CHIEF EXECUTIVE OFFICER’S REPORT
PERCEPTION, PERSPECTIVES AND PERSISTENCE
2020 has been a year of firsts – for the world and particularly for AEEI, and as the Group’s newly appointed and first black female CEO, I am pleased to write my report, albeit currently working from home, necessitated by another first in our lifetime, the COVID-19 pandemic.
This year has been about digging deep in both stamina and strength – much like training for an ultra-marathon. Starting the race is one thing, but going the distance and completing it, is another entirely. It takes a solid foundation, visualising the end goal, along with a comprehensive multi-faceted exercise and nutrition programme, total dedication to the aim, and the support of a team all pulling in the same direction, to succeed, despite any hiccups along the way.
AEEI’s dream team has afforded the Group the ability and resilience to overcome the challenges this marathon of a year has presented. Joining AEEI a mere two weeks before the national lockdown, I have been humbled by the immense support I have received from the employees and the Board of AEEI, the spirit of ubuntu and can-do attitude of the employees in our Group, which is our main asset, and for that I wish to thank everyone.
As noted in the chairman’s report, AEEI has also welcomed new members to our Board and said farewell to others. I would like to extend my personal gratitude to Khalid Abdulla, Advocate Dr Ngoako Ramatlhodi, Moleboheng Mosia and Chantelle Ah Sing for their sterling service and advocacy and wish them well in their next endeavours. I would also like to extend a note of welcome to new Board members, Bongikhaya Qama and Willem Raubenheimer, and to our new chief financial officer, Jowayne Van Wyk, who, in a short space of time, have positively contributed to AEEI and who have also provided me with sound counsel over the past few months.
A CHALLENGING OPERATING ENVIRONMENT
The last 12 months have seen the Group face difficult operating conditions, beginning with a weakened South African economy in the first half of the year, which was further exacerbated by the effects of COVID-19 in the second half. The South African national lockdown since 27 March 2020, as well as global lockdown restrictions, created significant business disruption around the world. In South Africa, it has been made even more challenging with load shedding, political uncertainty and a deteriorating fiscus balance sheet, which have added to the country’s economic woes. This has led to large-scale closures of businesses, and those that remain have severe cash flow and profitability constraints. Consumers are highly cash strung, with a study by the United Nations Development Programme indicating that as much as a third of South Africa’s middle class is likely to become vulnerable.
While these factors are at play in the operating environment, a shrinking customer and client base for our businesses is becoming more prevalent. The AEEI Group has not escaped the effects of these extremely challenging times, as they have also brought to the fore the excellent leadership within our various divisions, the perseverance and loyalty of our employees, and the unwavering support resulting from our relationships with our customers and suppliers. Profit is the product of people, and it is the people we surround ourselves with and whom we engage with along with our diverse product portfolio, that have yielded a formidable financial performance despite the most challenging year in recent memory.
YEAR UNDER REVIEW
STELLAR GROUP PERFORMANCE
Against the backdrop of an economically challenging and turbulent year, the AEEI Group has delivered an admirable set of results for the period ended 31 August 2020. Revenue increased by 44% from R2.4bn to R3.4bn, while earnings per share increased by 101.32% from a loss of 283.30c to 3.74c in the current year. Our balance sheet is enviable, with a NAV of R6.1bn, which is a slight decrease from the prior year of R6.4bn as a result of impairments and fair value adjustments resulting from the impact of COVID-19 and cash reserves of R3.2bn. This puts the AEEI Group in a position to pursue lucrative investments and to focus on organic growth without the constraint of working capital.
Also notable for the 2019 financial year, is the successful conclusion of our Vision 2020 Vision Strategy, which saw AEEI overachieving on all the goals set in 2015 . There is no doubt that the success story that is AEEI today, is the culmination of the right investments and the deployment of the correct strategic direction for both, that has also initiated substantial organic growth across the Group.
Although Vision 2020 Vision has concluded this year, and we have produced a solid set of results for the past 12 months, it is important that we highlight that the COVID-19 pandemic has had a negative impact on all our business units, the full effects thereof expected to mature over the next 12–18 months.
FISHING AND BRANDS
Premier Fishing and Brands Ltd (Premier or the Premier Group) operated as an essential service provider throughout the lockdown period. Despite this, sales to its major customers in the USA and Asia were heavily disrupted by export restrictions in South Africa, with permits not being issued during the lockdown period.
Global prices for fish and fish-related products were also placed under immense pressure. In addition to the impact of COVID-19, other external factors have negatively impacted the performance of our fishing and brands division – most significantly, the seven-month period of riots in Hong Kong. The depleted squid resource saw catch rates dropping by 47% compared to the prior year. Despite this, the fishing and brands division posted a respectable revenue of R449m and profit after tax of R6m from R575m, R58m respectively, compared to the prior year.
This resilient set of results, although below expectation, could have been more devastating were it not for the swift mitigating actions of the Premier leadership team in curbing expenditure, maximising revenue and preserving cash flow. Sustainability in the fishing sector is of vital importance, and speaking directly to this, the expansion of the abalone farm is nearing completion after months of lockdown disruptions. Based on current growth of spat, Premier expects the abalone farm to produce up to 400 tons of abalone in the next 4–5 years (current: 200 tons). The Fishing Rights Allocation Process (FRAP 2021) is under way, and Premier’s empowerment credentials and history of productivity in using their allocated rights has them standing in good stead to retain their FRAP allocations. The fishing and brands division is solid, and we are confident that AEEI will continue to reap maximum value from this investment.
The COVID-19 pandemic, as devastating as it has been, has also brought with it many opportunities for the digital economy, of which our technology division is central to. Our diversified portfolio has given us a competitive advantage, which is evident in the brilliant performance posted by this division.
In the face of adversity and the pressure on margins, AYO Technology Solutions Ltd’s (AYO’s) revenue grew by an impressive 47%, mainly through acquisitive growth, delivering on the promises made when AYO company listed on the JSE in 2017. The relentless, unfair treatment of AYO in the media has had a detrimental impact on this division’s ability to swiftly deliver on its strategy. Despite this, the AYO management team remained focused, which is evident in the technology division’s financial performance with revenue of R2.9bn and profit after tax of R104m from revenue of R1.9bn and profit after tax of R273m in the prior year.
In the wake of the COVID-19 pandemic, millions of people started working from home, which has seen online activity soaring. Our technology division’s subsidiaries were well placed to respond to this emerging trend of ‘everything remote’, which has accelerated the globe towards the 4th industrial revolution (4IR). Some examples of this are:
- Remote working – Sizwe Africa IT Group Ltd, Kalula (Pty) Ltd, Puleng (Pty) Ltd, Kathea Communications (Pty) Ltd
- Remote banking – Payment gateways and financial services through its investment in the fintech fund, Tamlalor (Pty) Ltd
- Remote Learning – Sizwe Africa IT Group Ltd and its eLearning solutions (a first of its kind in South Africa)
- Remote access – Puleng (Pty) Ltd
Acquisitive growth continued in the current year, and the technology division ended the year with the announcement of the acquisition of Kathea Communications (Pty) Ltd and a significant stake in Kathea Energy (Pty) Ltd. Kathea Communications (Pty) Ltd will see our technology division becoming the largest distributor of headset equipment in Africa, enabling AYO to capitalise on the remote working explosion, while Kathea Energy (Pty) Ltd will put AYO at the forefront of providing clean and sustainable energy solutions. This is a rapidly growing industry, which will assist in diversifying AYO’s investment portfolio.
Although there is a good story to tell for our technology division, AYO has not escaped the aftermath of the pandemic, and expect subdued demand in the short- to medium-term, as cash strung clients delay purchases in order to preserve cash for the sustainability of their businesses. However, despite this challenge, AYO remains committed to the pursuance of their vision to be the leading empowered digital and technology service provider for business partners across the African continent. AYO has a desirable balance sheet, competent, highly skilled employees, and a passionate and strong leadership team to deliver on its vision.
EVENTS AND TOURISM
Our events and tourism division was particularly badly impacted by the fallout from COVID-19 and the subsequent national and international lockdowns, with business and leisure travel being banned, along with the prohibition of large gatherings. As a result, espAfrika (Pty) Ltd (espAfrika), the owners of the Cape Town International Jazz Festival (CTIJF), which is world renowned as “Africa’s Grandest Gathering”, a major arts and culture event for the Western Cape and the flagship event for espAfrika, could not be held. Depending on government regulations, “Africa’s Grandest Gathering” may take place in 2021. The CTIJF festival continues to be a best seller, with ticket sales for the March 2020 event indicating that it would have sold out had lockdown regulations not disrupted proceedings. Despite this setback, the CTIJF festival is a household brand and significant value is retained in it. In anticipation of 2021, the team at espAfrika has been pivoted into conceptualising smaller, premium, as well as virtual events, which they hope will be staged in the new financial year.
Our travel business, Tripos Travel (Pty) Ltd, suffered considerably due to the national lockdown and the local and international travel restrictions that were imposed. Tripos Travel is currently in the process of mapping a new strategy to cater to emerging travel needs of a post-COVID-19 clientele. In the interim, the business has been right-sized to cater to a reduction in activity, thereby curbing operating losses.
Magic 828 (Pty) Ltd (Magic 828) continued on a path to improve its financial performance and finding new and alternate revenue streams to the traditional radio advertising. In the current year, Magic 828 managed to successfully set up an internet radio station for a restaurant chain in the Middle East. This is a significant opportunity for Magic 828 to increase its offshore revenue base. Spreading the geographical footprint of the radio station to other parts of the country is a major objective of the management team. This objective was partially achieved through a simulcasting opportunity with LM Radio in Gauteng, which is expected to increase its audience reach, advertising revenue, and reduce operating costs. They reached 240 000 listeners as at August 2020, compared to August 2019. The foundation for a growth phase has been set, and management is optimistic that the business will turnaround in the next 12 months.
HEALTH AND BEAUTY
The health and beauty division has also proved to be relatively durable, despite its products being classified as non-essential items during the height of lockdown. Orleans Cosmetics products retail in stores located mostly in major shopping malls around the country, with a select line only available in spas and beauty salons. The lockdown restrictions have resulted in reduced foot traffic and increasingly cash-strung customers. This has negatively impacted our sales which have decreased by 10% compared to prior year sales.
However, the loss mitigation plans by the management team of Orleans Cosmetics and the personal sacrifices made by their employees curbed the losses, which saw Orleans Cosmetics contributing a positive EBIT to the Group for the 2020 financial year. There are early signs of improvement in sales and Orleans Cosmetics is confident that the 2021 financial year will yield much better results, albeit not at pre-COVID-19 levels. The exclusive distribution agreements with Gatineau, RVB, Sothys and Nuxe are due for renewal in December 2020, and Orleans Cosmetics is confident of a positive outcome.
The pandemic shone a spotlight on the health and agriculture business, AfriNat (Pty) Ltd (AfriNat), which saw a surge in the purchase of its organic sanitisers and cleaning products. Farming produce became high in demand due to a shortfall in supply of products from overseas suppliers whose countries were in lockdown and could not export as usual. The high demand was also pushed further by the high prices that South African produce was fetching from export markets. This led to farmers purchasing more of AfriNat’s pre- and post-harvest products, in order to increase yields and benefit from these market dynamics. Revenue increased by 97% from R6.9m to R14m. We believe that our investment in AfriNat is at the beginning of a major growth trajectory, as AfriNat plans to keep expanding on their environmentally friendly and sustainable product offerings.
RESEARCH AND DEVELOPMENT
Genius Biotherapeutics (Genius) continues along its path to developing its dendritic cell vaccine (DCV). The national lockdown slowed down this process, but Genius remains hopeful that human trials will be completed by the end of the 2021 financial year. Genius has registered generation 3 dendritic cell maturation Intellectual Property in nine regions including the USA, South America, China and Europe, which will be in effect until the year 2038. This updated Intellectual Property increases the value proposition and moves Genius closer to its goal of developing a cancer vaccine. Genius remains a long-term investment and the intention is to ultimately list on an international stock exchange due to significant capital required, and partnerships with international pharmaceutical companies, to fully harness the benefits of this novel treatment. The production of biosimilars remains on hold so that the team can continue to focus on the DCV project, which is their core biotech asset.
Our strategic investments in Saab Grintek Defence (Pty) Ltd, British Telecommunication Services South Africa (Pty) Ltd and Sygnia Ltd continue to bolster the value of our diversified investment portfolio with a regular annual dividend flow.
2021 – A YEAR TO EXERCISE OUR CORE STRENGTHS AND INVESTMENTS
Despite areas of resilience within the AEEI Group, we anticipate that 2021 will be an even more difficult year, as the real effects of the COVID-19 pandemic start to make themselves apparent. Although there are vaccines on the horizon, and economies around the globe are opening, there are signs of a second wave of lockdown at the time of writing this report, which are contributing to heightened uncertainty surrounding the global economy for 2021.
AEEI’s response to this uncertainty is to focus on protecting our core strengths and investments through strategic cost saving, while also investing for future growth and managing our working capital more optimally. This may necessarily entail the disposal of some non-performing assets.
I would like to assure our stakeholders that we are treading very cautiously and working hard not to place AEEI’s strong balance sheet at risk. We aim to protect the value of AEEI and safeguarding our continued survival during this challenging environment. It is for this reason that AEEI will delay its transition to a passive investment holding company, as we need to be operationally involved in our divisions, which have been thrust into operational fragility because of the pandemic. The holistic wellbeing of all our employees will continue to be a priority as we face this unknown future.
I do, however, enter 2021 with a sense of confidence even though the year will be difficult and there is already evidence of financial strain in our post-year-end performance. The Group will once again prove its determination and we will succeed in protecting the superior stakeholder value that we have created over the years. We will continue to go the distance.
GRATITUDE AND APPRECIATION
One aspect that the pandemic has confirmed with crystal clarity is the importance of relationships, in particular those we have with our stakeholders. The loyalty and steadfast commitment to AEEI has been exceptional. It has sustained us through this very difficult period, and my heartfelt gratitude goes to each one of you – our amazing stakeholders, including our strategic partners.
A successful company is the sum of all its parts, and I would like to extend a special message of gratitude to our employees without whom we could not have experienced the successes that we have achieved to date. At a time when they had to contend with the responsibility of keeping their families safe, adapting to a changed home/work/life balance, which in most instances entailed home schooling and/or taking care of elderly relatives, as well as continuing to keep the work fires burning, our team, without exception, continued to give AEEI their full commitment. It gives me much pleasure to work alongside such a dedicated and professional workforce.
Finally, I would like to thank our Board of Directors for supporting our new executive team in steering the Company through these trying times. With your support and that of all our stakeholders, I am confident that we will handle whatever 2021 and beyond has in store for us.