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NOVUS HOLDINGS LIMITED - Strategic Initiatives and Business Update

Release Date: 28/09/2018 15:55
Code(s): NVS     PDF:  
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Strategic Initiatives and Business Update

Novus Holdings Limited
(Incorporated in the Republic of South Africa)
JSE share code: NVS
ISIN: ZAE000202149
(“Novus Holdings”, “the Company” or “the Group”)



STRATEGIC INITIATIVES AND BUSINESS UPDATE


Introduction

Following the recent appointment of Mr. Neil Birch as chief executive officer, the Board wishes to
share details of the Group’s revised short-term strategy in relation to operational focus and capital
allocation.

With the revised Media24 Print Agreements coming into effect from 01 April 2018, the Company is
now in a position to provide more specific guidance to shareholders on the anticipated impact on
Novus Holdings and its subsidiaries’ (“Group”) normal future headline earnings. A previous SENS
announcement dated 26 March 2018 provided the quantum of potential revenue and margin
reduction but was unable to quantify the extent to which mitigating actions would offset such
reductions. With five months history of trading under the new contractual conditions and other
market influences, Management considers it prudent to now provide the market with more reliable
estimates of the potential resultant full year’s impact.

Strategic initiatives

Given the mature nature of many of the segments in which the Group operates, real meaningful
growth can only be achieved through diversification. Until recently the Group had embarked on a
diversification strategy, resulting in only limited additions to the Group’s revenue and profit. Under
the circumstances it has been decided in the short term to curtail the acquisition drive, focus
internally to consolidate and stabilise existing businesses and to maximise sustainability and cash
generating ability.

Whilst the tissue manufacture investment may have been appropriate in principle at the time of the
acquisition, implementation of the acquisition strategy was less than optimal and subsequent
further investment in the facility was not effective. Management is now singularly focussed on
minimising trading losses in this business with the view of exiting the business with an optimum
capital recovery.

In October 2017 the Group acquired the ITB Plastics flexible packaging business. The business has
been successfully integrated into the Group, but the opportunity to ensure anticipated further profit
contribution and growth needs to be supported by further Group Management involvement. The
generally difficult South African economic market conditions are placing pressure on this
consumption linked business volumes but the ITB Plastics Management is responding well in
managing these current pressures.

The print segment continues to adjust to the new operating environment post the Media24
Agreement changes and will continue to pursue opportunities for enhanced efficiencies and capacity
utilisation going forward.

When considering the Group balance sheet strength and anticipated sustainable earnings it must be
conceded that the return on capital invested is suboptimal at present. The internal focus is being
shifted to a more aggressive asset management philosophy, improving returns and disciplined
growth.

With the sustained cash generation, curtailed acquisition process, and general approach to better
utilising assets the Board will strive to return “lazy capital” to shareholders in the short term. The
process already initiated following the 2018 AGM is that of a buyback of shares in addition to a
successful repurchase of odd-lot shares, these processes have to date yielded a total of 3.9% of
Novus Holdings shares being bought by the Group. Subject to any cash flow constraints, asset
liquidations, and limited gearing the Board will continue to assess the possibility of further Novus
Holdings share repurchases.

Novus Holdings has maintained a Level 4 B-BBEE rating which is a minimum requirement of a
number of its key customers but if Novus Holdings is to lead transformation in this segment and to
stand above its competitors in pursuit of sustained volumes, further decisive action will be required
in this regard. The Novus Holdings Board has endorsed a non-dilutive suite of actions to improve the
company’s B-BBEE rating meaningfully in the short term and thereby provide a compelling argument
for increased customer support.

In summary, Novus Holdings will during the next 12 months at least;
    -   Focus priorities for capital allocation towards increased shareholder returns and portfolio
        optimisation, curtailing the acquisition-led diversification programme.
    -   Focus internally on operational efficiency gains and disciplined capital spending.
    -   Stabilise the management structure to suit current requirements.
    -   Enhance balance sheet utilisation.
    -   Pursue transformation and an improved B-BBEE rating.


Business update

Following the finalisation of the Media24 Print Agreements the Group engaged immediately in the
restructuring of operational facilities and capacity to match the contractual loads and to extract
operational costs where possible.

Due to the dynamic product mix between Print, Labels, Tissue and Flexible Packaging, it is difficult to
predict margins and to identify the impact directly attributable to the Media24 Print Agreement
changes. The below table is designed to assist in understanding the historic and future margin
ranges for the Group and its various sub divisions.

Historic and projected gross margin by segment
 Segment                           Gross margin for 12 months          Forecast gross margin ranges
                                   ended 31 March 2018                 for 12 months ending 31
                                                                       March 2019
                                   %                                   %
 Print                             28,7                                25 - 27
 Labels                            24,7                                23 - 25
 Flexible Packaging*               14,0                                13 - 15
 Tissue                            (10,9)                              (5) - 0
 Group                             26,2                                22 - 24

Based on the actual trading experience for the five months to 31 August 2018 and segmental
forecasts to 31 March 2019 the Group is anticipating the following range of revenue in the operating
segments.

Historic and projected revenue by segment

 Segment                           Revenue for 12 months ended         Forecast revenue ranges for
                                   31 March 2018                       12 months ending 31 March
                                                                       2019
                                   R’m                                 R’m
 Print                             3 634                               3 010 - 3 330
 Labels                            210                                 240 - 270
 Flexible Packaging*               265                                 490 - 550
 Tissue                            175                                 200 - 220
 Other                             24                                  -
 Group                             4 308                               3 940 - 4 370

*ITB Plastics acquired from 01 October 2017, therefore results are included for the six month period
in 2018 year and projected for a 12 month period in the 2019 year.

Historic and projected range of headline earnings per share in cents

                Year ended 31 March 2018                Forecast year ending 31 March 2019
                       102 c                            between 50 c and 60 c

The abovementioned forecasts are based on the undermentioned key assumptions, namely;
    -   Reduced demand from consumers and competitive pricing from competitors in response to
        general economic conditions.
    -   Retention of existing print contracts in the normal course of business.
Already factored into the above projections are the following;
    -   An estimate of the impact of the recent weakening in the Rand and the extent to which such
        resultant material cost increases can be recovered from the market for the remainder of the
        financial year. Should the Rand weaken still further than currently anticipated there could be
        additional negative impact on earnings.
    -   ITB Plastics experienced industrial action in the month of August 2018 with a 27 day plant
        closure, the issue has now been amicably resolved but gross margin and trading profit were
        negatively impacted and such impact has been factored into forecast revenue and earnings.
    -   Tissue profitability has improved but unfortunately continues to contribute negatively to
        Group profits.
    -   Revenue forecasts for the balance of the year are based on operational managements’ views
        on likely sales success in the various segments taking into account current market sentiment,
        but should market sentiment deteriorate substantially, such forecasts may require revision.


The earnings forecast range is in terms of Headline earnings per share as this is seen as a realistic
comparative for sustainable earnings and cash generation. The Group has a policy of a dividend
cover that is based on Headline earnings. Dividends are proposed after assessing the liquidity needs
and cash resource requirements for the Group. Whilst the Group does employ a policy to protect
against general currency volatility the impact of sustained Rand weakness at current levels over an
extended period may have negative influences on Group revenues and profits.

Whilst further asset impairments are not specifically contemplated at this time, Management will
continuously assess any assets that may be impaired from the strategic initiatives. Management will
continue to be critical of balance sheet values if any non-performing assets that are identified to be
sold or abandoned. The Board and Management did take a view on impairment values in relation to
the Tissue business as at 31 March 2018 and further clarity on that value should become apparent
by the end of the current financial year.

This content has not been reviewed or reported on by Novus Holdings’ external auditor.

By order of the Board

Cape Town
28 September 2018
Sponsor Investec Bank Limited

Date: 28/09/2018 03:55:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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