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DATATEC LIMITED - Summary of unaudited results for the six months ended 31 August 2019 and change to the board
Summary of unaudited results for the six months ended 31 August 2019 and change to the board Datatec Limited Incorporated in the Republic of South Africa Registration number: 1994/005004/06 Share code JSE: DTC ISIN: ZAE000017745 ("Datatec", the "Company" or the "Group") Datatec Limited ("Datatec", the "Company" or the "Group", JSE), the international information and communications technology ("ICT") group, published its condensed unaudited results for the six months ended 31 August 2019 ("the Period" or "H1 FY20") on SENS which are available on www.datatec.com Summary of unaudited results for the six months ended 31 August 2019 and change to the board - Short form announcement The JSE link is as follows: https://senspdf.jse.co.za/documents/2019/JSE/ISSE/DTC/H1FY20.pdf Highlights - Solid operational execution in all divisions - Strong Logicalis performance in Latin America despite currency headwinds - Westcon International recovery progressing successfully - central cost reductions on track - Group revenue US$2.06 billion (H1 FY19: US$2.00 billion) - EBITDA US$70.0 million (H1 FY19: US$42.6 million) - Underlying* earnings per share 5.3 US cents (H1 FY19: 3.6 US cents) - Share repurchases of US$19.5 million and dividend of US$15.4 million during H1 FY20 Jens Montanana, Chief Executive of Datatec, commented: "All divisions delivered solid operational performances during the first half of the year in the context of continuing global macro-volatility. "Logicalis Latin America performed very strongly despite currency translation effects; and Westcon International improved profitability across all regions in line with its turnaround objectives. Our consulting business delivered an excellent performance as the adoption of new technologies, including 5G, accelerates internationally. "We continued to return cash to shareholders during the period through a special dividend and ongoing share buy-back programmes. "Looking ahead, despite growing uncertainties globally, we remain confident that the improvements in both the operational and financial performance of the Group will continue for the remainder of the year." Strategic overview Datatec's strategy is to improve shareholder returns over the medium term through a combination of corporate and business development actions aimed at enhancing the competitiveness and profitability of its subsidiaries and operating divisions. Logicalis is the largest contributor to the Group in terms of profitability. The division also continues to provide the widest geographical exposure and Datatec intends to continue to develop and grow Logicalis globally. Logicalis delivered a strong performance supported by a significant multi-year project in Latin America in the six-month financial period ended 31 August 2019 ("the period" or "H1 FY20"). While revenue remained stable, gross profit and EBITDA grew by 12% and 45% respectively compared to the six-month financial period ended 31 August 2018 ("the comparable period" or "H1 FY19"). Logicalis' gross profit and EBITDA include the positive effect of a favourable court ruling in Brazil with regards to certain overpaid indirect taxes. The ruling is not subject to appeal by the Brazilian tax authorities. Logicalis Brazil also recognised interest income on these multi-year overpaid taxes during H1 FY20. Westcon International is 90% owned by Datatec following the sale of Westcon Americas to SYNNEX Corporation ("SYNNEX") together with 10% of Westcon International in FY18. The Group's strategy is to reshape the Westcon International business in order to improve profitability and reduce the central cost base which was retained after the SYNNEX transaction. The improvement in Westcon International continued in H1 FY20, with revenue growth of 3.5% and improved profitability. Good progress continues to be made in terms of costs containment and the target reduction in central costs for FY20 is set to be achieved in accordance with management's plan. Following multiple years of restructuring in Westcon International, the BPO reversal and SAP implementation are complete and no restructuring charges were incurred in H1 FY20. IFRS 16 Leases has been adopted for FY20 which has had a significant effect on the Group's financial reporting in several areas. Operating expenses have reduced as the majority of rental costs of leased assets are no longer included and depreciation and interest expense have both increased by an approximately commensurate amount. Hence, the effect on key income statement metrics is an increase in EBITDA but only a negligible effect on earnings per share. On the balance sheet, fixed assets have increased with the inclusion of right-of-use assets and borrowings have increased with the equivalent lease liabilities affecting the net debt metric. The detail of this accounting change is set out in the full announcement on the JSE website. The Group balance sheet remains strong with net debt at 31 August 2019 of US$193.7 million compared to US$100.8 million at 28 February 2019. Excluding the adoption of IFRS 16, net debt was US$102.1 million. Group results Group revenues were US$2.06 billion in H1 FY20, up 2.6% on the US$2.00 billion revenues recorded in H1 FY19. In constant currency** terms, Group revenues increased by 8.2%. Group gross margins in H1 FY20 were 17.5% (H1 FY19: 15.9%). Gross profit increased by 12.7% to US$359.8 million (H1 FY19: US$319.4 million). Overall operating costs were US$289.8 million (H1 FY19: US$276.8 million). Included in the H1 FY19 operating costs were total restructuring costs of US$9.4 million. EBITDA was US$70.0 million (H1 FY19: US$42.6 million) and EBITDA margin was 3.4% (H1 FY19: 2.1%). Excluding the adoption of IFRS 16, EBITDA would have been US$53.3 million. H1 FY19 EBITDA benefited from US$15.0 million central costs accrued against the gain on disposal to SYNNEX in FY18, representing costs incurred to deliver transitional services to SYNNEX in H1 FY19. Depreciation increased by US$16.0 million to US$28.5 million (H1 FY19: US$12.5 million) mainly as a result of the adoption of IFRS 16. Amortisation was US$7.5 million (H1 FY19: US$6.0 million). Operating profit was US$34.0 million (H1 FY19: US$24.1 million). The net interest charge decreased to US$8.0 million (H1 FY19: US$9.6 million) and profit before tax was US$26.2 million (H1 FY19: US$13.9 million). The main reason for the decrease in the net interest charge is interest income recognised by Logicalis Brazil pursuant to a favourable ruling regarding previously overpaid indirect taxes. A tax charge of US$14.2 million has arisen on half year profits of US$26.2 million. The effective tax rate of 54.0% continues to be adversely affected by losses arising in Westcon International's Asia operations for which no deferred tax assets have been recognised and UK losses which give rise to a low rate of tax credits. As at 31 August 2019, there are estimated tax loss carry forwards of US$191.8 million with an estimated future tax benefit of US$40.1 million, of which only US$13.2 million has been recognised as a deferred tax asset. The Group's net asset value per share increased by 4.3% to 288.7 US cents per share (H1 FY19: 276.8 US cents per share). Underlying* earnings per share ("UEPS") were 5.3 US cents in H1 FY20 compared to underlying* earnings per share of 3.6 US cents for H1 FY19. Earnings per share (continuing and discontinued operations) were 2.9 US cents (H1 FY19: 0.7 US cents). Cash The Group generated US$77.8 million of cash from operations during H1 FY20 (H1 FY19: US$21.7 million cash utilised in operations) and ended the period with a net debt of US$193.7 million (FY19: US$100.8 million, H1 FY19: US$63.1 million). Excluding IFRS 16, net debt would have been US$102.1 million. The net debt has been calculated as: cash of US$37.5 million (FY19: US$40.4 million); short-term borrowings and current portion of long-term debt of US$127.9 million (FY19: US$109.8 million); and long-term debt of US$103.3 million (FY19: US$31.4 million). The adoption of IFRS 16 lease accounting has added $91.6 million to net debt. Foreign exchange translation Losses of US$24.0 million (H1 FY19: US$68.8 million losses) arising on translation to presentation currency are included in total comprehensive loss of US$8.9 million (H1 FY19: loss US$59.4 million). The bulk of these losses arise from weakening in the Rand/US$ exchange rate from 13.94 as at FY19 to 15.17 at H1 FY20 and weakening in the Brazilian Real/US$ exchange rate from 3.73 at FY19 to 4.14 at H1 FY20. The losses on translation to presentation currency contributed towards a reduction in tangible net asset value to US$324.9 million (FY19: US$364.1 million). Liquidity The Group is expected to generate sufficient cash to settle liabilities as they fall due. Working capital remains well controlled. Trade receivables and inventory are of a sound quality and adequate provisions are held against both. Net working capital days improved in both Logicalis and Westcon International. Acquisitions There were two acquisitions that were made during the period: on 1 March 2019, Analysys Mason Limited acquired 100% of the issued share capital of Stelacon Holding AB ("Stelacon"), a Swedish consulting company for US$2.6 million (including a deferred purchase consideration of US$1.2 million). Effective 30 June 2019, Logicalis SA (Pty) Ltd, acquired 100% of the issued share capital of Mars Technologies, a South African IT services business, with offices in Cape Town, Johannesburg, Port Elizabeth, Durban and East London for US$0.7 million (including a deferred purchase consideration of US$0.1 million). Current trading and outlook Despite ongoing uncertainties and complex geopolitical issues, the Board remains confident that the Group will deliver an improvement in its operational and financial performance compared to the prior financial year. Logicalis' financial performance is expected to be maintained throughout the rest of FY20, although currency translation weakness, especially in Latin America, may impact its results. Westcon International has a solid base to support its growth following disruptions over the past few years. Management is optimistic about the opportunities for the business in its chosen markets based on the sound operational platform now in place. Shareholder distributions: dividend policy and share repurchases The Group's policy is to maintain a fixed three times cover relative to underlying* earnings when declaring dividends. The level of underlying* earnings in H1 FY20 would only support a small dividend under this policy and as a result, no interim dividend for FY20 is declared declared (H1 FY19: nil). However, the Board currently expects to pay a full year dividend. In July 2019, the earn-out payment relating to the disposal of Westcon Americas to SYNNEX of US$14 million was returned to shareholders by way of a cash dividend with scrip distribution alternative. This resulted in a cash payment of US$12.2 million to shareholders and the issue of 1 250 718 new shares as the scrip alternative. In the period ended 31 August 2019, 8 450 718 shares (being 3.9% of the Company's issued share capital) were repurchased under separate shareholder mandates provided at general meetings on 15 January 2019 and 26 June 2019. The Company repurchased 5 086 565 shares (being 2.4% of the Company's issued share capital) in September 2019 under the shareholder mandate given at the Company's AGM on 29 August 2019. The Company has now completed the previously committed share repurchases, representing the scrip component of the January 2018 special dividend. The Board will consider further share repurchases as appropriate under the general authority granted by shareholders. Repurchases effected during the Company's closed periods were undertaken in terms of a fixed mandate to the Company's broker in accordance with paragraph 5.72(h) of the JSE Listings Requirements and notified to the JSE prior to the commencement of the closed periods. Subsequent events Logicalis Group purchased a 70% interest in Cilnet in September 2019, a Cisco systems integrator and managed services business in Portugal which increases Logicalis' Cisco technical expertise in the Iberian region and complements the existing Spanish operation with data centre, collaboration, networking, infrastructure and managed services capabilities, expanding the offering to the region. In addition, Logicalis also acquired Orange Networks on 2 September 2019, a Microsoft services business focused on Microsoft cloud and managed services, with Germany wide presence including Hamburg, Munich, Offenbach and Dusseldorf. This acquisition advances Logicalis Germany to Microsoft Gold-Certified Partner status and enhances its hybrid cloud offering. H1 FY20 H1 FY19 Increase US cents US cents in US cents Earnings per share 2.9 0.7 2.2 - Continuing operations 2.2 0.7 1.5 - Discontinued operations 0.7 - 0.7 Headline earnings per share 2.3 0.7 1.6 Underlying* earnings per share 5.3 3.6 1.7 In September 2019, the Group announced a change in the black economic empowerment ("BEE") partner of its subsidiary Westcon Southern Africa Holdings (Pty) Ltd ("Westcon SA"). This followed the disposal by MIC Investment Holdings (Pty) Ltd of its 40% equity interest in Westcon SA to Ascension Capital Partners (Pty) Ltd, a South African private equity investor. Westcon SA has maintained its level 1 BEE rating pursuant to this transaction. Change to the board Datatec announces the appointment of Rick Medlock as an independent non-executive director and member of the Audit, Risk and Compliance Committee with effect on 1 January 2020. Rick Medlock has been working in the technology, media and telecoms sector for more than thirty years, specialising in fast-growing globally focused technology companies, private equity-backed investments and IPOs. Rick was the Chief Financial Officer (CFO) of Synamedia after assisting with its buyout from Cisco in October 2018. Prior to that, Rick was the CFO of Worldpay from 2015 to 2018. During that period, Worldpay transitioned from the largest ever European private-equity IPO to a US$30 billion merger in January 2018 becoming the largest payments processor in the world listed on NYSE. Prior to Worldpay, Rick held a succession of CFO roles at Misys, Inmarsat plc, and NDS Group plc. Rick is an independent non-executive director of Sophos Group plc (LON: SOPH) and is a Fellow of the Institute of Chartered Accountants in England and Wales and has a BA degree in Economics from the University of Cambridge. As previously announced, Maya Makanjee became the Chairman of the Social and Ethics Committee on 1 June 2019 and also became the Chairman of the Remuneration Committee on 1 September 2019. DISCLAIMER This announcement may contain statements regarding the future financial performance of the Group which may be considered to be forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty, and although the Group has taken reasonable care to ensure the accuracy of the information presented, no assurance can be given that such expectations will prove to have been correct. The Group has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements and there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. It is important to note, that: (i) unless otherwise indicated, forward-looking statements indicate the Group's expectations and have not been reviewed or reported on by the Group's external auditors; (ii) actual results may differ materially from the Group's expectations if known and unknown risks or uncertainties affect its business, or if estimates or assumptions prove inaccurate; (iii) the Group cannot guarantee that any forward-looking statement will materialise and, accordingly, readers are cautioned not to place undue reliance on these forward-looking statements; and (iv) the Group disclaims any intention and assumes no obligation to update or revise any forward-looking statement even if new information becomes available, as a result of future events or for any other reason, other than as required by the JSE Limited Listings Requirements. On behalf of the Board: SJ Davidson Chairman JP Montanana Chief Executive Officer IP Dittrich Chief Financial Officer 17 October 2019 Directors: SJ Davidson# (Chairman), JP Montanana# (CEO), IP Dittrich (CFO), M Makanjee, JF McCartney°, MJN Njeke, E Singh-Bushell° °American #British Short form announcement The contents of this short form announcement are the responsibility of the Board of Directors of the Company ("the Board") and have not been reviewed or reported on by the Group's external auditors. Shareholders are advised that this short form announcement represents a summary of the information contained in the full announcement, published on SENS, via the JSE link and on Datatec's website www.datatec.com on 17 October 2019, and does not contain full or complete details of the financial results. Any investment decisions by investors and/or shareholders should be based on consideration of the full announcement as a whole and shareholders are encouraged to review the full announcement, which is available for viewing on SENS, via the JSE link and on the Company's website as set out above. The full announcement is also available for inspection at the registered office of the Company and at the offices of Datatec's sponsor, Rand Merchant Bank (a division of FirstRand Bank Limited). Inspection of the full announcement is available to investors and/or shareholders at no charge, during normal business hours from 17 October 2019 to 15 November 2019. Copies of the full announcement may be requested from firstname.lastname@example.org. * Excluding impairments of goodwill and intangible assets, profit or loss on sale of investments and assets, amortisation of acquired intangible assets, unrealised foreign exchange movements, acquisition-related adjustments, fair value movements on acquisition-related financial instruments, restructuring costs relating to fundamental reorganisations and the taxation effect on all of the aforementioned. ** The pro forma constant currency information, which is the responsibility of the Datatec directors, presents the Group's revenue for the current reporting period had it been translated at the average foreign currency exchange rates of the prior reporting period. This information is for illustrative purposes only and because of its nature, may not fairly present the Group's revenues. This information has not been reviewed and reported on by the Group's external auditors. To determine the revenues in constant currency terms, the current financial reporting period's monthly revenues in local currency have been converted to US dollars at the average monthly exchange rates prevailing over the same period in the prior year. The average exchange rates of the Group's material currencies are listed below: Average US Dollar exchange rates H1 FY20 H1 FY19 British Pound/USD 1.26 1.34 Euro/USD 1.12 1.18 USD/Brazilian Real 3.94 3.69 Australian Dollar/USD 0.69 0.75 Singapore Dollar/USD 0.73 0.74 USD/South African Rand 14.50 13.08 Registered office: Ground Floor, Sandown Chambers, Sandown Village, 16 Maude Street, Sandown Sponsor: Rand Merchant Bank (a division of FirstRand Bank Limited), 1 Merchant Place, Corner Fredman Drive and Rivonia Road, Sandton Transfer secretaries: Computershare Investor Services (Pty) Ltd Date: 17/10/2019 08:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on, information disseminated through SENS.