Johannesburg, 23 Aug 2002
MGX`s chickens came home to roost this year as the number and complexity of the deals it became involved in weighed on its year-end results by swallowing profits from the operations that performed well.
The R240 million that the purchase of CCH has already cost MGX was larger-than-expected, prompting a forensic audit in order to determine how this happened, according to MGX`s results statement.
In the year to 30 June, MGX posted a 70% increase in revenue to R1.5 billion with a 55% increase in operating income to R227.628 million and this led to a 17% increase in headline earnings per share (excluding discontinued operations) to 150.9c from 138.9c.
However, the interest and financing costs associated with the CCH purchase, which was effective from 1 March 2001, weighed on the results. It was a major contributor to increasing net financing costs to R45.842 million from a previous R14.262 million, and once combined with taxation of R33 million (steady from the previous year), it left minority shareholders` interest at minus R6.184 million from a previous R684 000.
Attributable earnings fell to R8.355 million from R30.244 million the year before. Operating margins were at 12.4% compared to 13.5% last year. Headline earnings rose by 16.6% to R87.3 million.
MGX CEO Chris Hills says: "The earnings were flat but reasonable given the current market conditions. There was a reasonable growth in revenue and one must also remember there is a larger number of shares in issue now."
The group`s results are not strictly comparable with those of previous years, as it has to take into account the business of US start-up enTech, whose results have to be consolidated as MGX effectively controls the board. However, the MGX holding of enTech does not impact headline earnings.
In the review, MGX says MGX Business Continuity Solutions, Software Futures, MGX Enterprise Solutions, Drive Control Corporation and the Metrofile Content Management group largely met or exceeded their targets for the year. MGX Storage Solutions had its toughest year on record and performed well below expectations. DiData UK, EC-Hold and enTech all fell short of their targets for the year.
"In addition, MGX had to carry the costs of tendering for several large government projects that have not yet borne fruit but should make a contribution next year," the statement says.
Referring to the questions surrounding the CCH acquisition, MGX says the integration and rationalisation of the CCH operations took longer than expected, resulting in higher costs. Interest paid was much higher than expected, as MGX has had to take on to its balance sheet a significant amount of debt relating to CCH lease commitments.
"In addition, CCH`s total liabilities have proved to be higher than were originally disclosed. Due to the nature of these undisclosed liabilities, and supported by the findings of the recent audit, MGX is to undertake a forensic audit to investigate these liabilities," the statement says.
Hills says the forensic audit is still in its early stages, but that the situation should be resolved soon.
"We are confident that the legacy costs of the CCH deal will be contained."
The Securities Regulation Panel ruling concerning the EC-Hold purchase may cause MGX to increase its investment by R30 million in a worst-case scenario. MGX now owns 89% of EC-Hold after purchasing the shares owned by the Mandy Rebecca Price Trust.
Negotiations are still on track for the sale of MGX Software Futures to Paracon, although no price has been detailed yet.
Following a strategic review, MGX has consolidated its group structure into three main business units: Metrofile (formerly Content Management), MGX Solutions (incorporating Enterprise Solutions, Storage Solutions and Business Continuity Solutions), and Software Futures.
"An aggressive cost reduction programme has been implemented to ensure that all central costs are borne by the operating units and MGX`s head office has been reduced to the bare minimum," the statement says.
MGX closed 50c down at 600c on Thursday after the results were released.
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