Key features: interim results for the 6 months ended 30 Sept 2019 (1H19 vs 1H18):
- Revenue up 14.7% to R308.6 m
- EBITDA up 152.8% to R22.5 m
- Cash on hand up 91%
- Profit after tax up 325% to R5.4 m
- HEPS and basic EPS up 294% to 0.97 cents
Teddy Daka – Etion CEO
Says Etion CEO Teddy Daka: “Our focus on integrating the LawTrust acquisition, reducing the cost base and implementing our strategy has resulted in a significant improvement in our performance. As promised, we have improved working capital by reducing inventory and have tightly managed capital allocation. We have enhanced our cash generation and moved from making a loss to achieving a profit after tax of R5.4m. We are also seeing the benefits of the investment in our own targeted intellectual property.”
Revenue for the Group of R308.6m, up by 14.7%, was driven mainly by the impact of consolidating the results of Secure for the full six months and increased revenue realised from the internationalisation strategy. The Group’s performance has benefited from the rollover of revenue from a key project in the Digitise business. Slow revenue growth from Connect has continued, due to reduced project spend from our key clients who have invested less, due to macro and micro economic factors. Moderate revenue growth was recorded in Create due to delayed buying from Middle East clients. Create’s continued involvement in design and development work should convert into increased requests for production as the cycle turns.
Operating expenses increased 8.7% to R99.7m as a result of consolidation of 6 months’ operating expenses in Secure and non-recurring costs of the Digitise restructure. The benefit of once-off costs of R10m relating to the acquisition of Secure, the rebranding of the Group, and the restructuring of Connect incurred in the prior year, has been offset by the decline in projects executed during the current period and resultant inability to allocate the related costs to cost of sales.
During the period Etion used forward exchange contracts, which reduced the unrealised foreign exchange losses to R0.1m, when restating the trade payables. Profit after tax increased 325% to R5.4m while basic earnings per share increased by 294% to 0.97 cents per share.
Etion has focused on controllable factors, such as extracting operational efficiencies, costs and managing working capital, which contributed to a 307% improvement in cash and cash equivalents. The SASFIN bridge finance was settled resulting in improved cash management. Cash generated from operations increased by R64.8m and the net working capital movement for the period, at R43.4 million, was positively impacted by the reduced inventory holdings in Connect.
Contribution to Group revenue | 27% Contribution to Group profit | 20%
Continued investment into products and solutions has contributed positively to successful customer engagements, which bodes well for future business opportunities in the medium term.
Contribution to Group revenue | 7% Contribution to Group profit | -56%
The strategic review has been completed and a phased restructure plan is being implemented.
Contribution to Group revenue | 33% Contribution to Group profit | -11.2%
Significant efforts at diversifying the customer base have translated into orders from greenfields operators. This is expected to continue through continued aggressive, yet targeted, pipeline development.
Contribution to Group revenue | 37% Contribution to Group profit | 85%
Revenue increased due to the increased focus on growing international markets and the impact of
consolidating revenue for the full 6-month period.
Commenting on strategy, Daka says: “In line with our strategy to build an integrated business, and in consideration of the current tough trading conditions in the RSA economy, we have effected some changes to our operating model. These are aimed at not only consolidating our business and making it more agile and responsive to current market conditions but also at building resilience and sustainability.”
The Secure business has implemented four strategic initiatives to accelerate medium-term growth and further globalisation, including the creation of a cyber security centre which will generate subscription income and uncover opportunities. Says Daka: “We have focussed on the MEA market with an immediate win in Saudi Arabia. Secure has been appointed as the sole distributor for the SOLIDguard range of products, designed and manufactured by Etion Create, which continues to directly support defence clients in the Middle East.”
He adds that the improved performance in Digitise was largely a result of historic contracts, which have now been fulfilled. Due to the long procurement cycles and prevailing market conditions, revenues are expected to remain subdued for the foreseeable future, thereby necessitating an internal reorganisation. The division has been streamlined with only a dedicated rail-focused business development capability remaining. Digitise will leverage off the experience of the Create team for the oversight of operations and sales.
The Connect business has endured downward pressure on revenues over the past few years due to a depressed economy. While closely monitoring the cost base and growing its revenue base, Etion has decided to streamline the business and make it more agile to match current business needs.
Says Daka: “Our corporate office has been reorganised and trimmed. We have implemented cost optimisation initiatives in the marketing team and human resources department, and we have insourced the company secretariat. As we progress into the second half of FY2020, Etion has four optimised business entities, each competitive in its field of excellence and serving local and international customers.”
Turning to the outlook, Daka concludes: “In response to the subdued market we have implemented initiatives to reduce costs, improve working capital and to re-focus business efforts to meet the challenge of thriving in the local landscape as well as growing international revenue. There is a clear global demand for our products and services and this indicates a positive outlook for the Group in the medium term with the drive into MEA and other markets.”