Wrap Text
Condensed consolidated preliminary audited results for the year ended 31 August 2012
CONDUIT CAPITAL LIMITED
Incorporated in the Republic of South Africa
(Registration number: 1998/017351/06)
Share code: CND ISIN: ZAE000073128
(“Conduit” or “the Group”)
CONDENSED CONSOLIDATED PRELIMINARY AUDITED RESULTS FOR THE YEAR ENDED
31 AUGUST 2012
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Audited Audited
31 August 31 August
2012 2011
R'000 R'000
Gross revenue 1 071 936 920 517
Net insurance revenue 290 784 274 764
Other operating revenue 143 817 109 110
Net revenue 434 601 383 874
Operating expenses (369 870) (356 046)
- Direct expenses: Insurance and risk services (215 333) (219 375)
- Administration and other expenses (67 116) (58 720)
- Depreciation and amortisation (3 514) (3 519)
- Employee costs (83 907) (74 432)
Operating profit 64 731 27 828
Equity accounted income 723 667
Investment income 14 116 24 923
Other income 528 1 190
Finance charges (427) (1 300)
Profit before taxation 79 671 53 308
Taxation (30 418) (16 988)
Profit for the year 49 253 36 320
Other comprehensive income - -
Total comprehensive income 49 253 36 320
Attributable to:
Equity holders of the parent 32 156 22 419
Non-controlling interest 17 097 13 901
Profit for the year 49 253 36 320
Basic earnings per share (cents) 12.7 9.0
Diluted earnings per share (cents) 12.6 8.7
Headline earnings per share (cents) 12.7 8.6
Diluted headline earnings per share (cents) 12.6 8.4
CONDENSED SEGMENTAL ANALYSIS OF EARNINGS
Corporate
and Insurance
investment and risk Consoli-
services services Direct dation Total
R'000 R'000 R'000 R'000 R'000
Audited - year ended 31 August 2012
Gross revenue 6 184 938 062 132 838 (5 148) 1 071 936
Net revenue 6 184 300 727 132 838 (5 148) 434 601
Investment income 17 831 12 569 516 (16 800) 14 116
Profit before taxation 4 880 47 010 44 581 (16 800) 79 671
Attributable earnings 4 904 32 774 11 278 (16 800) 32 156
Non-controlling interest 11 170 16 916 - 17 097
Total assets 169 084 819 335 47 545 (134 147) 901 817
Total liabilities (9 711) (706 720) (28 870) 131 781 (613 520)
Capital expenditure 37 1 459 2 632 - 4 128
Audited - year ended 31 August 2011
Gross revenue 6 418 815 088 103 830 (4 819) 920 517
Net revenue 6 418 278 445 103 830 (4 819) 383 874
Investment income 17 229 13 911 583 (6 800) 24 923
Profit before taxation 5 575 20 257 34 276 (6 800) 53 308
Attributable earnings 4 618 15 483 9 118 (6 800) 22 419
Non-controlling interest 51 81 13 769 - 13 901
Total assets 200 249 730 098 51 660 (164 125) 817 882
Total liabilities (22 136) (650 368) (24 279) 161 759 (535 024)
Capital expenditure 94 830 2 548 - 3 472
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Audited Audited
31 August 31 August
2012 2011
R'000 R'000
Net cash flows from operating activities 30 629 34 166
Net cash flows from investing activities 2 372 (22 866)
Net cash flows from financing activities (32 891) (11 684)
Total cash movement for the year 110 (384)
Cash at the beginning of the year 269 862 270 246
Total cash at the end of the year 269 972 269 862
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Audited Audited
31 August 31 August
2012 2011
R'000 R'000
ASSETS
Non-current assets 160 517 143 629
- Property, plant and equipment 14 601 14 457
- Intangible assets 46 457 46 089
- Loans receivable 15 245 5 351
- Deferred taxation 9 965 7 190
- Investment properties 3 851 3 442
- Investment in associates 311 281
- Investment in jointly controlled entities 3 756 3 325
- Investments held at fair value 66 331 63 494
Current assets 741 300 669 503
- Insurance assets 357 402 316 026
- Investments held at fair value - 4 592
- Trade and other receivables 113 513 78 761
- Taxation 413 262
- Cash and cash equivalents 269 972 269 862
Non-current assets held for sale - 4 750
Total assets 901 817 817 882
EQUITY AND LIABILITIES
Capital and reserves 288 297 282 858
- Ordinary share capital and share premium 175 917 199 155
- Retained earnings 97 694 65 538
- Share based payment reserve 182 600
Equity attributable to equity holders of the parent 273 793 265 293
Non-controlling interest 14 504 17 565
Non-current liabilities 30 840 28 629
- Policyholder liabilities under insurance contracts 19 052 19 661
- Interest-bearing borrowings 3 753 3 796
- Deferred taxation 8 035 5 172
Current liabilities 582 680 506 395
- Insurance liabilities 422 561 379 765
- Trade and other payables 152 626 122 341
- Current portion of interest-bearing borrowings - 3 175
- Taxation 7 493 1 114
Total equity and liabilities 901 817 817 882
Net asset value per share (cents) 107.5 106.0
Tangible net asset value per share (cents) 89.2 87.6
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Share Non-
capital control-
and share Retained Other ling
premium earnings reserves interest Total
R'000 R'000 R'000 R'000 R'000
Balance at 1 September 2010 199 155 43 626 363 16 419 259 563
Reversal of equity options - 66 (66) - -
Transaction with owners - (573) - (2 555) (3 128)
Total comprehensive income for the
year - 22 419 - 13 901 36 320
Equity options issued to executives - - 303 - 303
Dividends paid - - - (10 200) (10 200)
Balance at 31 August 2011 199 155 65 538 600 17 565 282 858
Total comprehensive income for the
year - 32 156 - 17 097 49 253
Equity options issued to executives - - 22 - 22
Equity options exercised 2 240 - (440) - 1 800
Loans advanced by non-controlling
shareholders - - - 5 101 5 101
Capital distribution (25 478) - - - (25 478)
Dividends paid - - - (25 259) (25 259)
Balance at 31 August 2012 175 917 97 694 182 14 504 288 297
NOTES TO THE CONDENSED CONSOLIDATED PRELIMINARY AUDITED FINANCIAL STATEMENTS
1. Basis of preparation
The accounting policies applied in the preparation of these condensed consolidated preliminary audited
financial statements for the year ended 31 August 2012 (“audited results”) are based on reasonable
judgements and estimates and are in accordance with International Financial Reporting Standards (“IFRS”)
and AC 500 standards as issued by the Accounting Practices Board. These accounting policies are
consistent with those applied in the annual financial statements for the year ended 31 August 2011. The
audited results have been prepared in terms of IAS 34 – Interim Financial Reporting, the Companies Act of
South Africa and the Listings Requirements of JSE Limited. These condensed consolidated preliminary
audited financial statements were prepared under the supervision of Mr Lourens Louw, the Financial
Director of Conduit.
2. Changes in share capital
Details of shares in issue as at the reporting dates are as follows:
Audited Audited
31 August 31 August
2012 2011
R'000 R'000
Number of shares in issue 254 777 250 277
- Shares in issue 256 380 256 380
- Shares held as treasury shares (1 603) (6 103)
Weighted average number of shares 254 181 250 277
- Shares in issue 256 380 256 380
- Shares held as treasury shares (2 199) (6 103)
Diluted weighted average number of shares 256 181 256 531
- Shares in issue 258 380 262 634
- Shares held as treasury shares (2 199) (6 103)
3. Reconciliation of headline earnings
Audited Audited
31 August 31 August
2012 2011
R'000 R'000
Profit attributable to ordinary equity holders of Conduit 32 156 22 419
Net profit on revaluation of non-current assets held for sale - (300)
Net (profit) loss on revaluation of investment properties (41) 1
Net loss on disposal of intangibles, property, plant and equipment 89 603
Net profit on disposal/revaluation of subsidiaries and associates - (891)
Tax on the items above (17) (26)
Non-controlling interest on the items above (after taxation) (24) (249)
Headline earnings 32 163 21 557
4. Contingent liabilities
4.1. The Group's bankers have issued the following guarantees on behalf of the Group:
4.1.1. Government Employees Pension Fund for office rent R540 724
4.1.2. South African Post Office Limited for postage R100 000
These guarantees are secured by corresponding cash deposits held at the banks that have issued
the guarantees.
4.2. As previously reported, a dispute relating to inward reinsurance arrangements concluded in 2006
and 2007 through one of the Group's external underwriting managers is the subject of arbitration
proceedings. The matter is complex and financial exposure to the dispute in issue is difficult to
quantify, though dependent on certain key outcomes, may be material.
Other than what is noted above, the Group is not aware of any other current or pending legal cases
that would have a material adverse effect on the Group's audited results.
5. Directors
5.1. Mr Stanley D Shane resigned as a non-executive director of the Group on 26 March 2012;
5.2. Mr Robert L Shaw was appointed as an executive director of the Group on 2 July 2012; and
5.3. Mr Richard Bruyns was appointed as an independent non-executive director of the Group on
4 October 2012.
6. Dividends
The board of directors of Conduit (“the Board”) has not recommended a dividend payment to ordinary
shareholders for the 2012 financial year (2011: Nil).
7. Post balance sheet events
There were no material post balance sheet events.
8. Audit opinion
Grant Thornton has audited the Group's results and their unqualified audit report is available for inspection
at the Group's registered office.
The auditor's report does not necessarily cover all of the information contained in this
announcement/financial report. Shareholders are therefore advised that in order to obtain a full
understanding of the nature of the auditor's work they should obtain a copy of that report together with the
accompanying financial information from the registered office of the company.
COMMENTARY
GROUP OPERATIONAL REVIEW
1. CORPORATE AND INVESTMENT SERVICES
The Corporate and Investment Services division comprises the Group's head office activities and
investments that are considered ancillary to core operations. Significant movements in the year relate to
our 26% interest in Amalgamated Electronics Corporation Limited (“Amecor”), which is accounted for on a
mark-to-market basis. In the first half of the year we benefitted from a 51 cent movement in the share
price equating to after-tax earnings of R8.8 million or 3.5 cents per share. By contrast, a downward
movement of 65 cents in the second half of the year negatively impacted after-tax earnings by
R10.9 million or 4.3 cents a share. Volatility aside, and after taking into account an 8 cent dividend, the
investment had only a marginal impact on overall Group results. Post year-end the Amecor share price has
recovered to trade above R2 off the back of recently published positive results. Accounting rules dictate
that our treatment of the asset will remain unchanged.
2. CONDUIT INSURANCE AND RISK SERVICES
The business of insurance is rather intriguing. On one hand the benefit of receiving premiums in advance
and only paying claims later, has the effect of creating what the industry calls an "insurance float".
Simplistically put, this float is really just an amount of "free" capital that "floats" around our investment
portfolio (strictly monitored by the Financial Services Board (“FSB”) of course) and generally increases along
with our premium income. The money we make from this insurance float, alongside the investment of our
assets, which have no direct corresponding liability, is what makes up our investment income. The other side
of the insurance coin is the core of our business and the actual underwriting of risk. It is here where, along
with other insurers and few other industries, we only truly know our final cost of sale down the line once a
claim materialises. Even with all the historical and predictive analysis money can buy, it is by no means a
precise science. This brings us to our point:
At Constantia we will not compromise on quality for market share. We insist on allocating capital to portfolios
that make us money and do so time and again. In rare instances where we get it wrong in a given year, it is
not out of greed or as a result of chasing premium. We know that no amount of "free" (responsibly invested)
insurance float will deliver the returns necessary to make up for ill-discipline in underwriting. Whilst it is
always good to see top line growth, we are far more focused on the quality of that premium and its ability to
deliver bottom line profits.
Commentary contained in the Group's February interim report provided shareholders with some insight into
recent insurance regulations, which would impact the allocation of capital within our Group. In October
2011 (effective January 2012) the FSB introduced Interim Measures in the lead up to the implementation of
Solvency and Assessment Management (“SAM”) regulations in 2015. This risk based capital approach - which
follows European standards - has effectively doubled the statutory capital requirements for short-term
insurers and heavily penalises all asset classes other than cash or premium debtors, provided they are
current or outstanding for less than 60 days. Whilst this may seem quite alarming at first, it strongly
supports our conservative investment strategy and continued focus of underwriting profitable business. The
Regulations do not of course end there and there is indeed a cost to ensure compliance with the
governance, reporting and financial aspects of SAM in the months and years to come.
The Group's balance sheet is robust and we intend to keep it that way. To illustrate the position, as at
31 August 2012 Constantia's statutory capital exceeded its minimum Capital Adequacy Requirement or CAR -
a new capital measurement for short-term insurers - by more than 40%. In addition, we maintained our
Global Credit Rating of A- and improved our international solvency margin to 53% as at year-end
(29 Feb 2012: 44%). As our business develops and the regulatory environment changes, so will we continue
to refine our capital model.
In term of numbers the Insurance and Risk Services division produced very satisfying results. Operating
profit climbed to R33.8 million (31 August 2011: R6.2 million) with profit before tax topping R47.0 million
(31 August 2011: R20.3 million).
Our ultimate objective is to obtain and preserve a delicate balance between regulatory requirements, credit
rating maintenance, shareholder expectations and, of course, our own return targets. We are getting there
and I have an exceptional team to thank for it. They are truly living up to our ethos of "Insurance made
Personal".
3. CONDUIT DIRECT
In good times, when credit is abundant, consumers tend to over-extend themselves on the false expectation
that it will remain in plentiful supply. Unfortunately this is rarely the case and before long they find that they
have spread themselves and their repayment to creditors rather thin, initiating a self-fulfilling prophecy that
rears its ugly head the moment leaner times arrive. Here credit is scarce and good credit records even more
so. The debtor's conduct in earlier times has come home to roost and a debt spiral begins. Ironically, we do
not thrive at this, or the other extreme of the credit cycle. Our 'sweet spot' is somewhere in the middle; it is
at the point when credit advances are moderate and payments are consistent. It is at a time where the back
of the debt spiral has been broken and relaxed repayment terms permit the consumer a steady and
continual upkeep of payments to creditors.
Over the years our business has skilfully navigated its way through many a credit cycle and we have seen
the best and worst of both extremes. Yet, with each passing year our staff numbers grow (approximately 1
250 at last count), our skill base expands and our knowledge of an ever-changing credit landscape improves.
Though we have become a vital link in an important supply chain, we operate in a highly competitive
industry. We are all too aware of our need to stay relevant to our customers by keeping their infrastructure
cost base low, their credit recovery efficient and, most importantly, helping to maintain more of their
customers in a credit worthy state.
The Direct division's operating profit of R43.8 million reflects its expertise and standing in the industry,
bettering the prior year's performance by 30.1%.
4. BRIDGING THE GAP BETWEEN NET ASSET VALUE (“NAV”) AND EMBEDDED VALUE
It appears to be fairly common that an investment holding company's NAV serves as a proxy for its share
price. To prove the point, one need look no further than our own share price and how closely it tracks our
NAV. Arguably, this would have been a reasonable basis for valuing Conduit in the past. Today, such a
methodology would, in our minds, significantly undervalue the combined worth of our various business units.
For now, we shall limit our explanation to a few observations in relation to both the Insurance and Risk
Services division, as well as the Direct unit.
The Insurance and Risk segment is comprised of businesses that bear risk and those that don't. The
businesses that do - the insurance licenses - have a considerable amount of capital on the balance sheet in
the form of cash and a modest spread of other asset classes. At year-end this number stood at
R117.8 million. For valuation purposes, it would be reasonable to place a pure R1 for R1 value on this
capital (Part 1). Then there is the float and the value of the 'free' interest that we earn on the "free" capital.
This we estimate would be worth no less than R28.2 million, even on the most conservative of discounted
cash flow calculations (Part 2). The next component is the underwriting activity and the value of the
underlying book. Though the ability to write and retain premium is a function of and certainly has a direct
correlation with capital, the profitability of it is not. In this case the value is more subjective and by looking
at the operating profit line we consider our estimate of R90.6 million to be rational (Part 3). Finally there is
the pure value of our interests in non-risk businesses, to which we have merely attributed a modest value
equivalent to our share of any cash surplus to working capital requirements within these entities (Part 4).
The aggregation of parts 1, 2, 3 and 4 reveal a value of R255.4 million.
The explanation for the Direct division is far easier. It is held on our balance sheet at R19.7 million and has
remained unadjusted since 2006. This year it produced profits before tax of R44.6 million. Incidentally, our
share of dividends this year alone amounted to R16.8 million. Using a similar discounted cash flow model to
the one applied in the Insurance division calculation, our valuation of R99.3 million to us seems reasonable.
So, if we add up the parts and add to that the cash and investments elsewhere in the group, we arrive at a
conservative total embedded value of R372.8 million, translating into 146.3 cents a share. We shall let you
decide if this represents fair value. In future reports we intend to articulate our view in much greater detail.
5. CONCLUSION
With Group turnover breaching the R1 billion mark (R1.07 billion), operating profit sharply up and headline
earnings rising by 49.2% to R32.2 million or 12.7 cents a share, there is certainly room for optimism.
Investors will note a change of tone in our report. This year it is far more revealing of our psyche as a
business and how we see our operations in a practical and hopefully understandable way. Going forward, we
will expand this thinking and provide shareholders with greater insight into our activities in a manner and
form that cuts through the jargon and enables existing and prospective investors to make informed decisions
about their current or future investment in Conduit Capital Limited.
For and on behalf of the Board
Jason D Druian Lourens E Louw
Chief Executive Officer Financial Director
Johannesburg
22 November 2012
Directors:
Executive directors: Jason D Druian (Chief Executive Officer), Lourens E Louw (Financial Director),
Robert L Shaw, Gavin Toet
Non-executive directors: Reginald S Berkowitz (Chairman), Scott M Campbell, Richard Bruyns, Günter Z
Steffens OBE
Company secretary:
Probity Business Services Proprietary Limited
Third Floor, The Mall Offices, 11 Cradock Avenue
Rosebank, 2196
Registered address:
Unit 7 Tulbagh, 360 Oak Avenue
Randburg, 2194
PO Box 97, Melrose Arch, 2076
Telephone: 011 686 4200
Facsimile: 011 789 3709
Transfer secretaries:
Computershare Investor Services Proprietary Limited
Ground Floor, 70 Marshall Street, Johannesburg, 2001
Sponsor:
Merchantec Capital
Auditors:
Grant Thornton
Chartered Accountants (SA)
Registered Auditors
Date: 22/11/2012 10:15:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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