Chief financial officer’s report

CHIEF FINANCIAL OFFICER’S REPORT

STACKING UP THE NUMBERS OF BEING HUMAN

As the newly appointed chief financial officer at AEEI, it is with due respect to my predecessor, Chantelle Ah Sing, and regard to the turbulent year the business world has lately experienced, that I submit my first report.

Having had a non-executive role at AEEI, I am no stranger to the Company’s investment into its human capital.

OPERATING IN A DIFFICULT MACROECONOMIC ENVIRONMENT

2020 has been a defining moment in business. With the COVID-19 pandemic triggering a national emergency, we are going through the most radical transformation the world has ever seen. The outbreak of the COVID-19 pandemic has led to a sudden shift in the dynamics of workforce behaviour. While businesses are hitting back at the impact of coronavirus with resilience, operating any business in this climate can be stressful. However, we are all navigating this new normal together, and as we lock arms (virtually) and try to find new ways of working and surviving, the result has been inspiring.

“The secret of change is to focus all of your energy, not on fighting the old, but on building the new.” Socrates

South Africa’s already ailing economy has been particularly hard hit by the COVID-19 pandemic. In order to overcome this, collaboration between government, business and people will be essential to our economic revival.

Pre-COVID-19, economists had hinted at the country being in a technical recession, which has been exacerbated over the past few months. Currently, South Africa finds itself in a perilous and subdued macroeconomic environment due to years of State Capture, a weak Rand, an inflexible labour market, and a lack of investment into infrastructure and education, which has led to a shortage of the necessary skills that will carry the country forward into the Fourth Industrial Revolution (4IR). This is underpinned by a lack of local and international business confidence in the country and its policies, which have seen our investment rating severely impaired in recent times.

Gross Domestic Product is expected to contract by 7% for the 2020 year. Business confidence is at an all-time low and CEOs of major businesses are expecting an 18- to 36-month recovery period for the economy to return to levels seen in 2019. The rate of unemployment in South Africa stood at 29% pre-COVID-19, and with the lockdown extending beyond five months, this percentage is expected to increase to unprecedented levels, not seen over the past 20 years.

Before the government applied a level 5 lockdown restrictions, the South African Revenue Service (SARS) had already warned stakeholders that they would not reach their 2020/2021 revenue collection target for the fiscal year. Revenue collections declined even further, and relief packages set out by the government have presented more challenges, with a R280bn shortfall expected, even though the South African Reserve Bank has cut the repo rate to provide businesses and consumers relief during these trying times.

AEEI’s sustainability and model will have to be resilient, adaptable, and flexible to the “new normal”. AEEI, as a diversified investment holding company has in the financial year-ending 31 August 2020, delivered robust results despite the unknown territory we find ourselves in.

COVID-19 – ITS IMPACT NOW AND BEYOND

As a direct result of worldwide lockdowns due to the proliferation and pervasive nature of COVID-19, the business world has been disrupted like never before. This has paved the way for technology to play a dominant role and which has resulted in an accelerated thrust into the 4IR for developed and developing economies.

This is certainly true of South Africa, where remote working has suddenly become the order of the day. With signs of an increase in productivity, many employees preferring to work from home and a reduction/change in cost centres, companies are adapting to operating in a new manner.

However, as aforementioned, not all sectors have been able to adjust, and against the backdrop of an economy that requires a radical overhaul and stimulus, we need to ask the question: Do we (as a country), borrow to improve investments, or make policies more investor friendly to attract foreign direct investment (FDI) into our country?

2020 FINANCIAL OVERVIEW

Commentary on key indicators :

Revenue Premier Fishing and Brands Ltd experienced a significant revenue reduction of 22% and also struggled to maintain sales margins as a result of the impact of the COVID-19 pandemic and other exogenous factors that affected the fishing industry and markets. Our other businesses also suffered severe margin pressures despite the increased revenue. In the face of adversity and the pressure on margins, AYO Technology Solutions Ltd’s (AYO) revenue grew by an impressive 81.2% from R1.6bn to R2.9bn, mainly through acquisitive growth, delivering on the promises made when AYO listed on the JSE in 2017.

DIVISIONAL REVENUE – 2020 IMPACT

FISHING AND BRANDS DIVISION

Premier Fishing and Brands Ltd (Premier), the fishing and brands division, was not untouched by the COVID-19 pandemic, which affected their revenue growth. Premier’s selling prices came under pressure due to global economies suffering from the economic fallout of this pandemic, and prior to that, the rise in political unrest in the Far East led to a retarded export of seafood. The squid sector remained under pressure, with catch rates decreasing by 47% for the year under review compared to the prior year, primarily as a result of changes in climatic conditions that adversely affected squid reproduction and growth rates, as well as their location.

This had a material impact on revenue for 2020 and affected the Group’s margins, which could not be offset by the increase in lower margin revenue growth from the technology businesses.

TECHNOLOGY DIVISION

In the face of adversity and the pressure on margins, AYO’s revenue grew by an impressive 81.2% from R1.6bn to R2.9bn, mainly through acquisitive growth, delivering on the promises made when AYO listed on the JSE in 2017.

EVENTS AND TOURISM DIVISION

The events and tourism division’s revenue decreased due to COVID-19 restrictions, which led to the cancellation of events and large public gatherings, including the annual Cape Town International Jazz Festival, also known as “Africa’s Grandest Gathering”. Also, hard hit was the travel business, as airlines were grounded with the cancellation of all non-essential inbound and outbound flights, therefore curtailing corporate as well as leisure travel.

Magic 828, our radio business, is steadily increasing its listenership and due to COVID-19 had to change direction from growing to surviving the pandemic. Advertisement income declined due to businesses reducing their marketing budgets.

HEALTH AND BEAUTY DIVISION

The health and beauty division’s revenue increased, with its main contributor being AfriNat (Pty) Ltd (AfriNat), due to the successful supply of COVID-19-related personal protective equipment (PPE) products. Orleans Cosmetics (Pty) Ltd revenue is expected to break even this year, due to suppressed consumer spending on luxury items such as cosmetics and perfumes.

RESEARCH AND DEVELOPMENT DIVISION

Bioclones

This is the biotechnology research division of the Group and has not seen much progress on the DCV project, largely owing to the COVID-19 pandemic and delays by the Department of Trade and Industry. The facility in Centurion, the production site of erythropoietin, was sold off as the decision was made to no longer invest further resources into biosimilars. This has reduced the overhead expenses drastically.

Ribotech

There has been no progress with the Technology Innovation Agency, and we have not been funded to continue the development of the G-CSF product.

STRATEGIC INVESTMENTS

AEEI’s investment in BT and Sygnia has performed above market expectations and complemented the Group’s result for the year ended 31 August 2020.

GROUP FINANCIAL POSITION

Asset base

The AEEI Group maintained a strong total asset base of R7.2bn for the year 2020 and is very well positioned to take advance of potential investment opportunities in the future.

Shareholder returns

Total dividends paid for the year-ended 31 August 2020 was 30c, an increase of 76.5% from 2019.

Our strategic investments

BT and Sygnia have delivered great value for the year ending 31 August 2020 as has increased in value.

CASH FLOW

Cashflow

Cashflow from operations increased by 104.77% from the prior year which clearly demonstrates AEEI’s ability to create value for shareholders despite the COVID-19 pandemic effect on businesses in South Africa. This was achieved through sacrifices from employees and management’s intervention to ensure the sustainability of the business for the future.

FINANCIAL OUTLOOK

AEEI has been fortunate to mitigate much of the fallout from the economic challenges faced as a direct consequence of how the world’s governments reacted to the COVID-19 pandemic. This was largely due to our strong growth strategy and the dedicated teams at AEEI, not forgetting the support that we received from all our stakeholders.

Our fishing and brands division remains on track to deliver an improvement in the catch landings in the squid sector, as actual catches for the 2021 financial year are already looking very promising. The Fishing Rights Allocation Process (FRAP) coming up in 2021 may have an impact, but management has addressed this issue with a ground-breaking B-BBEE transaction in Premier Fishing SA (Pty) Ltd, which will see a rights issue comprised of: employees at 20% and a B-BBEE woman-led consortium at 10% that will increase their B-BBEE significantly.

The 4IR is well and truly here, and AYO is well-positioned to take advantage of this evolution – not just in the products and services that it offers to meet the rapid and heightened demand in this sector, but in its training of human capital to cater for this surge.

The work from home and e-Commerce markets have shown to be resilient, with a substantial number of consumers seeing the value of online shopping and working from home. AYO, with its diverse basket of products – which directly addresses this shift – is well-placed to be an ICT partner of choice to help businesses achieve their own goals.

The health and beauty division have withstood the COVID-19 pandemic to deliver positive results in 2020, and the trajectory is looking extremely positive for the 2021 financial year.

LOOKING AHEAD

We are looking forward to a recovery in 2021 for the squid sector after the lowest catch rates were recorded in the last 15 years.

AEEI will continue on growing its technology division through organic and acquisitive growth in 2021.

The health and beauty division appears promising as the hygiene sector will benefit from COVID-19 and will have a great opportunity to increase market share with their organic range of product lines for the agriculture sector.

APPRECIATION

I would like to thank all our employees across the Group, our subsidiaries, business associates and partners as well as our stakeholders who weathered the proverbial storm with us through our commitment to creating sustainable value to shareholders and stakeholders alike.

I would also like to thank our Board of directors and the executive management team for their guidance and support during my first month as CFO.

CONCLUSION

This year, AEEI has demonstrated that it is well-positioned to mitigate risk, flexible enough to change strategic direction in the face of adversity and remains focused on further growth by improving its profitability and delivering greater value to its shareholders.

JOWAYNE VAN WYK

Group chief financial officer