financial and operationaloperational review: chief financial officer's report
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Against the background of a tightening economic environment the group’s financial management priorities have continued to focus on debtor management, cost containment, effective working capital management and maintaining a robust balance sheet. |
The chairman and chief executive officer have outlined the challenging environment and its impact on the group’s trading performance in their respective reports.
Despite the tough market conditions, the board has shown its confidence in the long-term outlook for the group and maintained the total dividend for the year at 323 cents per share, comprising an interim dividend of 144 cents and a final dividend of 179 cents.
Financial performance
The review of the performance for the period should be read together with the annual financial statements here.
Income statement analysis
Revenue increased by 5.9% to R3 807.1 million (2008: R3 569.4 million). This includes merchandise sales, finance charges, ancillary services and insurance income.
Merchandise sales grew by 1.6% to R1 919.9 million (2008: R1 889.7 million). Price inflation averaged 5% for the year, considerably lower than had been anticipated at the outset of the year.
Gross margin, inclusive of foreign currency gains, was impacted by the strengthening of the Rand late in the reporting period and declined from 32.7% to 31.3%. When the impact of the currency movement is excluded, margins were relatively stable but remain under pressure owing to higher levels of promotional activity.
Finance charges earned were R31.7 million higher owing to increasing numbers of customers selecting longer-term payment options which have been provided to the group’s top-rated customers.
Insurance revenue no longer reflects the earn-out of insurance premiums written in the buoyant trading period of 2007 and includes additional reserves required to cover the higher proportion of longer-term business.
Ancillary services rose by R131.6 million, benefiting from the monthly service and initiation fees on accounts opened post the introduction of the National Credit Act (NCA).
The increase in debtor costs from 6.5% to 10.0% of net debtors reflects the impact of the tougher collections environment.
Operating expenses, excluding debtor costs, rose by 8.8% and as a percentage of revenue moved from 33.5% in 2008 to 34.4% this year. In terms of International Accounting Standard (IAS 18), initiation fees and directly related costs are recognised over the period of the contract on an effective yield basis. Following the implementation of the NCA the deferral of directly related costs for the first time last year has affected the cost comparison. Operating expenses on a like-for-like basis increased by 5.4% and improved from 34.8% of revenue in 2008 to 34.6% of revenue in 2009.
Investment income of R76.9 million comprises mainly interest and dividend income on listed investments held by Monarch.
Net finance costs increased by R29.7 million owing to higher average borrowings and interest rates during the year.
The taxation charge declined in line with the reduction in the corporate tax rate to 28%. While the secondary tax on companies (STC) was higher owing to the increased dividend payout, this impact was limited as a result of the lowering of the STC rate from 12.5% to 10% during the previous financial year. The effective tax rate is 31.7% (2008: 32.1%). Attributable earnings were 11.7% lower at R567.0 million (2008: R642.3 million), impacted mainly by the increase in debtor costs.
The return on assets before tax was 22.9% (2008: 27.8%) and the return on equity 20.0% (2008: 24.4%).
Segmental performance
| Retail | ||
| R million | 2009 | 2008 |
| Revenue | 2 213.6 | 2 141.0 |
| Cost of sales | (1 318.3) | (1 272.1) |
| Trading profit | 895.3 | 868.9 |
| Net operating costs | (609.2) | (561.6) |
| Operating profit | 286.1 | 307.3 |
| Operating margin | 12.9% | 14.4% |
The retail segment includes the sale of merchandise and ancillary services such as delivery and maintenance contracts.
Revenue increased by 3.4% with merchandise sales up 1.6%. Net operating margin declined from 14.4% to 12.9% owing to lower sales growth and margin pressure.
The performance is covered in detail in the Retail Brands report.
| Financial services | ||
| R million | 2009 | 2008 |
| Revenue | 1 012.1 | 891.1 |
| Debtor costs | (338.8) | (190.4) |
| Other operating costs | (301.9) | (253.0) |
| Operating profit | 371.4 | 447.7 |
| Operating margin | 36.7% | 50.2% |
Financial services covers the management and collection of the debtors book. Revenue earned includes finance charges, initiation and service fees charged on customer accounts.
Financial services revenue increased by 13.6% owing to the increasing number of longer-term contracts as well as service and initiation fees on post-NCA contracts.
The operating margin has been impacted by the higher level of debtor costs this year.
| Risk services (Insurance) | ||
| R million | 2009 | 2008 |
| Revenue | 581.4 | 564.3 |
| Operating costs | (398.6) | (388.9) |
| Operating profit | 182.8 | 175.4 |
| Operating margin | 31.4% | 31.1% |
Risk services covers the activities of the group’s insurer, Monarch Insurance Company Limited (Monarch).
Revenue increased by 3%. The operating margin improved from 31.1% to 31.4%.
Balance sheet review
Insurance investments increased by R69.3 million as a consequence of additional funds being invested. The asset allocation has remained consistent throughout the year with approximately 75% held in cash and bond portfolios.
Inventory levels were consistent with the previous year. Stocks were well managed and the inventory turn improved from 5.5 to 5.8 times.
The increase in net debtors reflects the increasing number of contracts with extended credit terms. The provision for doubtful debt as a percentage of net debtors has risen from 13.5% to 15.7%, again highlighting the financial stress of consumers.
Net asset value per share has increased by 9.5% to R33.48.
Cash flow and capital management
The group has remained strongly cash generative, with a 20.4% increase in cash generated from operations to R669.7 million. This improvement can largely be attributed to efficient cost and working capital management.
Operating cash flows have funded the following during the year:
Gearing at 23% remains the same as last year. The board and management expect gearing for the 2010 financial year to be at a similar level.
Since the commencement of the share buy-back programme the group has repurchased 11.2% of the issued share capital. In the current credit and liquidity environment, no further repurchases are planned for the new financial year.
Cash returned to shareholders in dividends and share buy-backs has totalled R1.6 billion since the group’s listing on the JSE in 2004, equivalent to 57% of the group's market capitalisation of R2.8 billion at the time of listing.
Les Davies
Chief Financial Officer