group’s logistics operations in Europe performed well in the first half, but the global financial crisis caused a drastic decline in logistics volumes in the second half. Revenue in Europe in the first half was 20% higher year on year but 23% lower in the second half, leading to a 21% decline in operating profit for the year.

The southern African logistics business was less affected, as second-half revenue and operating profit declined by only 12% and 2% respectively.

In the car rental and tourism division, operating profit declined by 8% in a tough year, while the insurance division performed well, increasing its operating profit by 39% as underwriting profits recovered .

Cash generated by continuing operations increased by 43% to R5 187 million and debt levels declined substantially. Net debt (excluding non-redeemable preference shares of R441 million) amounted to R5 139 million compared to R8 451 million a year ago, a decline of 39%.

Income from associates declined by 62% to R107 million. Last year’s income included a once-off gain of R70 million through Ukhamba Holdings from the unbundling of Eqstra Holdings. This year the contribution from Ukhamba was further affected by lower profits from its 32,4% interest in Distribution and Warehousing Network Limited. Our share of Imperial Bank’s earnings declined by 39% to R126 million. This associate (49,9% held) recorded a sharp increase in impairment charges as a result of the weak economy, especially in the second half. Imperial Bank’s total assets grew by 17% to R51,2 billion over the year. The results of the Renault joint venture improved, although it is still lossmaking. The loss was not recognised in the income statement as our investment in Renault has already been fully impaired.

Net finance charges from continuing operations increased by 14%. Against lower interest rates and lower debt levels, which had a positive impact in the second half, the charge was negatively impacted by fair value losses of R61 million (2008: profit R41 million) on interest rate swaps and a lower recovery from discontinued operations compared to the prior year due to the reallocation of capital.

Included in headline earnings per share (HEPS) for 2009 was a foreign exchange gain realised on repatriating some of the capital of our European operations of 212 cents per share (R394 million). Our offshore businesses serve as a natural hedge against currency weakness and capital is repatriated from time to time. The gain in the prior year from the same source was R150 million.

The tax rate of 32% includes secondary tax on companies, disallowable expenses relating to goodwill impairments and the loss on the sale of Eqstra shares, offset by exempt income and prior-year overprovisions. A detailed reconciliation of the tax rate is given in note 32 to the group annual financial statements.

Significant non-trading items included in HEPS in 2008 included a foreign exchange gain of 81 cents (R150 million), a gain through associate company Ukhamba Holdings on unbundling Eqstra of 38 cents (R70 million), and impairment losses on the vendor loan to Lereko Mobility and the share trust loan of 166 cents and 98 cents (R308 million and R182 million) respectively.

Earnings per share (EPS) was 776 cents compared to a loss of 510 cents in 2008. HEPS for continuing operations was 13% higher than last year at 698 cents. Exceptional items recognised in EPS (but not in HEPS) in 2009 included the profit on the disposal of Tourvest of 285 cents (R529 million), a loss of 117 cents (R217 million) on the disposal of Eqstra shares and impairment of goodwill amounting to 105 cents (R194 million). The main contributors to the goodwill impairment charge were Gillhuber, Laabs and Lex Commercials in the international operations, the Imperilog group, caravan manufacturer and distributor, Jurgens, and a number of smaller entities locally. While we regard these businesses as sound, their carrying values were adjusted in accordance with their cash flow expectations under the current difficult economic conditions.

EPS in the comparative period was impacted by negative fair value adjustments on the sale of the bulk of the aviation division of 688 cents (R1 276 million) and 378 cents (R701 million) on the discontinuation of the commercial vehicle assembly and distribution business, Commercial Vehicle Holdings.

Discontinued operations

Net income from discontinued operations was R508 million, consisting of trading profits of R24 million and fair value profits of R571 million largely from the disposal of Tourvest and a tax charge of R87 million.

Assets classified as held for sale amounted to R950 million compared to R1 478 million in December 2008 and R4 440 in June last year. The assets held for sale in 2009 comprised aviation assets of R703 million and R247 million of commercial vehicle assets related to the closure of Commercial Vehicle Holdings.

Details of the discontinued operations are given in note 16 to the group annual financial statements.

Dividend

A final ordinary dividend of 120 cents per share has been declared, which brings the total ordinary dividend for the year to 200 cents per share. A preferred ordinary dividend of 535 cents per share was paid for the year.

Financial ratios and statistics       
   2009 2008 
EBITDA to revenue (%) 7,2 7,3 
Net interest covered by EBITDA (times) 4,1 5,1 
Interest cover by operating profit (times) 2,7 3,7 
Depreciation to revenue (%) 2,5 2,1 
Operating margin (%) 4,7 5,3 
Profit before exceptional items to revenue (%) 4,0 3,8 
Tax rate (%) 32,1 38,5 
Return on invested capital (%) 10,61 10,85 
Return on average equity (%) 13,7 12,0 
Net debt to equity (preference shares treated as debt) (%) 53,9 85,4 
Net debt to EBITDA (times) 1,5 2,2 
Equity to total assets (%) 31,1 27,5 
Operating profit to operating assets (%) *  9,0 9,9 
Distributions during the year (cents per share) 200 245 
Headline earnings per share (cents) *  698 615 
Basic earnings per share (cents) *  503 629 
Price earnings ratio (times) *  8,2 7,3 
Earnings yield (%) *  12,2 13,6 
Net asset value per share (cents) *  4 820 4 732 
* Continuing operations only       

Review of the balance sheet

Total shareholders’ equity was stable year on year at R10,4 billion.

Net working capital declined by R1 311 million over the year to R1 887 million. This amounted to 3,6% of revenue compared to 5,7% last year.

The equity portfolio of the insurance division was significantly reduced to address volatility in earnings caused by this asset class. This contributed to a reduction in investments and loans of R1 184 million. The levels of fixed assets, transport assets and vehicles for hire grew by less than 10% in aggregate. We have assessed our property portfolio and believe that the market value exceeds book value by some margin.

The share purchase trust loan totalling R177 million has not been further impaired except for the interest accrued during the year. The board has resolved to use the impairments raised to facilitate settlement of outstanding loans after disposal of the scheme shares. Participants in the scheme, excluding executive directors, would consequently have no further rights or obligations in terms of the scheme. Executive directors would be required to settle loan obligations from the proceeds of a special share appreciation rights allocation made this year. It is not anticipated that there will be any further impairment required.

The ratio of net debt (excluding non-redeemable preference shares) to equity was 50% compared to 81% last year and 75% at the interim stage. During the year, R1 003 million and R337 million were received on the disposals of Tourvest and the aviation business respectively, and R227 million on the disposal of Eqstra shares.

In December 2008, Moody’s Investor Services held the view that the trading environment in which Imperial operates was likely to have a significant negative impact on the group. Consequently Moody’s downgraded the group’s long-term rating to Baa3 from Baa2 and maintained a negative outlook. The group’s domestic long-term national scale issuer rating was also downgraded to A2.za from A3.za, however the short-term national scale rating was left unchanged at P-1.za.

The group participates in the commercial paper market and roll-overs during the year were achieved without any difficulty.

Two corporate bonds totalling R2 billion mature in August and November 2010. Depending on market conditions, we intend to replace these bonds with longer-dated issues. The group has unutilised facilities in excess of R10 billion, of which R4 billion represents term facilities longer than one year. All outstanding debt that matures in less than a year is adequately covered by unutilised facilities.

Review of the cash flow

Strong focus was placed on cash and liquidity management during the year with great success, as evidenced by the significant reduction in net debt and the extent of unutilised facilities. We believe further improvement in working capital levels will be more difficult to achieve as potential for growth is beginning to emerge.

Cash generated by continuing operations increased by 43% to R5 187 million. Discontinued operations contributed R566 million (2008: R2 056 million). Total positive working capital movements contributed R1 429 million (2008: negative R388 million) of which R408 million can be attributed to discontinued operations.

The proceeds of the disposal of discontinued operations amounted to R1 418 million, including R1 003 million from the Tourvest disposal. R337 million was collected on the sale of the aviation division.

Net capital expenditure was 33% lower at R1 755 million, the reduction being attributed to expansion capital expenditure which was R955 million lower at R640 million. Replacement capital expenditure was maintained at R1 115 million (2008: R1 017 million). All divisions reduced their net capital expenditure.

The free cash flow was up from R1 850 million to R2 938 million. The cash conversion ratio was 221% (of headline earnings).

Post year-end sale of Imperial Bank

Imperial and Nedbank Group have agreed, that Nedbank would acquire Imperial’s 49,9% holding in Imperial Bank for a consideration of R1 775 million.

This will significantly enhance the cash-generating capacity of the group as the sale proceeds will be released in cash and the group will have no further capital requirements in respect of Imperial Bank.

The group’s motor dealerships will have a relationship with Nedbank in terms of which they would participate in the promotion of vehicle finance and share in the profit from financing and ancillary products sold through the dealerships. Accordingly, the synergistic vehicle retailing and financial services product range which Imperial currently offers to its customers will continue uninterrupted.

Our investment in Imperial Bank has been reported as an associate held for sale on the balance sheet.

Contingent liabilities

In terms of the Lereko empowerment transaction, the preference shareholders in Lereko Mobility could force an early termination of the transaction if the combined share price of Imperial and Eqstra dropped to below R48,39. To avoid the trigger levels being reached, Imperial and Eqstra provided guarantees to bring the trigger levels down to R41,50. The guarantee of R78 million is reflected as a contingent liability.

The dispute with the South African Revenue Services relating to an assessment for an offshore company has been resolved and the contingent liability of R382 million has been expunged.

Treasury management

The treasury activities of the group are conducted, both centrally and divisionally, within policies and directives determined by the group’s asset and liability committee (Alco). Alco primarily focuses on liquidity, interest rate and foreign exchange risk and approves risk exposures, finance structures and hedging instruments.

The group’s liquidity position remained strong during the reporting period. Utilisation of bank facilities was low as a result of proceeds received from the sale of Tourvest and aviation assets, capital repatriated from our overseas operations and improved working capital.

Interest rate risk remained modest with interest rate repricing well matched. Interest rate swaps entered into boosted results in the first half but negated any benefit from further interest rate cuts in the second half. Approximately R1,5 billion of swaps mature before December 2009 which will result in a lower rate achieved on floating-rate borrowings.

Foreign exchange risk is mitigated by the group’s policy to be fully hedged against adverse movements in exchange rates for committed transactions, except for imported automotive parts, which may be transacted in the spot market. From time to time, when considered favourable, the motor distributor business enters into hedges on forecast orders in terms of a dispensation obtained from the South African exchange control authorities. Alco approved the use of a number of option-related instruments to further refine our foreign exchange risk management.

The capital-management processes implemented last year have been entrenched and the benefit of these disciplines was evident during the year, with increased focus on asset turns, working capital ratios and return on invested capital.

Bank facilities were reduced in consultation with our banking partners to reflect lower funding requirements and to minimise the commitment fees charged on unutilised facilities in terms of Basel II regulatory capital requirements.

To cover the group’s exposure on the share appreciation rights allocated to staff, equity option hedges were acquired.

Imperial Capital

Imperial Capital is a ring-fenced entity that owns fleet assets employed in the logistics and car rental divisions. It continues to make valuable contributions to the group in terms of debt capital market access and cost efficiencies. R2,3 billion of the group’s assets are funded through this entity. The balance sheet of Imperial Capital is contained in annexure D.

Ukhamba share conversion

In terms of the Ukhamba empowerment transaction, 886 269 deferred ordinary shares converted to ordinary shares effective from the beginning of the new financial year.

Hafiz Mahomed
Financial director

25 August 2009