Altron faces challenging year

Diversified ICT group Altron is geared up for a challenging first half of the new financial year.

It will concentrate heavily on subsidiary Altron's broadband strategy and UEC's set-top box manufacturing plans, says CEO Robbie Venter.

Altron's financial results for the year ended 28 February 2009, released today, are in line with the trading statement issued in February. Revenue increased by 16%, to R24.8 billion, on the back of strong sales from all three of its subsidiary companies - Altech, Bytes and Powertech - despite challenging market conditions.

Venter says the downturn in the building and construction industry, and the unprecedented and rapid decrease in the copper price during the latter part of the year, had a negative impact on certain operations within Powertech. This resulted in Altron's earnings before taxation, depreciation and amortisation (EBITDA) increasing by only 1%, from R2.21 billion in the prior year, to R2.24 billion. Adjusted diluted headline earnings per share declined by 18% for the year under review.

Commenting on its three subsidiaries' performance, Venter says: “We had an excellent year from Altech which, due to its successful strategy in East Africa, good performances from its larger operations and its strong annuity base, resulted in adjusted headline earnings per share growth of 15%.”

Venter says Bytes' results were roughly in line with the prior year, reflecting a challenging economic environment.

“Powertech had a disappointing year, especially in the second half, as the building and construction industry contracted and commodity price declines required inventory write-offs within Aberdare Cables.”

According to Venter, the rest of the Powertech businesses performed above expectations, especially Powertech Transformers and Powertech Batteries.

He notes the recently acquired Powertech IST continues to perform broadly in line with expectations, with over-performance in the industrial, data and energy divisions offset by a disappointing performance from the telecoms division.

“Altron's cash position improved strongly in the second half, to R1.1 billion, although this is R913 million down on last year, as a result of the R1.9 billion invested into the future growth of our group through acquisitions and capital expenditure,” explains Venter.

In terms of the business environment, Venter says the fall in commodity prices negatively affected mining companies' spend, primarily through the deferral of projects. The global recession also led to tougher trading conditions in the Iberian and UK markets where the group operates.

The high interest rate environment had also impacted the building and construction market. Although it is expected the recent interest rate cut will stimulate the sector, it will only be in late 2009 or early 2010.

Powertech's revenue grew strongly by 20%, to R9.6 billion from R8 billion in the prior year. However, EBITDA margins reduced to 7.7%, from the 12.8% achieved last year, partly as a result of once-off non-recurring charges relating to inventory write downs and retrenchment costs. This resulted in EBITDA declining 28%, from R1.029 billion to R738 million.

“Although Aberdare Cables experienced a strong first half of the year, the business was struck by a contraction in the building and construction industry, which comprises approximately 50% of Aberdare Cables' revenue. The destocking of the electrical wholesaler distribution channel further restricted demand. Coupled with this was the significant fall in the copper price from around $9 000 per ton to $3 000 per ton, which led to inventory write downs on our stock holdings.”

Venter adds that Aberdare Cables has taken remedial steps in order to right-size the business for the new demanding environment. These steps include reducing production time, extending shutdowns over holiday periods and rationalising certain of the operations.

“Although Bytes grew its revenue by 16%, to R6 billion, EBITDA only increased by 3%, to R427 million. Adjusted diluted headline earnings were in line with those reported last year, and at a headline earnings and attributable profit level, the contribution from Bytes SA to Altron has reduced after Kagiso exercised its option to acquire a further 22% equity interest in that business with effect from 1 July 2008.”

Venter says Altech significantly enhanced its EBITDA margins from 9.2%, to 11.6%, as a result of the high profitability in the newly-acquired East African operations, as well as good performances from Altech Netstar and Altech Autopage Cellular.

He says Altech would pursue a two-stage broadband strategy, with its East African operations looking at running a national network primarily based in Kenya. The South African plan is to focus on niche areas, such as bringing triple-play services to gated communities and possibly laying fibre cables to key clients.

“The two markets are very different and the purchase last year of Kenya Data Networks has been very successful in East Africa, while in SA our purchase of ISP Technology Concepts is proving key,” Venter notes.

Another of Altron's subsidiaries, UEC, will be a key player in the manufacture of set-top boxes (STBs), the units needed to convert digital TV signals for display on analogue TV sets.

“The tender for the STBs is not out yet, but we envisage a market of between eight to nine million units will be needed through to 2012.”

He says UEC has been working closely with the departments of communications and trade and industry on the STB specifications.

“The global economic crisis has led to a challenging business environment, as it is more difficult to borrow money to purchase products,” says Frost & Sullivan ICT analyst Mpho Moyo.

“Consequently, there has been a slowdown in sales within the construction sector and the cancellation of orders for IT equipment has negatively impacted on Powertech and Bytes. However, Altech has been able to take advantage of the sustained demand for voice and data services within Africa and ongoing infrastructural spend in SA.”

Moyo says Altron's global footprint has enabled it to draw from international, local and regional expertise, giving the group a distinct competitive advantage.

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