Overview

The predominant theme for the period under review is the commencement of the unwinding of the Infrastructure segment and the financial effects thereof. The results include a provision of R20 million, being the expected residual amount owing to The Standard Bank of South Africa Limited (“Standard Bank”) after the expected sale proceeds of Megatron SA’s assets net of costs and disbursements, together with a provision for guarantee to Lombard in the amount of R17 million. This coupled with the deconsolidation of Megatron SA and it’s subsidiaries resulted in a loss, on loss of control, of R123,9 million, which amount includes loans forfeited amounting to R88,9 million, giving a combined loss of R160,9 million.

It should be noted that the deconsolidation of the remaining Infrastructure segment companies will result in a profit, on loss of control, in excess of R100 million.

Operational review

The first six months of the financial period have been very challenging. Trading conditions in general were poor with a noticeable drop in spending by consumers.

Ellies Electronics

The continuing downturn in the economy and reduction of consumer spending severely affected Ellies Electronics, with revenue at R649 million, down from R737 million for the same period ended 31 October 2015. We have seen the slowdown in both our independents and retail sectors where we play in the electronic and general merchandise sectors. The consumers’ purchases have been subdued and only when there are specials do we really see larger movements of stock. The segment returned a loss for the period before interest and tax of R14 million. This includes a loss for the impairment of a loan to an associate, as a result of a bank guarantee that was called up of R4,5 million. The profit for the same period ended 31 October 2015 was R29 million.

With this in mind the board acknowledges that the company must adjust itself to the business before it and therefore is in the process of removing significant costs from its operations in order to make the Ellies Electronics cost base match where the business and economy is at present. The cost reduction exercise will be implemented aggressively over the next six months and also includes the centralizing of its computer and accounting system. We believe that these measures will not only reduce our costs significantly but will make us more efficient and broaden our customer base with a concentration on the independent market. It was in this market where Ellies Electronics started and grew, and so for all intent and purposes it's a return to basics and the core business. It will also enable a real-time consolidated view on major working capital cycle drivers, and will assist management in executing its stated aim of reducing working capital cycles year on year going forward.

The satellite market has seen a slight increase in numbers compared to last year, however the reduction in selling price has influenced the increase in turnover in this category. This together with increased costs due to increased landed costs, largely as a result of Rand volatility and weakness,
has resulted in a reduction in GP margin compared to the past. ElSat continues to work closely with MultiChoice to seek innovative ways in growing the market. We believe the introduction of a fully installed Explora will find a new market in the middle LSM as people enjoy the convenience of
recoding and catch up viewing. Multichoice has also launched a 3rd viewing environment with should stimulate sales in the future. Multichoices' transmission from a new satellite opens the opportunity for our corporate division, as people in apartments and complexes will need upgrading to a fibre viewing network in order to enjoy all of the channel offerings on the Explora. Our domestic electrical range has shown some increase in the six months reported, although we have lost some market share to competitors and to retail home brands. Ellies Electronics received some negative press with regards to claims by a competitor who claimed that we stole his surge idea. Ellies Electronics went to court and proved these claims were unfounded and obtained an interdict against the competitor with costs. This caused reputational damage at the time but we are confident that our excellent surge
range will continue to grow and we will soon regain whatever market share that was lost. We are confident that we will continue to grow in this category and have new products that are innovative and waiting approval from the national regulator.

Ellies Electronics continues to grow in the lighting segment with both our Lamp for Life and Residential ranges. The Ellies Electronics Lamp for Life is still one of the best value for money lamps that offers a 25 year warrantee while remaining very competitive in price. We believe that we have set the new benchmark in lighting for innovation, warranties and price. Our Residential range addresses the mass market with one of the lowest price points. Retailers are selling this lamp for as little as R25 per lamp and there have been tremendous sales of this product. Ellies Electronics aim is to become a dominate player in this category and will continue to be innovative.

The digital migration continues to stop and start as a result of the ongoing litigation between Etv and the Communications Minister. Ellies Electronics is still manufacturing satellite dish kits for the rollout as the means of satellite transmission is not being disputed. Ellies Electronics will complete its manufacture in January 2017. We hope that once the dispute on encryption of the terrestrial signal is finalised, which is expected to be in February 2017, we would be able to start with the promotion of antennas to both government and retail although we don’t expect there to be a large uptake in the beginning. These delays have seen our antenna and antenna accessories category virtually grind to a halt, leaving our local manufacturing of these products running at a loss. We will however maintain these production facilities albeit with a lower staff compliment as the migration is essential for the ICT sector of South Africa. We have already invested in the IP and machinery to produce the products needed.

Ellies Electronics and ElSat remain strong South African brands that are trusted and found in most homes in Southern Africa. We will endeavour to grow the brand and remain a trusted technology leader in all of our categories.

Megatron

As detailed in the notes above, this segment has been deconsolidated and all material contamination to the group has been provided for based on information provided by the Business Rescue practitioner. The provision for the shortfall from Megatron SA to Standard Bank, which the group has stood surety for, may exceed the provided amount of R20 million as indicative offers for Megatron SA’s assets are not binding at this stage.to the group has been provided for based on information provided by the Business Rescue practitioner. The provision for the shortfall from Megatron SA to Standard Bank, which the group has stood surety for, may exceed the provided amount of R20 million as indicative offers for Megatron SA’s assets are not binding at this stage.to the group has been provided for based on information provided by the Business Rescue practitioner.

Holding Company

This segment had the biggest bearing on the results for the period under review, and is fully detailed in the overview above.

Dividend policy

The dividend policy will be reviewed periodically taking into account prevailing circumstances and future cash requirements. In view of the group’s financial position, no dividend is proposed at this stage.

Appreciation

The directors and management once again continue to recognise and appreciate the focused efforts and hard work of the group’s staff and also continue to appreciate the support its customers, business partners, advisors, suppliers, funders and most importantly shareholders provide.