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Chief Executive's Report
The group’s current composition and momentum is underpinned by deep strategic insight into the media industry, great innovation and entrepreneurshipOVERVIEWI am happy to report to all our stakeholders that Primedia delivered a record set of results in the year under review and made substantial progress across all operations against the strategic objectives set out at the start of the year. Primedia is extremely proud to have produced another excellent set of results for the period under review and is pleased to report record revenue performances for both the advertising and content divisions. The group’s current composition and momentum is underpinned by deep strategic insight into the media industry, great innovation and entrepreneurship, as well as a management team focused on implementing a world-class strategy, which should deliver consistent and above-average returns and cash distributions to shareholders. FINANCIAL HIGHLIGHTSThe momentum at the interim stage was evident for the full year, with revenue increasing 23% to R2,4 billion, with both the core advertising and content divisions growing their revenue by 24% and 22% respectively and both divisions breaching the R1 billion mark for the first time. Group EBITDA surpassed the R0,5 billion mark for the first time, rising 28% to R531,4 million (2005: R415,0 million). After depreciation and software amortisation of R70,4 million (2005: R61,8 million) this translated into PBIT of R461,0 million, which was 31% higher than last year (R353,2 million). A once-off expense of R108,4 million, amounting to 48 cents per share, was recognised in terms of IFRS 2 (share based payment) and related to the group’s BEE initiative which involved the issue of 8 million N ordinary shares to Mineworkers Investment Company at par value. The result of this transaction, as well as many other transformation initiatives that have been embarked upon by Primedia over many years, has assured Primedia’s ranking as South Africa’s most transformed media company for the second year in a row. Headline earnings per share (“HEPS”) before the once-off BEE expense increased by 32% to 125 cents. The group generated after tax free cash flow of R304,4 million which exceeded headline earnings of R281,8 million (excluding the once off BEE cost) by 8%. Due to the group’s continued good free cash flow generation and sound financial standing, the group reduced its distribution cover (based on adjusted HEPS before BEE cost, IFRS share option costs and unrealised foreign exchange losses) for the full year to 1,5 times, resulting in a full year distribution of 85 cents (up 52%). The group successfully issued R150,0 million of perpetual preference shares which has strengthened the company’s balance sheet. Notwithstanding the significant cash returned to shareholders (R289,9 million) as well as R142,8 million spent on acquisitions, the group’s net debt reduced from R322,0 million to R282,6 million due to the group’s high free cash flow generation and the R150,0 million raised from perpetual preference shares. STRATEGIC REVIEWA benchmarked, world-class strategy drives Primedia's performance. The group continues to track global media trends and monitor best practices and this allows it to be proactive in identifying global opportunities that are appropriate to the local media market place. The group's leadership of the South African “out of home” media spectrum is pervasive and includes radio in the car, billboards, commuter media, airport advertising, shopping mall media, wash room advertising, in-store media and cinema advertising. As the world becomes more digitally centric and audiences more fragmented, Primedia's out of home media presence is assuming far greater importance to its clients and advertisers. Using digital technology to enhance existing traditional delivery channels (thereby increasing revenue and reducing distribution costs) Primedia is able to capitalise on global trends and opportunities from the digital world, including the increasing consumption of digital media by consumers. Delivering on the group’s strategic priorities for 2006At the beginning of the 2006 financial year, the group outlined five key strategic priorities for the short to medium term, namely:
Product supply problems in the filmed entertainment business were resolved in November 2005, and excellent progress has been made at the Ster-Kinekor Junction sites, where cinema ticket prices have been significantly reduced. Black consumer attendances across Ster- Kinekor's cinemas now stand at an impressive 36% (2005: 14%). Revenue at the Ster-Kinekor Junction sites increased by 42% subsequent to the resolution of the product supply problems as compared to the corresponding prior period. Taking into account the slower rate of revenue growth at the Ster-Kinekor Classic sites, Ster-Kinekor Theatres’ overall revenue has increased by 20% over the same period. On the back of targeted acquisitions, the financial objective originally set to attain critical mass at Primedia Unlimited Advertising was an annualised PBIT of R20 million. Although the division fell marginally short of this financial objective, much progress has been made, which will translate into significantly improved results for 2007. Unlocking the value of the group's sports assets is a medium- to long-term focus. Satisfactory progress has been made in positioning Primedia as the preferred media partner to corporate South Africa for the FIFA 2010 World Cup. The recent acquisitions of an 80% stake in Powerview (South Africa’s leading supplier of digital perimeter advertising boards at sports stadia, now renamed Megaview), and a 70% stake in Warwick Sport and Media (a leading hospitality operation) by Primedia Sport are both relevant in this regard. Content businesses currently contribute approximately 20% of the group's operating profit. The group's medium- to long-term objective is to generate between 30% and 40% of its operating profit from content, which is a less cyclical earnings driver. The achievement of this target remains a significant challenge, given the fact that the advertising businesses continue to grow robustly. However, it is of key importance that the group continues to increase the size of its existing content businesses, and to diversify into new areas. The improved performance of Ster-Kinekor Theatres will assist in the achievement of greater scale from the existing portfolio, and the purchase of a controlling stake in eXactmobile and establishment of Primedia Education will assist in achieving greater diversification. As with all companies, the pursuit of growth is a key objective. Whilst many of our strategic priorities embellish this, we persistently drive our growth through the group’s six-pronged growth strategy namely organic growth, innovation, geographic expansion into Africa, bolt-on acquisitions, acquisitions of companies in new growing sectors of the media industry and finally, growth through convergence opportunities. Highlights for the 2006 fiscal include organic and innovative growth in operating profit of 24%. In addition, the group made a number of earnings enhancing acquisitions including the bolt-on acquisitions of GMR (Comutanet), Indiza Media (Primedia Outdoor), Powerview (Primedia Sport), 365 Digital (iafrica.com) as well as investments into new high growth, scalable media sectors namely The Letter Corporation, Campus Media (formerly Moving Tactics), X/Procure and eXactmobile. The full impact of all these acquisitions will be felt in the 2007 fiscal. In summary, very satisfactory progress was achieved in respect of the group’s strategic priorities for the 2006 fiscal. Setting the group’s strategic priorities for 2007The group's key strategic priorities for 2007 are largely a continuation of 2006 strategies, and include the following:
The group's growth strategies will also continue to be a major focus, as will the increase in the scale of many of our businesses. PROSPECTSThe group's strategic and financial health is excellent. In the next fiscal, we expect good organic and innovative growth fuelled by the group's leadership of "out of home" media, the use of digital technology to enhance existing traditional delivery channels and the contribution from recent acquisitions. Given the progress made to date, the group is focused on development plans through to 2010 and internal targets have been set which, though ambitious, are achievable. We are most grateful to all our stakeholders and, in particular our dedicated employees, who have enabled our progress.  William Kirsh |