Wrap Text
Condensed consolidated preliminary audited results for the year ended 31 August 2013
CONDUIT CAPITAL LIMITED
Incorporated in the Republic of South Africa
(Registration number: 1998/017351/06)
Share code: CND ISIN: ZAE000073128
(“Conduit” or “Conduit Capital” or “the Group”)
CONDENSED CONSOLIDATED PRELIMINARY AUDITED RESULTS FOR THE YEAR ENDED
31 AUGUST 2013
CONDENSED CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
Audited Audited
year ended year ended
31 August 2013 31 August 2012
R'000 R'000
Gross revenue 1 168 165 1 071 936
Net insurance revenue 312 578 290 784
Other operating revenue 128 702 143 817
Net revenue 441 280 434 601
Operating expenses (391 301) (369 870)
- Direct expenses: Insurance and risk services (244 226) (215 333)
- Administration and other expenses (60 744) (67 116)
- Depreciation and amortisation (3 475) (3 514)
- Employee costs (82 856) (83 907)
Operating profit 49 979 64 731
Equity accounted income 522 723
Investment income 23 268 14 116
Other income 3 719 528
Finance charges (462) (427)
Profit before taxation 77 026 79 671
Taxation (18 293) (30 418)
Profit for the year 58 733 49 253
Other comprehensive income - -
Total comprehensive income 58 733 49 253
Attributable to:
Equity holders of the parent 39 625 32 156
Non-controlling interest 19 108 17 097
Total comprehensive income 58 733 49 253
Headline earnings 39 980 32 163
Earnings per share (cents)
- Basic 15.5 12.7
- Diluted 15.5 12.6
- Headline 15.6 12.7
- Diluted headline 15.6 12.6
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Audited at Audited at
31 August 2013 31 August 2012
R’000 R’000
ASSETS
Non-current assets 167 599 149 345
- Property, plant and equipment 14 102 14 601
- Intangible assets 46 865 46 457
- Loans receivable 12 801 4 073
- Deferred taxation 13 625 9 965
- Investment properties 3 978 3 851
- Investment in associates 323 311
- Investment in jointly controlled entities 3 566 3 756
- Investments held at fair value 72 339 66 331
Current assets 860 262 752 472
- Insurance assets 389 895 357 402
- Loans receivable 4 707 11 172
- Trade and other receivables 183 120 113 513
- Taxation 6 091 413
- Cash and cash equivalents 276 449 269 972
Total assets 1 027 861 901 817
EQUITY AND LIABILITIES
Capital and reserves 327 625 288 297
- Ordinary share capital and share premium 176 704 175 917
- Retained earnings 137 354 97 694
- Share-based payment reserve - 182
Equity attributable to equity holders of the parent 314 058 273 793
Non-controlling interest 13 567 14 504
Non-current liabilities 32 365 30 840
- Policyholder liabilities under insurance contracts 19 214 19 052
- Interest-bearing borrowings 2 695 3 753
- Deferred taxation 10 456 8 035
Current liabilities 667 871 582 680
- Insurance liabilities 454 147 422 561
- Trade and other payables 207 412 152 626
- Taxation 6 312 7 493
Total equity and liabilities 1 027 861 901 817
Net asset value per share (cents) 122.5 107.5
Tangible net asset value per share (cents) 104.2 89.2
SEGMENTAL ANALYSIS
Corporate
and Insurance
Investment and Risk Consoli-
Services Services Direct dation Total
R'000 R'000 R'000 R'000 R'000
Year ended 31 August
2013
Gross revenue 8 031 1 044 688 123 254 (7 808) 1 168 165
Net insurance revenue - 312 578 - - 312 578
Other operating revenue 8 031 5 225 123 254 (7 808) 128 702
Net revenue 8 031 317 803 123 254 (7 808) 441 280
Operating expenses (14 698) (304 208) (80 203) 7 808 (391 301)
- Direct expenses: Insurance
and risk services - (244 226) - - (244 226)
- Administration and other
expenses (3 638) (33 560) (31 354) 7 808 (60 744)
- Depreciation and
amortisation (76) (1 283) (2 116) - (3 475)
- Employee costs (10 984) (25 139) (46 733) - (82 856)
Operating profit (loss) (6 667) 13 595 43 051 - 49 979
Equity accounted income - 522 - - 522
Investment income 16 626 15 945 603 (9 906) 23 268
Other income (expenses) (14) 2 748 985 - 3 719
Finance charges (3) (459) - - (462)
Profit before taxation 9 942 32 351 44 639 (9 906) 77 026
Taxation (42) (5 350) (12 901) - (18 293)
Profit for the year 9 900 27 001 31 738 (9 906) 58 733
Other comprehensive income - - - - -
Total comprehensive income 9 900 27 001 31 738 (9 906) 58 733
Attributable to:
Equity holders of the parent 9 889 26 946 12 696 (9 906) 39 625
Non-controlling interest 11 55 19 042 - 19 108
Total comprehensive income 9 900 27 001 31 738 (9 906) 58 733
Headline earnings 9 903 27 287 12 696 (9 906) 39 980
As at 31 August 2013
Total assets 177 364 938 602 44 889 (132 994) 1 027 861
Total liabilities (7 473) (799 055) (24 339) 130 631 (700 236)
Inter-segment funding (124 938) 113 370 11 568 - -
Non-controlling interest (173) (400) (12 997) 3 (13 657)
Capital employed 44 780 252 517 19 121 (2 360) 314 058
SEGMENTAL ANALYSIS (continued)
Corporate
and Insurance
Investment and Risk Consoli-
Services Services Direct dation Total
R'000 R'000 R'000 R'000 R'000
Year ended 31 August
2012
Gross revenue 6 184 938 062 132 838 (5 148) 1 071 936
Net insurance revenue - 290 784 - - 290 784
Other operating revenue 6 184 9 943 132 838 (5 148) 143 817
Net revenue 6 184 300 727 132 838 (5 148) 434 601
Operating expenses (19 090) (266 905) (89 023) 5 148 (369 870)
- Direct expenses: Insurance
and risk services - (215 333) - - (215 333)
- Administration and other
expenses (5 294) (29 548) (37 422) 5 148 (67 116)
- Depreciation and
amortisation (131) (1 204) (2 179) - (3 514)
- Employee costs (13 665) (20 820) (49 422) - (83 907)
Operating profit (loss) (12 906) 33 822 43 815 - 64 731
Equity accounted income - 723 - - 723
Investment income 17 831 12 569 516 (16 800) 14 116
Other income (expenses) (34) 312 250 - 528
Finance charges (11) (416) - - (427)
Profit before taxation 4 880 47 010 44 581 (16 800) 79 671
Taxation 35 (14 066) (16 387) - (30 418)
Profit for the year 4 915 32 944 28 194 (16 800) 49 253
Other comprehensive income - - - - -
Total comprehensive income 4 915 32 944 28 194 (16 800) 49 253
Attributable to:
Equity holders of the parent 4 904 32 774 11 278 (16 800) 32 156
Non-controlling interest 11 170 16 916 - 17 097
Total comprehensive income 4 915 32 944 28 194 (16 800) 49 253
Headline earnings 4 928 32 741 11 294 (16 800) 32 163
As at 31 August 2012
Total assets 169 084 819 335 47 545 (134 147) 901 817
Total liabilities (9 711) (706 720) (28 870) 131 781 (613 520)
Inter-segment funding (127 302) 112 334 14 968 - -
Non-controlling interest (180) (413) (13 914) 3 (14 504)
Capital employed 31 891 224 536 19 729 (2 363) 273 793
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Audited Audited
year ended year ended
31 August 2013 31 August 2012
R'000 R'000
Net cash flows from operating activities 13 609 30 629
Net cash flows from investing activities 1 695 2 372
Net cash flows from financing activities (8 827) (32 891)
6 477
Total cash movement for the year 6 477 110
Cash at the beginning of the year 269 972 269 862
Total cash at the end of the year 276 449 269 972
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Share
capital Non-
and share Retained Other controlling
premium earnings reserves interest Total
R'000 R'000 R'000 R'000 R'000
Balance at 1 September 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
Total comprehensive income for the
year - 39 625 - 19 108 58 733
Reversal of equity options - 35 (35) - -
Equity options exercised 787 - (147) - 640
Loans repaid to non-controlling
shareholders - - - (5 118) (5 118)
Dividends paid - - - (14 927) (14 927)
Balance at 31 August 2013 176 704 137 354 - 13 567 327 625
NOTES TO THE CONSOLIDATED 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 2013 (“audited results”) are based on reasonable
judgements and estimates and are in accordance with International Financial Reporting Standards
(“IFRS”) and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and
Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council. These
accounting policies are consistent with those applied in the annual financial statements for the year ended
31 August 2012. The audited results have been prepared in terms of IAS 34 – Interim Financial Reporting,
the South African Companies Act, No. 71 of 2008 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
2013 2012
’000 ’000
Number of shares in issue 256 377 254 777
- Shares in issue 256 380 256 380
- Shares held as treasury shares (3) (1 603)
Weighted average number of shares 255 982 254 181
- Shares in issue 256 380 256 380
- Shares held as treasury shares (398) (2 199)
Diluted weighted average number of shares 255 982 256 181
- Shares in issue 256 380 258 380
- Shares held as treasury shares (398) (2 199)
3. Reconciliation of headline earnings
Audited Audited
31 August 31 August
2013 2012
R'000 R'000
Profit attributable to ordinary equity holders of Conduit 39 625 32 156
Net loss (profit) on revaluation of investment properties 43 (41)
Loss on disposal of intangibles, property, plant and equipment 66 89
Impairment of associates and jointly controlled entities 267 -
Tax on the items above (21) (17)
Non-controlling interest on the items above (after taxation) - (24)
Headline earnings 39 980 32 163
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 R909 318
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. The outcome of the arbitration relating to inward re-insurance arrangements concluded in 2006
and 2007 has been determined and accounted for in the results.
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 results.
5. Directors
Mr Richard Bruyns was appointed as an independent non-executive director on 4 October 2012.
6. Dividends and other distributions
In anticipation of the capital requirements under the Solvency Assessment and Management (“SAM”)
regulatory framework and in order to accommodate growth in premium income, the board of directors of
Conduit Capital has not recommended any dividend payment to ordinary shareholders for the year ended
31 August 2013 (2012: Nil).
7. Post balance sheet events
Other than the sale of the Group's holdings in Amalgamated Electronic Corporation Limited (“Amecor”) (as
announced on SENS on 15 October 2013), there were no events that resulted in a material impact on the
Group between the reporting date and the date of publication of this report.
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.
9. Directors’ responsibility
The directors take full responsibility for the preparation of the preliminary report and the financial
information has been correctly extracted from the underlying Group financial statements.
The preliminary report is extracted from audited information, but is not itself audited.
COMMENTARY
REVIEW OF OPERATIONS
Corporate and Investment Services (Head Office and ancillary investments)
On 15 October 2013 we announced on SENS the disposal of our 27% interest in Amecor, realising R40.2
million (R2.00 per share).
At 28 February 2013 we recognised mark-to-market profits of 40 cents per Amecor share (R7.6 million after
tax); by year-end that gain had retreated 15 cents per share, reducing the profit to R4.0 million. This was
partially offset by a 10 cent (R2.0 million) dividend, resulting in a net gain of R6.0 million for the year. The
table below demonstrates that 2012 was no less turbulent.
6 months to February 6 months to August Dividend Net profit (loss)
2013 R7.6m (R3.6m) R2.0m R6.0m
2012 R8.8m (R10.9m) R1.6m (R0.5m)
At February 2014 we will book a further and final profit of 10 cents per Amecor share (or R1.6 million after
tax) on the investment, bringing our total after-tax return over the 3-year period to approximately 57%. Quite
apart from the asset being considered non-core to the Group’s future strategy, in the end the investment
proved friendlier on the income statement than on the stomach. That said, Amecor is by all accounts a solid
business and ultimately it was not the sharp fluctuations in share price from one reporting period to the next
that tipped the decision, but rather the fact that it has no future in ours.
Overall Corporate and Investment Services contributed R9.9 million to headline earnings (2012: R4.9 million)
Conduit Insurance and Risk Services (Risk and non-risk bearing businesses)
For many general (non-specialist) insurers - what the Americans call Property & Casualty - this past
underwriting year was an Annus Horribilis. If the natural perils weather losses at the end of last year (the
early part of ours) didn’t take their toll, then it fell to large fires, soft rates and anaemic motor portfolios to
undermine underwriting profitability. Fortunately for us the impact of these occurrences was less severe,
though we did have our fair share of hazards with which to contend. In May of this year, the management of
one of our long-standing underwriting agencies unlawfully orchestrated the demise of its business with the
purpose of quite literally establishing a mirror image of its former self, not next door, but behind the very
same doors. In concert with the local office of an international insurer they succeeded in diverting a large
portion of their portfolio from our Group. In favour of letting the legal process take its course we will resist
the overwhelming temptation to name and shame the individual perpetrators. While in time lost business will
be replaced by other opportunities (and there are many), for now we are left with little choice but to wipe the
trickle of blood from our somewhat out of joint noses and write down the investment. The flip side of this
particular coin is that some of the volatility brought about by the portfolio in question has been quite
unintentionally ameliorated.
Whilst it is true that most risks or potential hazards can be priced, pricing for moral ones will always prove
more difficult.
A stellar underwriting year it was not, yet once again we proved our resilience. Gross Premium Income
advanced by 11.4% to R1.04 billion and Net Premium Income increased by a more modest 7.5%. The
advances are respectable but only meaningful if they produce profit. We stand firm in our view that chasing
premium growth at the expense of quality remains a vain pursuit, serving to do no more than to create more
claims. Emphasis remains on quality, not quantity!
There is abundant opportunity for us in what has become a very cluttered and competitive market. Though
we fight in the same arena, our business is distinguished by diversity in niched insurance classes that rely on
specialised skills, which serve as barriers to entry for most insurers.
We have good reason to expect great things of our Insurance group in the coming years.
Conduit Direct (Credit management and debt recovery)
The marginal improvement in turnover and profit in the Direct division is to be commended. The division’s
overall client spread and individual client portfolio numbers are at record levels, still the impact of cautious
lending practices for the past 2 years (despite what you may have read) has affected the true underlying
portfolio volume. Practically, while we wait for the credit cycle to turn (which it eventually will) we continue to
invest in technology with the aim of increasing production and not head count.
With effect from 1 September 2013 we no longer account for Anthony Richards and Associates Proprietary
Limited (“ARA) as a subsidiary. Our control was not contractually entrenched and enjoyed over the last 8
years only through board representation. We are entirely satisfied that this aligns with the Group’s future
strategic direction (see below) and for the time being represents no more than a cosmetic alteration in our
reporting.
The Direct division contributed a respectable R12.7 million to headline earnings, bettering last year’s
performance by 12.4% having benefitted from a lower tax charge. It is also noteworthy that ARA was recently
accorded a level 2 B-BBEE rating, further embedding its status as an industry leader.
Strategic direction
Historically, the Group has been perceived as an Investment holding company with interests in Insurance,
Credit recovery and debt management and (until recently) a peripheral investment in an electronics
enterprise. This impression has been driven largely by the relative contribution of our investments to
profitability and in all probability simply because we have not stated otherwise. It does however belie the fact
that over the past few years the majority of our time, head office resource and capital have all been
deliberately herded in the direction of our insurance segment.
By nailing our flag to the insurance mast we eliminate any room for confusion and squarely position ourselves
as an Insurance Group. In order to formally effect this change, application will be made to JSE Limited to
transfer our listing to the Insurance sector. As the Direct division will no longer be consolidated, it will be
assimilated into the Corporate & Investment Services segment.
Our shareholders are no doubt wondering what we intend doing with the spoils of the Amecor transaction.
Though the undiluted answer is that we intend to keep it, it does require further explanation. By April of
2014 insurers are required to submit the results of QIS3, the quantitative impact study, before the final
implementation SAM in January 2016. It is the product of that study that will ultimately determine the capital
course for all insurers. All indications are that between SAM and our present underwriting prospects, we will
soak up the R40 million with ease. Until then the capital will be invested wisely and strictly in accordance with
our investment framework. We know that a distribution may please some shareholders (and annoy others)
but it would simply be an irresponsible action given our foreseeable future.
Change of year-end
It is anticipated that prior to the introduction of SAM, Conduit will change its year-end. The motivation for the
change lies primarily in the likely increase in reporting requirements that will result in undue strain on staff
resources over the Christmas period. It would have been ideal to follow the current February and August
reporting cycle, however JSE rules dictate that year-end movements are limited to a maximum period of three
months at a time. When the time does come, we will certainly ensure that our financial reporting provides a
suitable basis for comparison with the prior period.
Embedded value update (our conservative valuation of the Group)
At interim stage we compared our embedded value calculation with the most recent (and only other)
valuation available, being 31 August 2012. We now have the advantage of providing a more meaningful year-
on-year comparison. For the purposes of this report, and indeed future ones, we will only compare year on
year values. At interim stage we will speak purely to the operational result.
It was almost prophetic when at interims we drew shareholder attention to the potential for movements in
the risk free rate to influence valuations. And so it came to pass. In just 6 months the risk free rate - the
return that the man in the street can get on a long-term government bond - moved significantly upwards.
Good for him/her, not so good for our embedded value calculation. Basically, as the rate goes up the cost of
capital or equity - a fundamental building block in the discounted cash flow model - also rises. On the
assumption that the rate of earnings growth remains unchanged, the cost of capital effectively increases as
you, the investor, are prepared to pay less for the asset in order to achieve a higher rate of return. The
negative impact of this change is fully accounted for in this year’s valuation.
We have grouped our explanatory notes (with some repetition for your convenience) and tabulated the
numbers in exactly the same format and under the same headers as they appeared in the interim results to
28 February 2013.
Insurance and Risk activities
Parts 1 through 3 represent our RISK activities and Part 4 the NON-RISK component.
Part 1 - Cash and investments is comprised of assets invested in equities, bonds and investment funds,
taken at market value and added to the face value of the cash in excess of our insurance float and working
capital requirements.
Part 2 - The net present value of the expected returns on our Insurance float.
Part 3 - The value of the Insurance book utilising 36 months of underwriting performance data and
moderate growth assumptions
Part 4 - Our share of cash surplus to working capital in our NON-RISK bearing investments, plus a modest
amount attributable to the equity portion.
Direct activities
Part 5 - Direct accounts for our 40% interest in ARA.
Other
Part 6 - Other comprises investments in fixed property and the majority of our shareholding in Amecor. As
before, unallocated group operating costs are accounted for as negative value adjustments.
August 2013 August 2012
Corporate &
Investment Insurance &
Services Risk services Direct Total Total
Part R'000 R'000 R'000 R'000 R'000
1 RISK: Cash and investments - 156 758 - 156 758 117 790
- Surplus cash - 116 778 - 116 778 78 731
- Investments held at fair value - 39 980 - 39 980 39 059
2 RISK: Insurance float - 47 262 - 47 262 28 211
3 RISK: Insurance operations - 135 393 - 135 393 90 553
4 NON-RISK - 19 045 - 19 045 18 843
- Investment in associates - 260 - 260 -
- Investment in joint ventures - 3 482 - 3 482 -
- Surplus cash - 15 303 - 15 303 18 843
5 DIRECT - - 96 285 96 285 99 278
6 OTHER 10 543 13 007 - 23 550 18 127
- Investments held at fair value 31 406 - - 31 406 27 273
- Operations (20 863) - - (20 863) (22 054)
- Properties - 13 007 - 13 007 12 908
TOTAL 10 543 371 465 96 285 478 293 372 802
Number of shares in issue, net of
treasury shares ('000) 256 377 256 377 256 377 256 377 254 777
Embedded value per share (cents) 4.1 144.9 37.6 186.6 146.3
Conclusion
The word ‘colourful’ would best describe 2013. Under trying conditions we managed to deliver headline
earnings of R40.0 million or 15.6 cents equating to an annualized return on equity of 14.5% (20.1% pre-tax),
up considerably on a return of 12.1% a year ago. We are all too cognisant of the fact that there is little point
in hoarding capital if it does not deliver satisfactory risk-adjusted returns. In our instance the trend is positive
and we are hard at work to achieve our targeted after-tax return of 20% over time. With R310 million in cash
and investments at year-end, we certainly have the tools to ply our trade. I am confident of our team will
prove as formidable as the Group’s balance sheet.
We do look forward to our new incarnation as an Insurance Group.
For and on behalf of the Board
Jason D Druian Lourens E Louw
Chief Executive Officer Financial Director
Johannesburg
18 November 2013
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)*, Richard Bruyns*, Scott M Campbell*, Günter
Z Steffens OBE*
* Independent
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: 011 886 0206
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: 18/11/2013 04:27:00 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.
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