REVENUE INCREASED BY 13,0% TO R1 980 million, IMPACTED POSITIVELY BY THE NEW ACQUISITIONS
SUMMARISED INCOME STATEMENT | |||
| 2005 | 2004 | % | |
| R'm | R'm | change | |
| Revenue | 1 980,3 | 1 752,4 | 13,0 |
| EBITDA | 418,9 | 324,7 | 29,0 |
| Depreciation | (62,7) | (59,7) | |
| PBIT | 356,2 | 265,0 | 34,4 |
| Foreign exchange items | (2,1) | 1,0 | |
| Amortisation of intangibles | (4,7) | (8,6) | |
| Exceptional items | 16,9 | 23,3 | |
| Operating profit | 366,3 | 280,7 | 30,5 |
| Net finance cost | (39,7) | (16,5) | |
| Fair value adjustments | (7,5) | – | |
| Associates' profit/(losses) | 0,4 | (0,3) | |
| Profit before tax | 319,5 | 263,9 | 21,1 |
| Taxation | (86,6) | (64,0) | |
| Profit after tax | 232,9 | 199,9 | 16,5 |
| Minority interest | (17,3) | (24,4) | |
| Net profit for the year | 215,6 | 175,5 | 22,8 |
| Headline earnings | 211,7 | 147,4 | 43,6 |
INCOME STATEMENT
Group operating performance
Revenue increased by 13,0% to R1 980 million (2004: R1 752 million), impacted positively by the new acquisitions in the financial year, namely 94.5 Kfm, 567 CapeTalk and the Primedia Unlimited businesses, which collectively contributed additional revenue of R121,1 million. Excluding 94.5 Kfm (proportionately consolidated for nine months of the year) and 567 CapeTalk (consolidated for six months of the year), revenue from existing advertising businesses grew organically by 13,3% to R861,0 million (2004: R759,6 million), tempered to some extent by consolidation in the commuter media division following a period of strong growth. Revenue from the filmed entertainment division was up 3,8% to R933,8 million (2004: R899,5 million), notwithstanding the 7,8% decline in Ster-Kinekor Theatres' revenues, which was offset by an excellent performance by Ster-Kinekor Home Entertainment. Revenue from the one to one businesses declined by 7,5% to R62,7 million (2004: R67,8 million), largely as a result of a poor performance by The Database Group.
Group operating profit before depreciation rose by 29,0% to R418,9 million (2004: R324,7 million) due to improved gross margins, as well as the new acquisitions. Depreciation plus software amortisation (disclosed separately following changes to IAS 38 – Intangible assets) increased from R64,4 million to R67,4 million.
Group operating profit before amortisation, foreign exchange items and exceptional items ("PBIT") increased by 34,4% to R356,2 million (2004: R265,0 million), of which 94.5 Kfm, 567 CapeTalk and the new media sector (Primedia Unlimited) acquisitions contributed R50,7 million. PBIT margins increased from 15,1% to 18,0% mainly due to the growth in the higher margin advertising businesses and acquisitions.
Operating profit grew by 30,5% to R366,3 million (2004: R280,7 million) which was after foreign exchange losses of R2,1 million (2004: profit of R1,0 million) and amortisation of intangibles of R4,7 million (2004: R8,6 million). The prior year charge of R8,6 million included goodwill amortisation of R3,9 million. In terms of IFRS 3 – Business combinations (AC 140), which was adopted by the group in the current year, goodwill no longer falls to be amortised but rather is tested for impairment on an annual basis.
Finance costs
Profit before taxation rose 21,1% to R319,5 million (2004: R263,9 million) which was positively influenced by exceptional items of R16,9 million (2004: R23,3 million) but was reduced by the group's increased net interest charge of R39,7 million (2004: R16,5 million) as well as a negative R7,5 million non-cash fair value adjustment relating to a four-year R100 million interest rate swap taken out with effect from 1 July 2004 as a part of the group's risk management strategy. This fair value loss is expected to reverse over the life of the swap. The increased net interest charge was in line with the group's increased borrowings. Interest cover remains high at 9,0 times (2004: 16,0 times).
Exceptional items
The exceptional items included a R14,9 million reversal of loan impairments previously written off through headline earnings in respect of associate companies, Ster Century Middle East and VWV. Also included are R2,6 million additional proceeds received from prior year disposals of subsidiaries, various exceptional costs amounting to R6,0 million (including a R3,0 million charitable donation to the Nelson Mandela Foundation) and a R3,3 million reversal of an onerous lease provision as well as a fair value adjustment on investments of R1,1 million.
Profit after tax
Profit after tax rose 16,5% to R232,9 million (2004: R199,9 million). The tax rate was at a more normalised rate of 27,1% (2004: 24,3%), but was lower than the standard corporate tax rate of 29%. This was due mainly to the non-taxable nature of certain of the exceptional items and the recognition of a deferred tax asset in respect of prior year losses which largely offset the impact of the 1% drop in tax rates on the deferred tax asset balance.
Net profit for the year increased by 22,8% to R215,6 million (2004: R175,5 million), partly as a result of the lower minority interests, following the purchase of additional interests in Africa on Air, Rank TV, Rank Branding and Primedia Sport.
Headline earnings
Headline earnings grew by 43,6% to R211,7 million (2004: R147,4 million). Headline earnings per share ("HEPS") grew by 39,7% to 95 cents taking into account the issue of 1 449 580 ordinary and 3 174 604 Primedia "N" shares in part settlement of the purchase consideration for the Africa on Air minority interest and the exercise of share options by employees.
SHAREHOLDER DISTRIBUTIONS
Distributions to shareholders out of share premium, in lieu of dividends, totalled 56 cents per share for the year (2004: 40 cents). This was an increase of 40% and represents a distribution cover of 1,7 times (2004: 1,7 times) of headline earnings per share.
CASH FLOW
Cash generated by operations increased by 10,2% to R389,9 million (2004: R353,6 million) notwithstanding a R29,1 million negative swing in working capital movements due to increased trading activity. Net cash inflow from operating activities grew to R289,6 million (2004: R273,4 million) after increased net interest payments of R30,8 million (2004: R14,6 million) and tax payments of R69,4 million, representing a 22% cash tax rate.
Net cash used in investing activities of R484,8 million included R395,6 million spent on the acquisitions (set out in more detail in the group chief executive's report), capital expenditure of R86,6 million (of which R61,9 million was replacement expenditure to maintain operations) and the acquisition of other investments of R2,6 million. The replacement expenditure was significantly higher than in prior years due to Ster-Kinekor Theatres' R35 million upgrade of its IT infrastructure.
Group borrowings increased by R225,0 million (net of debt repayments of R46,0 million). R29,1 million was received from the placement of Primedia shares to Mineworkers Investment Company, pursuant to the acquisition last year of the additional 30,5% economic interest in Africa on Air. Distributions to shareholders increased by 62% to R103,3 million (2004: R63,7 million), resulting in a net reduction of cash and cash equivalents to R6,4 million.
BALANCE SHEET
Total assets grew by R384,5 million to R1 374,9 million. The new acquisitions resulted in a R340,5 million increase in goodwill and intangibles which mainly related to the acquisition of 94.5 Kfm (R240,3 million), the minority interests acquired in group subsidiaries (R46,7 million) as well as the Primedia Unlimited acquisitions (R22,7 million). The 94.5 Kfm intangible assets were independently assessed as having indefinite economic useful lives in terms of IAS 38 and are therefore not subject to amortisation but will instead be reviewed for impairment on an annual basis.
During the year, the group increased to 100%, its economic interest in its former 43,75% associate, 567 CapeTalk, which is now consolidated with effect from 1 January 2005. At year end, the previously impaired loans to Ster Century Middle East and VWV were written back to their expected recovery value of R14,9 million.
The deferred tax asset balance at the end of the year reduced, due to the increased utilisation of tax losses in the group and the 1% drop in tax rates. In terms of IFRS 3, the group was obliged to recognise a R59,6 million deferred tax liability in respect of the intangible assets relating to the 94.5 Kfm acquisition, which is deemed to be a timing difference for the purpose of IAS 12, even though no tax deduction is being claimed in respect of the value ascribed to the intangibles. It should be noted that this is purely an accounting liability which will never crystallise in cash terms. Its effect will merely be to reduce the earnings impact of any future impairment of the 94.5 Kfm intangible assets, which is considered to be highly unlikely.
The movement in shareholders' funds is set out in the statement of changes in shareholders' equity and mostly relates to the following:
- The R103,3 million distribution to shareholders out of share premium;
- Proceeds of R29,1 million received on the issue of shares to the Mineworkers Investment Company in connection with the Africa on Air minority interest acquisition concluded last year;
- A R29,1 million dilution resulting from share options exercised and acquired from The Primedia Trust and additional buy-backs of shares into The Primedia Trust;
- Net profit for the year of R215,6 million;
- The R2,9 million reversal of negative goodwill to retained earnings following the adoption of IFRS 3; and
- R23,0 million adjustment to NDR in respect of Africa on Air trademarks previously written off.
BORROWINGS
Total interest bearing debt increased by R304,5 million to R322,0 million following the various acquisitions made in the year. The debt to equity ratio is not an appropriate measure of the group's borrowing capability given the historic write-offs against share premium of intangibles, as well as the very high return on tangible assets achieved by the group. A more appropriate measure is the debt to EBITDA ratio, which in terms of the group's banking covenants is limited to 1,4 and translates into a maximum borrowing limit of R586,5 million, based on the 2005 results. The group therefore remains comfortably within these limits and is well-positioned to fund future growth opportunities. The maturity profile of the group's borrowings as at 30 June 2005 is disclosed in note 19 of the annual financial statements.
BASIS OF PREPARATION OF FINANCIAL RESULTS AND IASB IMPROVEMENTS PROJECT
The group results as at 30 June 2005 have been prepared in terms of South African Statements of Generally Accepted Accounting Practice. The International Accounting Standards Board has issued a number of new or revised accounting standards during the past year, which are mainly designed to improve existing International Financial Reporting Standards ("IFRS") and are effective for our 2006 financial year. Changes to the following accounting standards have been adopted in the current year:
IAS 36 – Impairment of assets
IAS 38 – Intangible assets
IFRS 3 – Business combinations
The group has adopted IFRS 3 in respect of all business combinations concluded after 31 March 2004. Under IFRS 3, the fair value of all of the identified assets and liabilities acquired as part of each acquisition were independently assessed and the acquisition price of the business combination was allocated accordingly. IFRS 3 was not applied to the acquisition of the Africa on Air minority interest which was settled in the current year as this transaction was effective on 31 March 2004. The fair value of the assets and liabilities acquired in terms of the 567 CapeTalk acquisition will be reflected in the group's consolidated interim results for the six months to 31 December 2005.
The revisions to the following accounting standards have not yet been adopted in the current year but their impact on financial statements has been estimated and determined not to be material:
IAS 1 – Presentation of financial statements
IAS 2 – Inventories
IAS 7 – Cashflow statements
IAS 8 – Accounting policies, changes in estimate and errors
IAS 10 – Events after balance sheet date
IAS 12 – Income taxes
IAS 14 – Segment reporting
IAS 18 – Revenue
IAS 19 – Employee benefits
IAS 21 – Effects of changes in foreign exchange rates
IAS 23 – Borrowing cost
IAS 28 – Investment in associates
IAS 31 – Joint ventures
IAS 32 – Financial instruments: disclosure and presentation
IAS 33 – Earnings per share
IAS 37 – Provisions, contingent liabilities and contingent assets
IAS 39 – Financial instruments: recognition and measurement
The company proposes to adopt the following new or revised standards in the 2006 financial year:
IAS 16 – Property, plant and equipment
IAS 17 – Leases
IAS 24 – Related party disclosure
IAS 27 – Consolidation and separate financial statements
IFRS 1 – First time adoption
IFRS 2 – Share based payments
IFRS 4 – Insurance contracts
IFRS 5 – Non-current assets held for sale and discontinued operations
We are currently quantifying the effect of these accounting standards on the results of the group. IFRS 2 is likely to have the most impact. Under IFRS 2, the company is required to expense share options granted after 7 November 2002 over the vesting period of the options. The group has made three option grants in the period since this date as follows:
| Option grant date | 2/12/02 | 1/12/03 | 20/5/05 |
| Strike price (cents) | 361 | 604 | 1 094 |
| Expiry date | 1/12/08 | 30/11/09 | 19/5/11 |
| Number of options | 5 533 246 | 3 712 623 | 9 913 274 |
The first two share option allocations vest in three equal tranches from the second anniversary of the date of grant. The remaining option allocation granted on 20 May 2005 vests in four tranches from the second anniversary of the date of grant. Using preliminary assumptions of a Primedia share price volatility of between 28% and 40%, prevailing risk free interest rates and dividend yields on the grant dates and employee exit rates of 5% to 15%, it is estimated that the total fair value of the options is between R23 million and R30 million. Of this amount, the pre and post tax income statement charge for the 2006 financial year is estimated to be R8,1 million in 2006 and R3,8 million in 2005 (2004: R2,3 million).
CHANGE IN ACCOUNTING POLICY AND RESTATEMENT
In terms of IFRS 3, goodwill is no longer amortised through the income statement but is subject to an annual impairment test. The impact of this change has been to reduce goodwill amortisation by R27,8 million in 2005. There is no effect on headline earnings and prior year comparatives have not been restated.
In terms of a circular issued by the South African Institute of Chartered Accountants ("SAICA") on 2 August 2005, companies are required to smooth rental expenses on operating leases that are subject to annual fixed escalation increases, over the lives of the respective leases. Previously, such rentals were accounted for on the basis of the expenses due for payment in each respective year. The revised interpretation resulted in a credit to trading income of R3,1 million (2004: R1,2 million), an increase in taxation of R0,8 million (2004: R0,4 million) and a net reduction of R17,3 million in the opening retained earnings as at 1 July 2004.
GOING CONCERN
In terms of the requirements of the Companies Act 1973, the directors have confirmed their opinion that after the payment of the distribution, the company will be able to pay its debts as they become due in the ordinary course of business and its consolidated assets, fairly valued, will exceed its consolidated liabilities
POST BALANCE SHEET EVENTS
The group's post balance sheet events up to the date of approval of the financial statements are set out in note 36 to the financial statements and the group chief executive's report on page 13. In terms of a circular to be issued on or about 3 November 2005, the company is proposing to facilitate an increase in its BEE shareholding by 13,6% to 20,3%, through the issue of 8 million Primedia "N" shares at par value of 0,02 cents.
SHARES IN ISSUE
1 449 580 ordinary and 3 174 604 Primedia "N" shares were issued on 1 July 2004 in terms of the acquisition of the 30,5% minority interest in Africa on Air effected in the 2004 financial year and 4 472 419 shares were bought by The Primedia Trust, which is consolidated for group reporting purposes, to satisfy the requirements of the company's share scheme and to offset the disposal by the Share Trust of 4 834 122 shares on the exercise of options by the scheme participants. The weighted number of shares in issue was 223,0 million, which was 3,0% higher than the 216,5 million weighted number of shares in the prior year.
O Ighodaro
Chief financial officer
21 October 2005