ADCORP HOLDINGS LIMITED - Operational update, restatement of prior period results and trading statement for the year ended 28 February 2018

Operational update, restatement of prior period results and trading statement for the year ended 28 February 2018

Adcorp Holdings Limited
(Incorporated in the Republic of South Africa)
(Registration number 1974/001804/06)
Share code: ADR & ISIN: ZAE000000139
("Adcorp" or "the Company" or “The Group”)

OPERATIONAL UPDATE, RESTATEMENT OF PRIOR PERIOD RESULTS AND TRADING STATEMENT FOR
THE YEAR ENDED 28 FEBRUARY 2018

Operational update

Group revenue decreased by 3% in FY2018. Revenue for the Adcorp Industrial Services business was
flat for both South Africa and Australia operations. Adcorp Professional Services continued its strong
trajectory in both South Africa and Australia, with 11% revenue growth in South Africa. Australian
topline for Professional Services was down by 12%, largely due to the off-boarding of certain low
margin clients, which benefitted the EBITDA for this division. Adcorp Support Services revenue
declined by 9% on the back of a challenging year for the business. The Financial Services business had
a strong year, with revenue growth of 17% while the Training business had a tough year which
resulted in revenue declining by 29%.

As per the reconciliation on prior year earnings provided under the section “Restatement of prior
period results” below, the EBITDA for 2017 was restated to R373 million excluding the impact of
transaction costs incurred in 2017. This restatement arose due to the classification of the losses from
the Rest of Africa operations as discontinued operations, in addition to some prior year adjustments.

The Group EBITDA for the year grew by 4% to R387 million compared to the above restated 2017
results, excluding once-off costs. This was largely driven by the following:

   .   EBITDA for the Professional Services segment grew by 15% from prior year to R265 million,
       with Professional Services Australia’s EBITDA increasing by 6% while Professional Services
       South Africa EBITDA grew strongly by 21%. The increased profitability for the Professional
       Services segment was driven by continued growth in the traditional resourcing business. The
       emerging recruitment process outsourcing (RPO) and managed service provider (MSP)
       solutions continue to gain traction with clients and exceeded the targets for the year. The
       segment has also benefited from increased volumes in the higher margin, permanent
       placements and projects businesses.
   .   Industrial Services Australia had a strong year, with 67% improvement in EBITDA. This has
       been driven by recovery in profitability for DARE, which has benefited from the strategy of
       diversifying its exposure from oil and gas into other heavy engineering sectors.
   .   Financial Services posted solid results following a good trading year, with EBITDA growth of
       11% to R58 million. This was bolstered by the card payment business posting a profit for the
       first time this year.
   .   Central overheads for South Africa, excluding once-costs, reduced from prior year by R101
       million to R324 million. This is part of the new management team’s ongoing process to right
       size the business and ensure that it is efficient and optimal.

   These strong gains were reduced by:

   .   EBITDA for Industrial Services South Africa was down by 15% on prior year to R338 million.
       This was largely as a result of the closure of Fortress, which was a Payroll Bureau business
       providing upfront funding of client payrolls. This business has been wound down due to the
       business being non-core as well as serious credit control weaknesses that resulted in
        significant accounts receivables write-offs in the current year. Management believe that the
        core of the Industrial Services South Africa business remains solid, and are in the process of
        driving structural and process efficiencies into that segment.
   .    The Support Services segment EBITDA declined by 30% to R49 million. Various strategic
        options have been tabled for implementation in FY2019, including aligning back office
        infrastructure to Industrial Services South Africa in order to drive economies of scale and
        reduce the cost base of the business.
   .    The Training division incurred an EBITDA loss of R33 million for the current year. There is a
        significant project underway to completely restructure this business. The restructure will
        result in the closure of loss making revenue streams and align the Training business to the
        strategic imperative of the Group.

Once-off costs of R251 million were incurred in the current year. These include R115 million that was
written-off of for non-recoverable accounts receivable (largely from the recently shut-down Fortress
business); R50 million retrenchments costs, resulting in a 260 headcount reduction both at executive
and junior level, which will have significant benefits for the next financial year; R51 million of
restructure costs that include severance costs for exiting the Group’s offshoring contract, new
software implementation as well as debt refinance costs for the exit of the DMTN programme and
R1.150 billion working capital facility implementation. These activities position the business well for
the future.

Repositioning the Group

The financial period under review has been transformational for the Group, with a change in
leadership at both board and management level and a clear objective to reposition the Group for
sustainable growth and profitability. The focus for the new leadership team has been on the following
key areas:

   1.   To build a strong business that is focused on leveraging its core;
   2.   Ensure that the business is lean and agile;
   3.   Strengthen the brand; and
   4.   Transform the culture.

These initiatives are being implemented and will be discussed in further detail during our final
investor roadshows. A few highlights include:

   .    Strategic reviews of all the operating segments, including the Support Services and Training
        businesses, have been completed. The Group is now able to identify and dispose of non-core
        businesses, realign underperforming businesses and address underperforming revenue
        streams. These reviews enabled the leadership team to gain a firm understanding of the key
        levers required to facilitate future sustainable growth for the Group.
   .    Robust working capital management practices have been implemented, and, as reflected by
        the R115 million write-off above, a clean-up of the debtors’ book has been undertaken in
        order to ensure that the Group is not exposed to further significant write-offs going forward.
        The Group brought back in-house the previously offshored order-to-cash cycle. The transition
        was completed in November 2017, enabling Adcorp to commence a process to improve the
        underlying credit vetting and collections procedures. This should be improve debtors’
        collections for the Group as well as result in operating expense savings going forward.
   .    An evaluation of historical acquisitions has been performed to ensure alignment of the costs
        of acquisition versus the current value derived from acquired businesses before strategic
        restructuring. This has resulted in the write-off of goodwill amounting to R478 million for the
        current year.
        .   The review of the medium to long term prospects for the Rest of Africa operations culminated
            in a decision to exit these operations. The results for the year include the related operational
            losses and impairment adjustments.
        .   As previously announced to the shareholders through SENS, the Group concluded the sale of
            its associate, Nihilent. The current year results include pre-tax profit on the disposal of R185
            million. The Group obtained net cash proceeds of R305 million that were applied towards
            reducing borrowings.
        .   In December 2017 the Group successfully exited the South Africa Domestic Medium Term
            Note (DMTN) program, repaid all outstanding Notes and replaced this funding with a revolving
            working capital facility. The facility affords the Group access to R1 billion plus a seasonal
            accordion facility of R150 million. The terms of the new funding facility are more aligned with
            Adcorp’s requirements and afford the Group the opportunity to manage its cost of funding.

            The refinance, together with the additional R305 million repayment of borrowings from the
            proceeds on disposal of our share in Nihilent, significantly reduced funding costs in the second
            half of the year, and the total annual net interest was 14% down from FY2017.

Restatement of prior period results

There are prior year adjustments that are included in this year’s results, meaning that current year
comparative balances will differ in some respects to those reported in FY2017. In addition, the
financial results relating to the Rest of Africa have been disclosed retrospectively as discontinuing
operations, in line with the requirements of International Financial Reporting Standards. The
reconciliation below provides a high level overview of the impact:

                                                     Operating   Loss After      (Loss)      Headline (Loss)     Total
                                          EBITDA
               Reconciliation:                         Profit       Tax       Earnings Per    Earnings Per       Assets
                                          (R’000)
                                                      (R’000)     (R’000)        Share           Share          (R’000)

    As reported in FY2017                 303 786    130 310     (160 326)      (149,5c)         (28,0c)       5 744 072
    -    Transfer of the Rest of Africa
         losses to discontinuing          94 462      97 717      148 758       137,3c           137,3c        (288 993)
         operations
    FY2017 continuing operations
                                          398 248    228 027     (11 568)       (12,2c)          109,3c        5 455 079
    before prior year adjustments
    -    Impact of prior year
                                          (25 209)   (26 149)    (32 089)       (29,6c)          (29,5c)       (14 533)
         adjustments
    FY2017 continuing operations
    restated for impact of prior year     373 039    201 878     (43 657)       (41,8c)          79,8c         5 440 546
    adjustments
    Total restated FY2017 continuing
                                          278 577    104 161     (192 415)      (179,1c)         (57,5c)       5 729 539
    and discontinuing operations



Trading statement

In terms of the Listings Requirements of the JSE Limited, companies are required to publish a trading
statement as soon as there is a reasonable degree of certainty that the financial results for the period
to be reported upon next will differ by at least 20% from the financial results for the previous
corresponding period.

Adcorp shareholders are therefore advised that the results for the year ended 28 February 2018 are
expected to be as follows:

.       Basic loss per share of between 500 cents and 530 cents per share compared to the restated basic
        loss per share of 179,1 cents for the year ended 28 February 2017.
    This amount arises from both continuing and discontinuing operations as follows:

       o Basic loss per share from continuing operations of between 380 cents and 400 cents per
         share compared to the restated prior year basic loss per share from continuing operations
         of 41,8 cents.
       o Basic loss per share from discontinuing operations of between 120 cents and 130 cents
         per share compared to the restated prior year basic loss per share from discontinuing
         operations of 137,3 cents, representing a decrease of between 6% and 14%.

.   Headline loss per share of between 140 cents and 160 cents compared to the restated headline
    loss per share of 57,5 cents for the year ended 28 February 2017.
    This amount arises from both continuing and discontinuing operations as follows:

       o Headline loss per share from continuing operations of between 80 cents and 90 cents
         compared to the restated prior year headline earnings per share from continuing
         operations of 79,8 cents.
       o Headline loss per share from discontinuing operations of between 50 cents and 60 cents
         compared to the restated prior year headline loss per share from discontinuing operations
         of 137,3 cents, representing a decrease of between 56% and 64%.

The financial results on which this trading statement have been based have not been reviewed or
reported on by the Group`s auditors. The financial results of the Group are expected to be published
on or about 21 May 2018.

9 May 2018
Bryanston
Sponsor: Deloitte & Touche Sponsor Services (Pty) Ltd

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