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ARB HOLDINGS LIMITED - Unaudited interim results for the six months ended 31 December 2019

Release Date: 13/02/2020 08:15
Code(s): ARH     PDF:  
 
Wrap Text
Unaudited interim results for the six months ended 31 December 2019

ARB Holdings Limited
Registration number: 1986/002975/06
Share code: ARH
ISIN: ZAE000109435
("ARB" or "the company" or "the group")


Unaudited interim results for the six months ended 31 December 2019


Key financials

-   Revenue up 4.5% to R1 418m
-   Operating profit up 16% to R106m
-   Net profit after tax up 33% to R85m
-   Earnings per share (EPS) up 41.3% to 32.87 cents
-   Headline earnings per share (HEPS) up 40.9% to 32.65 cents
-   In line with past practice, no interim dividend is declared
-   Cash generated by trading activities up 17% to R114m
-   R85m net cash on hand


Financial performance

The group's revenue for the period increased by 4.5% to R1.42bn (2018: R1.36bn). The electrical division turnover decreased
by 4.5% to R1.04bn (2018: R1.09bn), due to the continued lack of major infrastructure projects with the low levels of economic growth.
The lighting division’s turnover increased by 36.1% to R396m, due to the inclusion of the newly acquired Radiant’s trading
for the first time.

The group’s operating profit increased by 16.0% to R106.3m (2018: R91.6m) at an operating margin of 7.5% of revenue (2018: 6.8%).
The gross margin increased by 1.6% to 25.1% (2018: 23.5%), due mainly to the new Lords View distribution centre (DC) rebates
received and the sales contributed by Radiant, while the expenditure grew only due to the inclusion of Radiant lighting
and foreign exchange losses. The group continues to be cash generative from trading activities, and remains largely ungeared,
other than for the IFRS 16 Right-Of-Use lease liabilities. The group has net cash on hand of R84.9m (2018: R147.8m), after payment
of dividends during the reporting period of R62.0m (2018: R109.3m). Net interest received decreased by 78.7% to R6.7m (2018: R12.6m),
with the interest expense recognition aspect of the IFRS 16 Right-Of-Use liability for the first time (R3.9m); investments over
the last two years of R296m, which related mainly to the erection and fitting of the Lords View DC; the acquisition
of Radiant Lighting (R96m) in the prior year and improvements to the Radiant properties of R19.0m. This latter expenditure
is an investment in the future and represents significant rationalisation in the lighting division’s infrastructure footprint.

Despite strong management focus, the investment in working capital increased by R98.0m. The major portion of this resulted from
the annual payment of accounts payable due to the earlier Chinese New Year and more stock having to be imported and paid for earlier
in the December season cycle. In addition to this, Eurolux has increased stock levels to improve service levels to chain stores.
Given the depressed sales in this sector, significant focus will be placed on stock levels in this division in the second half
of the year.

Shareholders have previously been advised that the valuation of the put option liability in favour of minority shareholders
in Eurolux is volatile and may increase or decrease in the short term due mainly to changes in the share price. The group’s EPS and HEPS
for the six months to December 2019 have increased by 7.06 cents per share as a result of the IFRS fair value adjustment of the put
option liability. This adjustment has resulted in an increase in profit for the period of R6.0m (2018: a reduction in profit of R10.6m),
with the net effect of a year-on-year change of R16.6m.

The Eurolux minority put option is reflected as a current liability of R54.0m (2018: R75.1m). These non-controlling shareholders may
now put their shares to the group but have not indicated any intention to do so. The CraigCor minority put option liability of R20.0m
is exercisable in March 2023, and is reflected as a non-current liability. These liabilities are calculated in terms of a formula
as set out under the basis of preparation set out below and in note 22 to the June 2019 annual financial statements, which are available
on the group’s website.


Divisional reviews

For management focus, the group is currently organised into three operating divisions. This is the basis on which the group reports
its primary segmental information.

Principal activities are as follows:

- Electrical - distributors of electrical products across three main categories: power and instrumentation cable, overhead line
  equipment and low voltage products;
– Lighting – distributors of halogen, fluorescent and energy-saving LED lamps, light fittings and electrical accessories; and
– Corporate – property owning, specialist IT services, strategic and technical consulting, group head office companies.

Electrical division (revenue decreased by 4.5% and operating profit increased by 13.5%)

This division comprises ARB Electrical Wholesalers, GMC Powerlines, ARB Global, CraigCor and CED. The electrical division’s
revenue decrease of 4.5% was a result of:
- the lack of major infrastructure projects given the continued low levels of economic growth;
- the lack of spend by Eskom on electrification projects; and
- the impact of load shedding on manufacturing and mining.

The principal focus of this division during the period under review has been to fully establish the DC at Lords View, in order
to achieve operational efficiencies at all levels and thereby ensure that the costs do not exceed the benefits of this long-term project.
The project has already contributed to increased margins for the division.

Power cable sales continued to decline with reducing margins. This is directly linked to the lack of infrastructure projects
and increased competition from manufacturers, both directly and from other cable traders. Despite the acquisition of GMC in March 2019,
the overhead line product sales have been disappointing because of the inconsistent spend by Eskom on electrification projects.
Low voltage sales, which have benefited from the connect model expansion in prior years, continue to improve and margins are being
maintained on these products.

Notwithstanding the abovementioned challenges, this division has reduced operating expenditure to achieve an increase in operating
profit of 13.5%. The focus on working capital has ensured that this division remains strongly cash generative.

Lighting division (revenue increased by 37.3% and operating profit by 2.2%)

This division comprises Eurolux, Radiant and Cathay lighting. Revenue was positively impacted by the inclusion of Radiant’s turnover
for the six months to December 2019 for the first time. This has been partially offset by the volatile exchange rate and the lack
in consumer confidence, which impacted the majority of our retailer customers.

Sales in lamps have been negatively affected by changes in technology, which have resulted in the division pursuing a strategy
of substitution with other electrical products that are less expensive and more durable. These technological changes, together
with delays in the implementation of retailer forex-related price increases, have resulted in a decline in gross margin.

This division’s focus in the last six months has been to consolidate the Johannesburg operations into the Radiant premises
in Wynberg. Originally this was anticipated to be completed by August 2019, but delays in the software integration of Radiant
resulted in the consolidation occurring over the December 2019/January 2020 shut-down period. As a result, the envisaged cost saving
from combined facilities will not be achieved until the last quarter of the June 2020 financial year.

The management of working capital, particularly stock, remains a key focus for the executive. Stock levels were particularly high
at the end of December 2019 due to the additional orders placed in anticipation of the Chinese New Year, which was considerably earlier
than in previous years.

Corporate division (revenue up by 34.9%, operating profit up by 62.5%)

This division comprises the property portfolio and Xact ERP Solutions business. The increase in operating profit has resulted mainly
from the additional rental in respect of the Lords View development from January 2019.

Given the fixed nature of the property income and the low corporate head office costs, the results are in line with expectations.

Xact ERP Solutions continues to develop a stand-alone identity relative to its target market. This division has continued to show
customer gains, but remains a small revenue and profit generator for the division.


Corporate activity and expansion

Acquisitions remain an integral part of the group's growth and expansion strategy. The board has decided to continue to explore
acquisition opportunities that may present themselves. However, the immediate focus is to fully integrate the Radiant acquisition
with Eurolux and manage the Lords View DC into an effective operating facility.


Prospects

The group foresees little or no improvement in the general trading environment, given the low economic growth forecast for South Africa.
We remain confident that the group is well positioned and has the resources to continue to build customer loyalty, to secure a fair share
of the limited project opportunities available and remain capable to take advantage of any improvement in trading conditions when
the South African economy improves.

These interim statements, including these prospects, have neither been audited nor reviewed by the company’s auditors.


Responsibility

The information in this report has been extracted from the unaudited condensed consolidated interim financial results, which have
not been audited nor reviewed by the company’s auditors. This short-form announcement is the responsibility of the directors of ARB.
This short-form announcement is only a summary of the information in the full announcement and does not contain full or complete details.
Any investment decision by investors and/or shareholders should be based on consideration of, inter alia, the full announcement.

The full announcement has been released on SENS on 13 February 2020 and is available for viewing on ARB’s website
(https://arbhold.co.za/index.php/2013-06-04-06-33-35/results) and at
https://senspdf.jse.co.za/documents/2020/jse/isse/arh/arh022020.pdf.

The full announcement is available for inspection at the offices of ARB (10 Mack Road, Prospecton, Durban, KwaZulu-Natal, 4133)
and the offices of the Sponsor, Grindrod Bank Limited (Grindrod Tower, 8A Protea Place, Sandton, 2196), at no charge during normal office
hours on business days from 12 February 2020 or may be requested by emailing info@arbhold.co.za.

13 February 2020
Sponsor Grindrod Bank Limited

Date: 13-02-2020 08:15:00
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