Commentary
General Review
The group had a disappointing year as a result of a weak performance from SecureData Africa which posted a loss in the second six months of the financial year. SensePost performed according to expectation, and SecureData Europe performed better than expected despite the continued uncertainty in the markets in which both entities operate.
Group EBITDA reduced to R17,6 million (2010: R57,2 million) on revenues that dipped to R406,6 million (2010: R459,0 million) reflecting an EBITDA margin of 4,3% (2010: 12,5%). The reduction in revenue and EBITDA was due to a poor sales performance in SecureData Africa. Rand strength negatively impacted the group's revenues and earnings, affecting not only the rand translation of the group's sterling-based income but also by reducing the selling unit cost of products sold in South Africa which are foreign-currency denominated.
Services revenues, the bulk of which are managed services, accounted for a greater share of revenue (24%) than any other technology or product. Revenue generated outside of South Africa increased to 53%, and annuity revenue increased to 54%.
The calculation of earnings per share ("EPS") and headline earnings per share ("HEPS") incorporates the following items:
- a R9,6 million (2010: R10,3 million) charge for amortisation of intangible assets created by the group's prior acquisitions. This charge has no effect on group cash flow;
- a R3,0 million (2010: R10,5 million) foreign exchange loss on intra-group loans reflecting the difference in rand to sterling exchange rate between the previous and current reporting closing dates. This expense is unrealised and has no effect on group cash flow; and
- the net movement in derivative financial instruments of a R0,09 million loss (2010: R2,8 million profit). This includes unrealised foreign exchange forward contracts, entered into to settle outstanding creditor payments by the group at a time of great rand volatility.
Together, these non-operational and non-cash items affected EPS and HEPS by 4,0 cents. Adjusted EPS, which ignores these items but includes cash expenses such as interest, reflects 2,3 cents per share (2010: 13,1 cents per share).
As reported in the 2010 annual report the company paid a dividend of 5 cents per share on 22 November 2010 for a total cash outlay including STC of R12,8 million. The STC payable affected the EPS, HEPS and adjusted EPS by 0,5 cents.
During the year the group repurchased 3 820 277 shares in the market at a cost of R3,6 million. This brings the total number of shares held in treasury to 17 925 000.
The combination of lower profits and problems with debtor collections in SecureData Africa caused the group to breach one of the financial covenants implemented by the long-term financier at 31 July 2011. The group paid all its instalments on the loan when they became due. Through correspondence with the financier they indicated it is unlikely that they will recall the total loan while the group is up to date with instalments, however it is possible that they may charge a penalty interest of up to 2% above the normal interest rate payable on the loan, for the period during which the loan covenant is in breach. The directors are confident the group will continue to meet all payments when they become due over the remainder of the term of the loan.
At the end of July 2011 the group ended with R27 million in net cash and cash equivalents, after the dividend payment and share buy-back, and total borrowing of R46,9 million. In comparison with the six months ended 31 January 2011 inventory increased to R6,1 million on the back of a project in SecureData Europe and debtors' days remained flat around 82 days. Management continues to place particular emphasis on effective working capital management especially debtors' collections in SecureData Africa.
No dividends have been declared for the year ended 31 July 2011.
Operational Review
SDH conducts operations through: SecureData Africa, SecureData Europe (previously MIS-CDS) and SensePost. Previously the results of operations were reported after a head office allocation but the results included herewith are before any head office cost allocation. The comparative results have also been similary restated, the effect of which is insignificant.
SecureData Africa markets and distributes best-of-class information risk management products in South Africa and across the rest of the continent.
As mentioned previously, SecureData Africa had a very tough year. Revenue declined almost 22% with the concomitant decline in EBITDA and EBITDA margin. In particular the Public Sector and Financial Services business units underperformed as Government departments delayed the award of tenders and financial institutions cut back on expenditure for new security projects. The board took corrective measures including a full strategic and operational review and instituting management changes at both the group and subsidiary level to return the unit back to profitability. There is current evidence that demand is improving in Financial Services, but the timing of Public Sector recovery remains uncertain.
SecureData Europe remains one of the largest and independently-managed information security solution providers in the United Kingdom.
In sterling SecureData Europe posted a credible 15,5% increase in revenue with a strong 39,1% improvement in EBITDA with the EBITDA margin getting back into double figures at 11,8%. This strong performance is not all reflected in the rand results of the company due to the strengthening of the rand in relation to sterling.
Management is confident that the company will continue to show sustainable margin and earnings performance in the coming period.
SensePost provides independent information security assessment services. Based in South Africa, the company is a recognised leader in this niche market and boasts a blue-chip client base internationally.
SensePost boosted revenue to R26,1 million and EBITDA to R7,7 million with a slightly reduced EBITDA margin of 29,5% reflecting the specialist, high-value nature of the company's service offering. Almost a third of SensePost revenues were generated outside of South Africa. The company continue to invest in the UK operations.
The table below reconciles the divisional results back to the consolidated group results:
Strategic Review
The Board has commenced with a strategic review of the group which should be completed prior to the announcement of the next interim results. There is early evidence that the management changes and corrective measures taken to restore SecureData Africa to profitability will bear fruit.
Basis of Preparation
These provisional condensed consolidated financial statements have been prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards and the presentation and disclosure requirements of IAS 34 – Interim Financial Reporting, the Companies Act, and with the Listings Requirements of the JSE Limited. The accounting policies applied in the preparation of these condensed financial statements conform with the requirements of International Financial Reporting Standards and are consistent with those applied in the prior year. The results have been prepared on the going concern basis.
Independent Review
Grant Thornton, SecureData's independent auditor, has reviewed the condensed consolidated financial statements contained in this provisional report and have expressed an unmodified opinion on the provisional statements. Their review report is available for inspection at the company's registered office.
Post-Balance Sheet Events
The directors are not aware of any material matter or circumstance arising since the end of the financial year-end up to the date of this report.
Directorate
Dean Brazier resigned as Chief Executive Officer of the group on 9 June 2011 and Thabiso Moerane resigned as an independent non executive director on 13 June 2011. Johan du Toit will fulfil the post of interim chief executive officer until a permanent appointment is made.
For and on behalf of the Board
P R Pretorius - Chairman
J G du Toit - Financial Director and Interim Chief Executive Officer
12 October 2011
SecureData Holdings Limited
Incorporated in the Republic of South Africa
(Registration number 1998/010017/06)
Share code: SDH ISIN: ZAE000096368
("SecureData" or "the group")
Directors
P R Pretorius† (Chairman), J G du Toit (Financial Director and Interim CEO), A Aitken†, N Mthembu†, P Sneddon*
*Independent non-executive †Non-executive
Company secretary
Merchantec (Proprietary) Limited
Registered office
Nicol Main Office Park, 4 Bruton Road, Bryanston, 2021
(PO Box 4673, Rivonia, 2128)
Transfer secretaries
Computershare Investor Services (Proprietary) Limited
(Registration number 2004/003647/07)
70 Marshall Street, Johannesburg, 2001 (PO Box 61051, Marshalltown, 2107)
Sponsor
Merchantec Capital