Ratio Magazine :: The Inside Track to East Africa’s Economies - Africa Agenda: Press Releases: Olympia Capital Publish 2009 Results

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Africa Agenda: Press Releases: Olympia Capital Publish 2009 Results - Chairman’s Report

Monday, 03 August 2009

The performance of the companies we have invested in, was generally as expected except for South Africa, where our subsidiary in Johannesburg, Plush Products (pty) Limited (Plush), went into a spiral of losses following the recession in South Africa. A decision was made to close this subsidiary, sell the assets to pay off bank debt and consider re-entering the market on a significantly leaner model that does not deal with the large retail chains in South Africa.

The company had advanced loans to a Cape Town based manufacturing business called Natural Wooden Products (pty) Limited (Natwood), in which there was a conditional offer to purchase. As at the reporting date, the sale purchase agreement had not yet been effected and since the company’s operations had also adversely been affected by the current recession in South Africa, the board was of the opinion that these loans should be provided for in full.

In view of these two developments in South Africa, the board felt it prudent to provide for the worst case scenario in terms of investment loss and contingent liabilities. We have thus provided a total of KES114,644,000 in our books for this. Any savings in the closure of Plush and the successful acquisition of Natwood would be written back to our books at the appropriate time.
It is important to note that neither Plush nor Natwood have contributed to the group’s profitability since our involvement with them. This action has resulted in a net reduction of bank borrowings of KES140m and elimination of KES180m in debtors factoring.
In order to give our stakeholders an accurate view of the financial affairs of the group, we did not consolidate the South African businesses and have totally provided for the investments and loans in both.

Financials:
In comparing the period under review, which is a twelve month period, we must remember that the previous period was a fourteen month period. Due to not consolidating any South African business, our group turnover dropped from KES1.3bn to KES521m. Despite the reduction in turnover, profit from operations increased from KES68m to KES77m.

There was a reduction in interest costs from KES36m to KES11m. This reduction in interest costs and increase in profit from operations resulted in an increase in profit from continuing operations from KES32m to KES66m. However due to the provision for discontinuing operations of KES200m, which has to be looked at with the credit to the minority account of KES85m, we have thus provided for KES114m due to the closure of Plush and restructuring of Natwood.

Unfortunately, the net result due to the provision is a loss of KES56m in the year under review as opposed to a profit of KES20m in the previous year. The company still has positive revenue reserves of KES79m.

Operational Review:
Kenya:

Our PVC tile and adhesive operations in Kenya, Dunlop Industries Limited, only managed to turn a profit in the last two months of the financial year. The unit however made a loss in the period under review, which dampened our group results. The new plant for Dunlop has arrived in Kenya, however it is yet to be installed and we expect this to be completed in the current year.

Mather + Platt Kenya Limited (M+P), a local fire systems, water services and mechanical installations business that we own 49% off, had a slightly better year than the preceding year before our investment. We spent the year reorganising the business to enable it to grow and achieve our set targets. M+P made a positive contribution to the bottom line in its first year in our group. Introduction of new products like the fireball fire extinguisher, give us a lot of hope for this investment.

This was the first year we consolidated our investment in Avon. Although we own 47.5%, we essentially control the activities of the company and thus consolidated it. Avon made a positive contribution to the group.

As I had predicted in my last Chairman’s report, Heri Limited, the property investment holding company that we own 12.5% off, made a significant contribution to the group profitability by way of a very generous dividend. We believe this to be a once off event and will seek to increase our shareholding in this business. The management of Olympia Capital are actively involved in the running of the affairs at Heri Limited.

South Africa:

The turn of events in South Africa was unexpected and worrisome. In mid 2008, we noticed a marked reduction in sales in both Plush and Natwood. This was due to the first recession in South Africa in seventeen years. On our end, we made reductions in operating costs to align our cost base with the reduced sales; all along we managed to maintain a break even position.

In early 2009, there was a further decline in sales and due to a policy with large retailers, where they were able to return product to us without cause, the business in Johannesburg spiralled into losses. A decision was made to exit this business, sell assets to meet our obligations to the bank and consider re-entering the business with a leaner model at a later stage.

In Natwood, we decided to retain the existing business but restructure it also, that is why we have provided for the advances to Natwood, but we are optimistic that the restructuring will succeed. We do not anticipate the group making any further investments in South Africa for the foreseeable future.

Botswana:

Kalahari Floor Tiles (pty) Limited (KFT) had an exceptional year, improving its bottom line by 50%. All its four divisions contributed to the bottom line and KFT was very helpful both in terms of management and cash resources in assisting the group in the South African restructuring and closure. KFT added an additional line as the Botswana sole agent for a large South African aluminium manufacturer. We expect to make an investment in one of the neighbouring countries to Botswana in the course of the current year.

Dividends:
Despite the provision, the group made a profit from continuing operations; we have therefore decided to pay a dividend of KES0.10 per share on 23 October 2009 to those shareholders registered in our books at the close of business on 21 August 2009. Our books closure dates will be 20 and 21 August 2009

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