REUNERT LIMITED - Operational update and trading statement

Operational update and trading statement

REUNERT LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1913/004355/06)
ISIN: ZAE000057428
Share code: RLO
(“Reunert” or the “Company” or the “Group”)

OPERATIONAL UPDATE AND TRADING STATEMENT

Reunert is in the process of finalising its interim financial results (“Results”) for the six month
period ended 31 March 2020. The board of directors of Reunert (“Board”) will consider and is
expected to approve the Results on 17 June 2020, for publication on SENS on 18 June 2020.

Accordingly, shareholders of Reunert (“Shareholders”) are provided herein:
       -   with an operational update, including an overview of:
           - the trading performance of the Company before the impact of the COVID-19
             pandemic is considered;
           - the impact of various impairments raised (which were based on forward-looking
             information as required by International Financial Reporting Standards (“IFRS”))
             against the reduced economic activity and credit losses anticipated to arise from
             the impact of the COVID-19 pandemic; and
           - an abnormal item that has arisen; and
       -   the resulting trading statement.

OPERATIONAL UPDATE

Reunert experienced challenging trading conditions in the first half of its 2020 financial year.

Despite these conditions, the information communication technologies (“ICT”) segment
delivered real growth in operating profit while the Applied Electronics segment performed in line
with expectations, despite being negatively impacted by the disruption caused by the National
State of Disaster and lockdown.

However, the Results have been adversely impacted by the underperformance of the Electrical
Engineering segment due to:
       -   a seven-week labour disruption at the power cable business, resulting in limited
           production in the first quarter of the financial year;
       -   foreign exchange losses at the Zambian cable operation; and
       -   low cable infrastructure investment across the Southern African markets.

Pleasingly, the generation of free cash flow during the period under review was in line with the
Group’s historic conversion ratios, notwithstanding the difficult trading environment.

The Group’s operating profit is expected to be between R357 million and R394 million (2019:
R615 million), being a decline of between 36% to 42% in the operating profit of the prior
comparative period, with the reduction in operating profit attributable to the performance of the
Electrical Engineering segment because of the reasons outlined above.

The Group’s Results for the six months ended 31 March 2020 were impacted by impairments
arising from the predicted future impact of the COVID-19 pandemic, embodied in the uncertain
future economic conditions, which were required to be raised in compliance with IFRS.

The Results were also impacted by an external fraud that constitutes an abnormal item. The
abnormal item arose from an external whistle blower report. Thus far, the ongoing investigation
has revealed prima facie evidence that an external party, unrelated to the Reunert group of
companies, has defrauded one of Reunert’s subsidiaries, Quince Capital. An independent,
comprehensive forensic audit is in process. However, from the evidence extracted to date, a
material impairment is considered necessary and has been raised accordingly.

COVID-19

The full impact of the COVID-19 pandemic on the South African economy and on the key
international geographies Reunert serves is uncertain. However, Reunert recognises that long-
term socio-economic shifts in the economy are predicted.

Accordingly, Reunert has pro-actively strengthened its resilience towards the post COVID-19
economy by increasing its committed debt facilities to R1.0 billion and total debt capacity to
R2.1 billion. This has been coupled with a comprehensive review of its operations and significant
cost reductions across the Group to ensure that its response to uncertain market activity is
sustainable.

Reunert’s businesses resumed operations on 1 May 2020, in strict compliance with the South
African Government (“Government”) regulations. Significant effort has ensured that the health and
safety of our employees remains paramount and our operations are steadily returning to full
capacity. Key stakeholders (banks, customers, employees and unions) have all responded
positively to our efforts and we remain aligned on the actions required in the present uncertainty.

Post the COVID-19 pandemic, the Group’s infrastructure companies are likely to continue to face
volume pressures as:
       -   Government budgets are reallocated to fight the effect of the virus;
       -   the timing and scale of funding for the Government’s infrastructure plans remain
           uncertain; and
       -   private industry remains cautious about their investment plans.

These expected volume pressures, together with the reduced economic forecasts for Gross
Domestic Fixed Investment, resulted in the Group recognising impairments in the cable businesses
in the Electrical Engineering segment.

These economic predictions also indicate that debt defaults are expected to materially increase as
the economic impact of the lockdown weakens growth prospects and demand, which will have an
impact on the future recovery of Quince Capital’s finance book. As a result, a significant increase in
the impairment allowance for expected credit losses against the Quince Capital book is required.

The impairments are in accordance with the forward-looking requirements of IFRS, requiring
Reunert to consider the potential future impact of the COVID-19 pandemic on our businesses. We
believe our forecasts are realistic based on the limited information available and that the
corresponding impairments are appropriate.

The rest of the Group’s businesses have robust business models and are serving markets that are
anticipated to offer good structural growth and opportunities. They include:
       -   our renewable energy businesses;
       -   our strong export businesses in the Applied Electronics Segment and at CBi-electric:
           Low Voltage; and
       -   our ICT businesses, specifically the Communications Cluster, the Total Workspace
           Provider offerings, and our 4th Cluster, all of which focus on the provision of business-
           to-business solutions that support the future of work in our country.

The Group will continue to focus on, and fund, the execution of our strategic initiatives, specifically
targeting those businesses with the greatest potential to emerge strongly from the current COVID-
19 crisis.

TRADING STATEMENT

In terms of paragraph 3.4(b) of the JSE Limited Listings Requirements, companies are required
to publish a trading statement as soon as they are satisfied that, with a reasonable degree of
certainty, the financial results for the current reporting period will differ by at least 20% from the
financial results of the previous comparative period.

Noting the expected trading performance outlined above, the impact of the COVID-19 pandemic
and the abnormal item, Shareholders are accordingly advised that the Company has
reasonable certainty that it will report:
       -   loss per share of between 162 cents and 180 cents (2019: earnings per share of 227
           cents), being a decline of between 171% and 179% compared to the previous
           results; and
       -   headline loss per share of between 72 cents and 80 cents (2019: headline earnings
           per share of 253 cents), being a decline of between 128% and 132% compared to
           the previous results.

The information contained in this announcement does not constitute an earnings forecast. The
financial information on which this announcement is based has not been reviewed nor reported
on by the Group’s external auditors and is the responsibility of the Board.



Johannesburg
10 June 2020

Sponsor
One Capital

Date: 10-06-2020 05:10:00
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