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PNC - Pinnacle Technology Holdings - Reviewed Results For The Year Ended 30 June

Release Date: 16/09/2011 07:15
Code(s): PNC
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PNC - Pinnacle Technology Holdings - Reviewed Results For The Year Ended 30 June 2011 PINNACLE TECHNOLOGY HOLDINGS LIMITED Incorporated in the Republic of South Africa Registration number 1986/000334/06) Share code: PNC ISIN: ZAE000022570 ("Pinnacle" or "the Group" or "the Company") REVIEWED RESULTS for the year ended 30 June 2011 HIGHLIGHTS Revenue increased by 57% to R5.0 billion EBITDA increased by 55% to R323 million Earnings per share increased by 58% to 121 cents Operating cash flow increased by 123% toR139 million CONSOLIDATED INCOME STATEMENT for the year ended 30 June Reviewed Audited 2011 2010 R`000 R`000 Revenue 4 960 074 3 166 925 Cost of sales (4 215 662) (2 687 295) Gross profit 744 412 479 630 Operating expenses (421 478) (271 353) Selling expenses (30 727) (30 454) Employee expenses (321 688) (218 670) Administration (82 835) (42 565) Gain on discounting of finance lease agreements 4 890 - Profit on foreign exchange 8 882 20 336 Earnings before interest, tax, Depreciation and amortisation 322 934 208 277 Depreciation and amortisation (13 916) (8 397) Impairment of intangible assets (12) (10 791) Excess of book value of over cost on acquisition of subsidiary 5 199 - Operating profit before interest 314 205 189 089 Investment income 6 943 10 845 Interest paid (11 510) (1 061) Profit before taxation 309 638 198 873 Taxation (87 297) (58 059) Net profit for the year 222 341 140 814 Attributable to: Owners of the Company 220 226 139 266 Non-controlling interests 2 115 1 548 RECONCILIATION OF HEADLINE EARNINGS Net profit attributable to ordinary Shareholders 220 226 139 266 Impairment of goodwill - 8 589 Excess of book value of over cost on acquisition of subsidiary (5 199) - Profit on sale of property, plant and equipment net of taxation (881) (230) Headline earnings 214 146 147 625 Weighted average number of shares in issue (`000) 181 965 181 475 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 30 June Reviewed Audited 2011 2010
R`000 R`000 Net profit for the year 222 341 140 814 Other comprehensive income Exchange differences from translating foreign operations (374) (203) Deferred losses on unmatched foreign exchange hedges - 884 Total comprehensive income for the year 221 967 141 495 Attributable to: Owners of the Company 219 421 139 947 Non-controlling interests 2 115 1 548 FINANCIAL REVIEW Performance per share (cents) Earnings (normal and fully diluted) 121.0 76.7 Headline earnings (normal and fully diluted) 117.7 81.3 Dividends 23.0 16.0 Dividend cover 5.1 5.1 Returns (%) Gross profit 15.0 15.1 Operating expenses 8.5 8.6 EBITDA 6.5 6.6 Operating profit before interest and tax 6.3 6.0 Effective tax rate 28.2 29.2 Net profit 4.5 4.4 CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS Reviewed Audited
2011 2010 R`000 R`000 Cash and cash equivalents at the beginning of the year 187 088 163 653 Cash flow from operations 138 734 62 342 Cash from operations 320 299 217 309 Cash (utilised in)/released from working capital (78 009) (102 488) Taxation paid (103 556) (52 479) Cash utilised in investing activities (207 927) (13 659) Cash flow from financing activities 7 133 (25 248) Distribution to shareholders (29 497) (21 909) Increase/(decrease) in third-party Liabilities 117 030 2 286 Repurchase and cancellation of shares (31 984) - Treasury shares issued 30 305 - Treasury shares acquired (78 721) (5 625) Net cash movement (62 060) 24 435 Overdraft acquired in acquisition of subsidiary (121 343) 24 435 Cash and cash equivalents at the end of the year 3 685 187 088 SUMMARISED SEGMENTAL REPORT for the year ended 30 June Net Group profit Revenue after tax R`000 R`000
2011 ICT Distribution 5 035 749 202 344 IT Projects and Services 158 559 9 809 Financial Services 22 778 7 181 Group Central Services 154 3 007 Less Intergroup revenue (257 166) - 4 960 074 222 341 2010 ICT Distribution 3 323 295 143 999 IT Projects and Services 39 386 780 Financial Services 3 373 (802) Group Central Services 245 (3 163) Less Intergroup revenue (199 374) - 3 166 925 140 814 RECONCILIATION OF ORDINARY SHARE MOVEMENTS for the year ended 30 June Reviewed Audited 2011 2010 Issued shares at beginning of year 187 107 270 187 107 270 Shares issued 24 545 - Shares repurchased and cancelled (5 815 363) - Issued shares at the end of the year 181 316 452 187 107 270 CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 30 June Reviewed Audited 2011 2010 R`000 R`000 Assets Non-current assets 192 338 146 427 Property, plant and equipment 105 145 90 400 Intangible assets 60 541 43 558 Trust loans - 3 516 Deferred taxation 26 652 8 953 Current assets 1 536 357 1 108 404 Inventories 576 384 384 347 Trade and other receivables 870 662 536 665 Taxation receivable 1 904 304 Cash and cash equivalents 87 407 187 088 Total assets 1 728 695 1 254 831 EQUITY AND LIABILITIES Capital and reserves 629 374 538 919 Share capital and premium 112 009 143 983 Treasury shares (74 885) (26 469) Non-distributable reserves 31 204 31 578 Accumulated profits 560 786 387 108 Non-controlling interests 260 2 719 Non-current liabilities 66 869 19 852 Interest-bearing liabilities 55 230 8 630 Deferred taxation 11 639 11 222 Current liabilities 1 032 452 696 060 Trade and other payables 863 743 677 776 Current portion of interest- bearing liabilities 15 632 806 Short-term loan 52 088 - Warranty provisions 10 646 6 678 Taxation payable 6 621 10 800 Bank overdrafts 83 722 - Total equity and liabilities 1 728 695 1 254 831 Shares in issue (`000) (excluding treasury shares) 165 528 180 303 Capital management Net asset value per share (cents) 380.2 298.9 Net tangible asset value per share (cents) 343.6 274.7 Working capital management Investment in working capital 583 303 243 236 Stock days 42.9 52.2 Debtors days 47.2 52.4 Creditors days 64.3 80.7 Liquidity and solvency Debt to equity (%) 0.11 0.04 Current asset ratio 1.49 1.59 Acid test ratio 0.93 1.04 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 30 June Non-
distri- butable Share Share Treasury reserve R`000 R`000 R`000 R`000
Balance 30 June 2009 1 871 142 112 (20 605) 30 780 Treasury shares acquired - - (5 864) - Net profit for the year - - - - On acquisition of shareholding - - - - Dividends paid Other comprehensive income - - - 798 Balance 30 June 2010 1 871 142 112 (26 469) 31 578 Treasury shares acquired - - (78 721) - Treasury shares Issued - - 30 305 - Shares issued - 10 - - Shares cancelled (58) (31 926) - - Net profit for the year - - - - Other comprehensive income - - - (374) Dividends paid - - - - Acquisition of non-controlling interests - - - - Balance 30 June 2011 1 813 110 196 (74 885) 31 204 Ordinary Retained share- Minority
earnings holders interest Total R`000 R`000 R`000 R`000 Balance 30 June 2009 269 858 424 016 1 351 425 367 Treasury shares acquired - (5 864) - (5 864) Net profit for the year 139 266 139 266 1 548 140 814 On acquisition of shareholding - - (170) (170) Dividends paid (21 899) (21 899) (10) (21 909) Other comprehensive income (117) 681 - 681 Balance 30 June 2010 387 108 536 200 2 719 538 919 Treasury shares acquired - (78 721) - (78 721) Treasury shares issued - 30 505 - 30 505 Shares issued - 10 (251) (241) Shares cancelled - (31 984) - (31 984) Net profit for the year 220 226 220 226 2 115 222 341 Other comprehensive income - (374) - (374) Dividends paid (29 137) (29 137) (360) (29 497) Acquisition of non-controlling interests (17 411) (17 411) (3 963) (21 374) Balance 30 June 2011 560 786 629 114 260 629 374 COMMENTARY INTRODUCTION Pinnacle is a diversified group active in all spheres of the Information and Communication Technology industry ("ICT"), including hardware, software, network cabling, infrastructure development and services. Pinnacle offers a world-class selection of branded products including Microsoft, VMWare, Citrix, Dell, Asus, Hewlett-Packard, Lenovo, Logitech, Oracle, Sun, Intel, IBM, Sharp, Samsung, LG as well as its own Proline range of IT and audio-visual equipment. Product and services sales are handled through individual focused companies, each with their own dedicated management teams and areas of expertise. RESULTS OF OPERATIONS OVERALL Satisfying trading results were delivered for the year ended June 2011, despite some of the trading subsidiaries not performing as expected. Acquisitions made during 2010 contributed significantly towards Group growth. Group revenues increased by 57% to R5.0 billion, (2010: R3.2 billion) of which 24% came from organic growth in the existing Group and 33% due to the acquisition and incorporation of the Axiz Technology Group and Centrafin. This was despite the impact on pricing of the stronger rand, which averaged nearly 8% stronger in 2011 than in 2010. The current organic growth of 24% before acquisitions is comparable to a 12% total turnover growth in 2010. Gross profit decreased from 15.1% to 15.0%, but this was mitigated by better efficiencies in operating expenses with ratio to turnover improving to 8.5% from 8.6%. The lower operating expense ratio is mainly due to synergies already achieved after the merger between Axiz and WorkGroup. EBITDA increased by 55% to R323 million and net profit attributable to shareholders increased 58% to R220 million. Group net profit improved marginally from 4.4% to 4.5% of turnover. Headline earnings per share increased by 45% to 117.7 cents per share (2010: 81.3 cents per share) and earnings per share based on net profit attributable to shareholders increased by 58% to 121.0 cents per share (2010: 76.7 cents). Working capital increased mainly through the acquisition of Axiz and Centrafin which added R258 million at their dates of acquisition. On a statistical level, trade debtors days outstanding improved to 47.2 days (2010: 52.4 days) after an improvement in the government debt balance in last year`s debtors and in the inclusion of Axiz, whose well controlled debtors are below the Group average. Days stock on hand returned to optimal levels at 42.9 days (2010: 52.2 days and 2009: 44.6 days) following the sell down of the stock build up that occurred in 2010 when business volumes fell sharply during the FIFA World Cup. Cash flow from operations yielded R139 million (2010: R62 million) which amounted to 65% of headline earnings (2010: 42%). Net cash on hand at year-end reduced to R3.7 million (2010: R187 million). This absorption of cash was largely due to R59 million cash paid by the year-end on the repurchase of 20 million shares from the Group`s BEE partner, R83 million disbursed in total on the acquisitions of Axiz and Centrafin, R44 million spent on funding Centrafin`s book and the consolidation of Axiz`s R121 million overdraft on acquisition. Net tangible asset value per share has increased to 344 cents per share (2010: 275 cents per share). Pinnacle Africa Revenue increased by 18% to R2.24 billion, although revenue generated outside of the Group increased by 22%. This growth was achieved despite a stronger rand, and was attributable to strong performances from all the trading divisions in Pinnacle Africa. Gross profit margin increased from 15.6% to 16.4%, although this was offset by an increase in operating costs from 7.4% to 8.1%, giving a net increase in operating margin from 6.6% to 7.2% and in operating profit year on year of 28% to R161million. After a subdued government ICT spend in 2010, government resumed its spend in 2011 and the company was able to conclude substantial deals with different departments during this period. Sales to the retail sector also showed good growth, while the small and medium enterprise markets remained robust. Prospects for Pinnacle Africa remain sound, with continued focus on high margin niche product sets as well as market share growth in the small and medium business markets. AxizWorkgroup The acquisition of the Axiz Technology Group in November and its merger with WorkGroup has delivered the results expected by the board with the realisation of synergies resulting in a reduction in the combined cost base of the merged operation to 6.3% of turnover, where previously the Axiz cost base was almost 9%. The combined entity delivered revenue of R2.5 billion and EBITDA of R133 million. AxizWorkgroup presents the market with some unique opportunities, both from a vendor and customer perspective, as it is the first distributor to combine broad- based and value-based distribution models. Its product portfolio is the most comprehensive of any competitor in the market and it aligns well with market dynamics like cloud computing and data centre expansion. AxizWorkgroup represents the leading cloud providers in the market today and the combined product portfolio allows its partner base to put together the best of breed solutions. DataNet DataNet`s revenue increased by 39% to R248 million largely as a result of the incorporation of the voice and data business of CentraVoice, with their brands such as Alcatel-Lucent and Mitel. The company still disappointed however and only managed a slightly better than breakeven bottom line before CentraVoice after having returned a profit of R3.8 million in the previous year. The Group acquired the remaining outstanding shares from non-controlling shareholders with effect from 30 June 2011 and will align the finance and back office functions of the company with Pinnacle Africa, which should substantially enhance the operational efficiency of DataNet. The company will also have access to the full customer base and distribution network of Pinnacle Africa which should more fully develop the sales potential of the company. DataNet is recognised as a market leader in the ICT infrastructure supply market, and management believes that the above mentioned changes will bear fruit in the coming year. Infrasol Infrasol is a design and development company with project management expertise focused on large network infrastructure, audio-visual, data centre design and implementation projects. Its partnership model has allowed many B-BBEE companies to jointly deploy these solutions for their clients. Now in its second year of operations, the company saw significant success having increased its turnover fourfold to R159 million (2010: R39 million) and its net profits increased to R9.8 million (2010: R0.8 million). Sharp Sharp multi-functional copiers and printers are recognised internationally as an advanced and reliable range of office automation. Turnover increased to R12 million from R2.4 million during the six months for which it was in the Group last year. The business is still loss making at R4.6 million after tax for the year (six months of 2010: R1.5 million), but continuing inroads into the market so far have been encouraging and should ensure that the company will become profitable in future. The business model retains significant growth potential for the Group as products are introduced and marketed to government, large and medium corporates. The Group also has plans to realise overhead synergies with Pinnacle Africa in order to reduce the company`s overhead burden. Centrafin Centrafin is a finance reseller, 90% of which was acquired by the Group at a total cost of R20 million in two tranches (at the beginning of the year and at the end of the year) to provide finance solutions to end users mainly in the government and commercial sectors. The company`s original model was to discount deals that it made into the banking sector, but banks are moving away from this type of transaction, so the Group decided strategically to provide some R44 million in funding to Centrafin in order for it to create its own book, and it continues to do so. The movement away from a discounting model to an own funded book will have a negative accounting effect on the company, but this notwithstanding, the company was able to maintain a net profit after tax this year of R7.2 million. CAPITAL EXPENDITURE R6 million was spent during the year on leasehold properties and R8 million on infrastructure (plant, furniture, fittings and office equipment). A further R6 million was invested into IT and R2 million on the acquisition of delivery vehicles. No material capital expenditure commitments have been entered into at year-end. Working capital management and cash generation will continue to enjoy attention as the Group aims to further improve its working capital efficiency and corresponding credit ratings. CORPORATE ACTIVITY Business combinations The Group finalised all of the acquisitions that were reported last year as being in progress. These and others include: - Centrafin (Pty) Limited and Centravoice (Pty) Limited: The Group acquired 51% of Centrafin and 100% of CentraVoice as part of a single deal effective from the beginning of the year for a net price of R8.422 million. The acquisition allowed the Group to appoint a majority of directors to both companies which gave the Group control of both companies. The deal was not consolidated last year because the conditions precedent in the contract had not been fulfilled by the time the Group`s 2010 results were published and the impact on the Group`s results and financial position for that financial year was not material. The business of Centrafin is the provision of medium- term financing solutions to both commercial and public sector entities for the acquisition of information and communication technology and allied products both from the Pinnacle Group and from third parties. CentraVoice is a distributor of voice and data PABXs and allied equipment. The acquisitions were made to augment and expand the Group`s product offering. The Group later purchased a further 39.2% of Centrafin for R11.35 million on 30 June 2011. This gives the Group a total holding of 90.2% of Centrafin with the remaining 9.8% still being held by Centrafin`s current managing director. The Group made the second purchase to allow it to re-engineer the business model of Centrafin in a manner that has necessitated additional injections of loan funding in order for the business build its own finance book, that the outside shareholders are unlikely to match by the provision of either funds or security. The second purchase was a small related party transaction because the sellers and Centrafin had common directors and a fairness opinion was obtained from Mazars Corporate Finance (Pty) Limited for the transaction. - The Axiz Technology Group: The 100% acquisition of Axiz Technology (Pty) Limited and its subsidiaries (the"Axiz Group") for R151.2 million was finalised during the year and became effective on 1 November 2010 after approval from the Competitions Commission had been received. Payment for the shares comprised 3 million Pinnacle shares fairly valued at 416.83 cents per share at the time, amounting to R12.5 million, and cash of R138.7 million. R75 million of the cash payment was funded over 7 years by a financial institution and the balance was funded from Group cash resources. Axiz is a leading IT infrastructure distributor of world-class products. Axiz is also recognised as a market leader as a result of employee empowerment and innovative CSI initiatives such as its Ledibogo Business Partner Programme and Qhubeka. Axiz is headquartered in Gauteng with regional offices around South Africa and neighbouring countries. The acquisition will improve return on equity for Pinnacle shareholders, as the purchase consideration was R2.7 million less than the tangible asset value of Axiz at the date of acquisition. Axiz`s historical audited results, if realised in successive years, are expected to outperform the finance and associated costs of the transaction. Axiz and Workgroup IT (Pty) Limited, a wholly-owned subsidiary of Pinnacle, will over time merge facilities, operations and eventually systems to leverage off a combined infrastructure. This combination will facilitate growth in distribution volume as new brands and brand segments are made available to an extended customer base. The acquisition has had a marked impact on the Company`s results for the year, despite its results only being consolidated into the Company`s group results for 8 months of the year. The assets and liabilities of the Axiz Group fairly valued at the date of acquisition were as follows: R`000 Assets Property, plant and equipment 7 262 Deferred taxation 18 465 Intangible assets 2 492 Inventories 134 063 Trade and other receivables 287 659 Cash and cash equivalents 4 863 Liabilities Trade and other payables (161 698) Taxation payable (10 106) Bank overdraft (126 601) Net asset value acquired 156 399 - The remaining 40% of DataNet Infrastructure Group (Pty) Limited ("DataNet") was acquired for R16.8 million which now makes DataNet wholly-owned by the Group (as per the SENS announcement on 4 July 2011). At the end of the financial year the Group`s BEE partner, the Amabubesi Group decided to sell its shareholding in the Company because their technology fund in which they held Pinnacle shares had reached its investment horizon. The Group re- acquired 20 million of its own shares on offer by Amabubesi at a price of R5.50, which was at a discount to market at the time of 19.9%, although the effective discount has proved to be significantly higher because of the rise in the share price since then. The remaining 17 281 647 Pinnacle shares were still owned by Amabubesi at the date that this report was issued. Further details were made public on SENS on 3 May 2011 and in a circular distributed to all shareholders ahead of a special meeting of shareholders held on 24 June 2011 to approve this transaction. TRANSFORMATION Pinnacle continues to embrace the principles of transformation set by the B-BBEE codes. The Group is actively applying policies to improve its contribution in procurement, employment equity, skills development and social economic development. The Group holds a level 4 rating as measured in accordance with the DTI B-BBEE codes. PROSPECTS Market sentiment is mixed at present with concerns emerging over the continuing inability of Europe to resolve debt crises in Greece, Ireland and the Iberian Peninsula and the threat of over a double dip recession from the USA. Global markets continued to recover at a restrained pace, as western governments drive their economies with stimulus packages. International risk, however, remains finely balanced. The key for the Group remains growth while continuing to focus on cost containment to reduce pressure on revenue generation. The Group is constantly striving to acquire new product agencies and businesses throughout the continent that will assist in the diversification of the Group`s existing markets, products, geography and clientele. CORPORATE GOVERNANCE The Group recognises the need to conduct its business with integrity, transparency and equal opportunity and subscribes to the spirit of good corporate governance as set out in the King 2 report. The Group is currently in the process of reviewing and evaluating its compliance with King 3 and a detailed programme has been adopted to ensure optimal compliance. SUBSEQUENT EVENTS The Board of Pinnacle Technology Holdings Limited records with sadness and regret the passing of Mr Cyril Biddlecombe on 30 July 2011, who had been the Chairman of the Group for the past 11 years. The Board extends its condolences to Mr Biddlecombe`s family. No events material to the understanding of the report, other than those discussed above, had occurred in the period between the year-end date and the date of the report. DIVIDENDS The Board of Directors has proposed a dividend of 23 cents per share (2010: 16 cents per share) for the year under review, yielding a dividend cover measured against headline earnings of 5.1 times (2010: 5.1 times). SALIENT DATES The salient dates applicable to the dividend are as follows: 2011 Last day to trade in order to be eligible to vote at the annual general meeting Friday, 4 November Record date to be eligible to vote at the annual general meeting Friday, 11 November Forms of proxy for annual general meeting of shareholders to be received by 10:00 Wednesday, 16 November General meeting of the shareholders held at 10:00 Friday, 18 November Results of annual general meeting announcement published on SENS and dividend distribution of 23 cents per share confirmed Friday, 18 November Last day to trade "CUM" dividend Friday, 2 December Ordinary shares trade "EX" dividend Monday, 5 December Record date to be recorded in the register to participate in the dividend distribution Friday, 9 December Payment to shareholders in respect of the dividend distribution Monday, 12 December Posting of cheques or electronic Bank transfers in respect of certificated shareholders. Accounts credited at CSDP or broker in respect of dematerialised shareholders. No share certificates may be dematerialised or rematerialised between Monday, 5 December 2011 and Friday, 9 December 2011, both days inclusive. STATEMENT OF COMPLIANCE These condensed consolidated financial statements for the year ended 30 June 2011 have been prepared in accordance with the Group`s accounting policies under the supervision of the Chief Financial Officer, FC Smyth CA(SA), with and containing the information required by IAS 34. They comply with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards (IFRS), the AC 500 standards as issued by the Accounting Standards Board and its successor, the Listings Requirements of the JSE Limited and the Companies Act (No 71 of 2008, as amended) of South Africa. The accounting policies adopted are consistent with those applied in the preparation of the audited annual financial statements for the year ended 30 June 2010. REVIEW The condensed consolidated financial statements for the year have been reviewed by BDO South Africa Incorporated, and their unmodified review report is available for inspection at the Company`s registered office. For and on behalf of the Board D Mashile-Nkosi AJ Fourie Midrand Chairperson Chief Executive Officer 16 September 2011 PINNACLE TECHNOLOGY HOLDINGS www.pinnacle.co.za Directors: D Mashile-Nkosi ** (Chairperson), AJ Fourie (Chief Executive Officer), PM Moyo **, N Mthombeni **, FC Smyth (Chief Financial Officer), TAM Tshivhase, A Tugendhaft* * (Non-executive) ** (Independent non-executive) Registered Office: The Summit, 269, 16th Road, Randjespark, Midrand, 1685 Transfer Secretaries: Computershare Investor Services (Pty) Limited, Ground Floor, 70 Marshall Street, Johannesburg, 2001 Auditors: BDO South Africa Inc, Registered Auditors, 13 Wellington Road, Parktown, 2193 Sponsor: Deloitte & Touche Sponsor Services (Pty) Limited Date: 16/09/2011 07:15:43 Supplied by www.sharenet.co.za 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.

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