Overview

Ellies is a company with innovation and entrepreneurial spirit etched into its foundation. It is exactly these traits which have attributed to a successful 2012. The decision to enter the lighting, bulb, energy-efficient shower-heads and renewable energy field has seen Ellies launch the innovative store within a store concept, a concept started in the Strubensvalley Builders Warehouse with massive success. The concept has been rolled-out to 31 other Builders Warehouse stores, in the Gauteng and KwaZulu-Natal Provinces, at the date of mailing this report, of which seven were rolled-out in the 2012 financial period, and plans are afoot to roll the concept forward into a further 17 stores in the Western Cape Province.

This idea lead to the establishment of the Ellies Renewable Energy (ERE) division which saw Ellies enter the renewable energy space, offering a complete suite of products from solar water heating systems, geyser and pool pump timers to CFL’s, LED’s and energy-efficient shower heads. It was this move into the renewable energy space that allowed Ellies to tender and secure Project Power Save contracts from Eskom, to date removing a total of 170MW from the national grid and 45MW in the current reporting period, while visiting a total of approximately 720 000 homes across the country.

Innovations in new product development and entering and bringing new product lines on board, ensured that Ellies was able to maintain market share.

The local operating context continues to present a challenging retail environment due to a depressed consumer market, within these constraints, growth in domestic electrical products was achieved.

Our infrastructure segment, Megatron, performed exceptionally well. In line with the innovative and entrepreneurial spirit within the holding company, Megatron has transformed itself due to a reduction of infrastructure and municipal spend in South Africa. Megatron perceived this as a risk to growth and repositioned itself to deliver turnkey projects in Africa. Potential payment risk is reduced through upfront fees payable in South Africa, prior to final shipment and installation of the project.

Ellies Engage is the group’s Corporate Social Investment programme. This programme allows Ellies to give back to the communities in which it operates, and among the programmes successfully completed this year is the blanket drive where 23 500 blankets were distributed to the needy across the country as well as showerhead assembling by various disabled communities, for the Project Power Save contracts.

Operational review

Although the retail environment remains challenging Ellies is proud to report that market share, in all Ellies divisions, was maintained, with market share gained by the consumer electrical business. It remains the aim of the group to achieve a 50% market share in all our product ranges. The Consumer Goods division achieved a full-year profit before interest and taxation growth of 32% to R164.6 million (2011: R124.8 million). The ERE division had successfully completed a third of phase one of the Project Power Save initiative by year-end. At Ellies we are continually focused on how we can improve our product offerings to better the lives of our customers, and it is these new products launched in 2012 that has considerably impacted the top line growth of this division.

It has been a successful year for Megatron with the division’s first BladeRoom Data Centre commissioned and completed in January 2012. The division also acquired Andrews Towers, effective on 1 November 2011. Andrews Towers is one of the most recognised brands in the global telecommunications industry and is a comfortable fit into the already existing Megatron Federal business. Megatron have taken over the complete Andrews Towers team; all personnel, designs, patents and tools in order to avoid disruption in the design, manufacturing, marketing and delivery of the current range. Alan Jones, former Vice President and MD of Andrews Wireless Solutions Africa, joined the Megatron team to manage and further grow this business. We would like to welcome the Andrews Towers team – we trust we will have a long and successful relationship.

Megatron has competencies in renewable telecommunications solutions, especially applicable in remote areas of Africa, often where mining operations or industry need to establish operations. Often coupled with a renewable telecommunications solution, transformers are also required and Megatron is able to design, build, transport and effect transformers of all sizes and abilities through its state of the art manufacturing plant. New technology development, innovation and associations with leading international brands, remains key to Megatron’s success.

Although infrastructure spend in South Africa has not been rolled-out as anticipated, Megatron has substituted this by focusing on African operations, with most of their contracts rolled-out for multi-nationals, especially mining houses, in Africa, where the infrastructure spend is remarkably higher than in South Africa.

The Megatron acquisition is starting to bear fruit for the group as this division delivered a stellar set of results, reporting a 158% growth in revenue to R559.2 million (2011: R216.5 million) and an increase in profit before interest and tax of 299% to R91.1 million in the current period (2011: R22.8 million). The improved earnings growth is mainly attributable to the improvement in product offerings across various sectors in which Megatron operate. To further enhance market penetration, the division upgraded production facilities and extended its skills base, which has resulted in increased orders. The segment contributed a total of 33.0% to group revenue, compared to 16.5% contributed in the corresponding period.

Group financial review

Overall the group grew revenue by 30% to R1.7 billion from the previous year’s R1.3 billion. EBITDA rose impressively by 71% to R273.4 million (2011: R159.8 million). Ellies boasts an EBITDA margin of 15.9% compared to 12.1% for 2011. The increase is primarily as a result of improved margins in the Infrastructure division. PBT rose by 73% to R230.0 million (2011: R133.3 million) as a result of improved gross profit margins and capacity utilisation, despite a loss from an associate amounting to R4.4 million. Headline earnings per share saw a notable increase of 73.3% to 54.45 cents compared to the prior period of 31.42 cents.

The group’s NAV and NTAV have shown steady growth increasing by 28.0% and 44.2%, respectively.

Cash flow from operating activities saw a decline in the period under review, as a result of working capital requirements to ensure sustainable growth in Megatron as well as the correctly-positioning stock demands for Project Power Save.

Prospects

The Ellies management team remain optimistic on the growth prospects of the group through continued diversification into new product development and ventures, with a focus on infrastructure development and expansion of the group’s customer base.

Ellies expects the roll-out of new phases of the Eskom Project Power Save programme, the implementation of the Digital Terrestrial Television (DTT) migration throughout southern Africa, further developments in the “Green store within a store” concept and expansion in the lighting sector to contribute meaningfully to the consumer segment of the business. Megatron’s growth is expected to continue, and is supported by its current order book and new business opportunities in South Africa and the rest of Africa. These new opportunities include: the development of alternate power solutions, telecommunication towers and data centre infrastructure. Substantial alliances with international technology and product leaders in industrial battery power storage, modulardata centres, telecommunications and telecommunication towers have been secured.

Megatron’s traditional business of customised solutions for power generation, transmission and distribution for utilities continues to recover well.

Diesel Generator Optimisation (DGO) is a technology invented in-house by Megatron engineers where the technology optimises the use of diesel generators in mobile technology resulting in reduced running time to extend service intervals and at the same time reducing diesel consumption. All related patents have been licensed exclusively to Megatron. The technology makes use of General Electric (GE) Durathon batteries which have been extensively tested in New York. Megatron has identified many applications for this technology in Africa and appetite from corporates is encouraging.

Ellies management continues to adopt a conservative approach towards SkyeVine, while cautiously optimistic of demand in this sector as additional service providers enter this space.

The board remains positive towards the group’s continued organic growth, new ventures and product opportunities, which continue to present themselves. The Ellies entrepreneurial spirit and constant drive to leading product development and application, will keep market share intact. Additional growth will come from the enhancement of our competencies which is a constant drive within Ellies.

Appreciation

We would like to thank our fellow directors for their commitment and support, our management and staff for their hard work, our customers, suppliers and business partners for their ongoing support and our advisors for their guidance.