Connection Group reports record earnings in the year to May, as well as good prospects and an extremely sound balance sheet.
SA`s leading IT retailer reports a 36% gain in operating profit before interest because of higher earnings in Incredible Connection and an excellent turnaround in Enterprise Connection.
Headline earnings per share rose 30% to 53.7c (41.2c) with tangible net asset value up 13% to 115.1c per share.
Group revenue of R804.7 million was down 6% mainly as a result of the deflationary effect of the strengthening rand and high interest rates, which depressed consumer spending on expensive durables.
Said CEO Toni Fourie: "Thanks to the stronger rand, prices of imported hardware fell by some 30% across the board, which depressed turnover, as we passed on the benefit to customers. Our products became more affordable and while unit volumes did grow by between 20% and 35% in key categories, this was not enough to compensate entirely for the drop in unit prices."
In notching up 22% earnings growth, Incredible Connection experienced four distinct trading patterns during the year. First quarter revenue grew, while a decline was felt in the second half, as higher interest rates dampened demand. A recovery was felt in the third quarter and in the fourth quarter the company returned to growth.
Because of the unstable environment, Incredible Connection slowed expansion and concentrated on increasing productivity in existing businesses. Notwithstanding the opening of three new stores, Incredible Connection reduced trading space by 500 square metres. Turnover per head rose to R120 000 and trading density to R39 000. Stock turns were constant at eight.
Enterprise Connection generated a profit of R3.8 million, a turnaround of R6.8 million. The group sold 50% of Enterprise Connection to Canal Square Investments, a new black empowerment company, effective 30 April 2003.
Fourie observed: "While corporate IT spending has slowed appreciably during the last year, government remains the largest spender on IT services. This market opportunity, coupled with Enterprise Connection`s black empowerment credentials, manageable cost base and good customer portfolio, will allow it to prosper in the future.
"In addition", he added, "much of the IT investment from Y2K is due to be upgraded and with some exciting new products released by both Microsoft and HP, Enterprise Connection is well positioned."
The group managed its working capital vigorously. This, together with an ability to convert operating profits into cash, helped the group to generate R46 million from operations.
The group spent a total of R44.4 million in the current year on the following: R8.5 million on opening three new retail outlets and upgrading infrastructure; R16.3 million on shares for the employee share trust scheme, thus avoiding any future dilution in earnings per share; and a further R19.7 million acquiring 8.1 million shares, which represents 17.4% of the issued share capital. Of these, 3.5 million will be cancelled and the rest held as treasury stock.
Connection had R83 million of cash in the bank at end May after these cash outlays, directly benefiting the income statement. Interest income came to R1.7 million, compared to interest paid of R564 000 in the prior year.
The group has made a "notional" tax charge of R9.1 million relating to movement on the deferred tax account. At end May it had assessed tax losses of R25 million.
The emphasis over the short-term will be on achieving superior earnings for the 15 months to 31 August, the group`s new financial year-end. Furthermore, as market conditions are expected to improve in the medium- to longer-term, the board is confident of achieving real earnings growth.
Share
