FINANCIAL DIRECTOR'S report

The ADvTECH group achieved pleasing trading results for the year ended 31 December 2018 and continued its consistent trend of strong performance in line with the growth strategy.

This is demonstrated by revenue increasing from R1.9 billion to R4.4 billion and operating profit before non-trading items increasing from R256 million to  R763 million over the last five years, a compound annual growth rate of 19% and 24% respectively, resulting in a marked increase in the scale of the group.




 



REVIEW OF GROUP TRADING RESULTS

Revenue growth of 11% to R4.4 billion (2017: R3.9 billion) resulted from growth in all divisions. While the schools division's organic growth was somewhat muted as enrolments at some of our premium brands were impacted by financial pressures on families and the effects of emigration, revenue still increased by 15% to R2.0 billion mainly as a result of acquisitions and good growth in the mid-fee sector. The tertiary division continued its trend of excellent organic growth, resulting in revenue increasing by 10% to R1.7 billion. The increase in revenue in the resourcing division of 4% to R670 million was impacted by the mix of a greater number of lower value but higher margin placements.

The strong revenue growth enabled the group to increase operating profit by 14% to R763 million (2017: R668 million) resulting in operating margins improving from 17.0% to 17.4%. The operating profit for South African schools increased by 5% to R330 million while operating profit from schools in the rest of Africa declined due to the costs incurred ahead of the opening of Crawford International School in Nairobi, Kenya, and as it moves through the j-curve. The tertiary division increased operating profit by 23% to R395 million and operating margins from 21% to 23% on the back of operational leverage from strong volume growth. The resourcing division improved operating profit by 22% to R39 million and improved operating margins from 5% to 6%. The division remains highly cash generative.

The higher average net borrowings, resulting from the significant capital expenditure incurred, together with the acquisition of the Makini Schools group (Makini), led to an increase in financing costs. The taxation rate increased due to the non-deductibility of the non-trading items. Profit for the year increased by 8% with normalised earnings per share also increasing by 8% to 81.1 cents (2017: 75.3 cents).

NON-TRADING ITEMS

Non-trading items consisted mainly of the settlement of the contingent consideration relating to the Maramedia acquisition. As reported in the interim results, the audited financial statements used to determine the additional consideration payable, indicated that the profit target was not achieved and therefore the fair value of the contingent consideration was determined to be nil. However, this was successfully disputed by the vendors. The consideration has now been settled and as the adjustment to the contingent consideration falls outside the measurement period as defined by IFRS 3 Business Combinations, it is required to be recognised in the summarised consolidated statement of profit and loss.


INVESTMENTS

The group's commitment to achieving its strategic goal of ambitious yet considered growth led to an investment of R670 million in capital expenditure and acquisitions. The elements that constitute the major activities in the group's investment programme are summarised below.



Through acquisitions and capital expenditure, the capacity of the schools division increased by 16% and we are now able to accommodate 38 200 students. Capacity on existing sites can be increased to accommodate a further 14 200 students while land banked sites will be developed to create capacity for an additional 10 000 students. Plans are in place to roll out the development of this capacity over approximately eight to ten years. In addition, the group continues to seek both greenfield and acquisition opportunities to expand or complement its offering.


​WORKING CAPITAL AND CASH FLOW

The group has an inherently negative working capital model due to fees being payable in advance, while most costs are payable in arrears. Negative working capital amounted to R443 million at year-end (2017: R468 million) with the decrease compared to last year mainly due to lower fees received in advance and deposits. Trade receivables continue to be well managed.

The decrease in fees received in advance and deposits was due to a greater proportion of parents selecting the monthly payment terms as opposed to the upfront payment option as well as parents delaying payment until after year-end, but still within the agreed payment terms. Receipts after year-end have been significantly higher than in the previous year as would be expected with the change in the payment options chosen and payment patterns.

Free operating cash flow before capex declined by 4% to R563 million as a result of the lower level of fees received in advance and deposits. Cash conversion nevertheless amounted to 138% of profit for the year. Cash generated by operating activities increased by 4% to R879 million and this, together with financing inflows of R590 million, enabled the payments of investments and capex of R658 million, financing costs of R139 million, taxation of R202 million and dividends of R191 million.


CAPITAL STRUCTURE TO SUPPORT THE ACCELERATED INVESTMENT PROGRAMME

During the year, and following the conclusion of the acquisition of Monash South Africa, which was still conditional at year-end, and taking into account the significant investment opportunities the group wishes to explore, new long-term funding agreements for facilities totalling R2.85 billion were entered into to replace the existing facilities of R1.6 billion. These increased facilities are expected to provide sufficient funding for the roll-out of the planned investment programme while still allowing for headroom against the covenants.

Net borrowings increased to R1.9 billion (2017: R1.6 billion) due to the funding required for capex and to settle the purchase consideration of acquisitions exceeding the net cash inflows from operating activities. The group remains well within its covenants at year-end, with net borrowings equating to approximately 2.0 times (2017: 2.0 times) EBITDA, while gearing increased to 60% (2017: 56%).

The group's inherently strong organic cash flow, which is expected to increase in line with earnings growth, together with the funding facilities in place, positions the group well to fund its future investment programme and enables it to consider significant additional growth opportunities.


DIVIDENDS

In determining the level of dividend, the directors have considered the significant investment opportunities available to the group and the associated capital expenditure required that the group considers additional cash preserving measures. This has previously been signalled by the board with a steady increase in dividend cover in recent reporting periods. Capital commitments amount to R1.9 billion, inclusive of the purchase consideration for the acquisition of Monash South Africa, and will largely be funded by way of additional debt. Taking these commitments into account, together with the continuing challenging economic environment, the board has decided it would be prudent and responsible to further preserve cash and have therefore reduced the dividend pay-out during this high capital investment period.

The group has declared a final dividend of 15.0 cents (2017: 19.0 cents) per ordinary share in respect of the year ended 31 December 2018, which together with the interim dividend of 15.0 cents (2017: 15.0 cents) per share brings the total dividend for the year under review to 30.0 cents (2017: 34.0 cents) per share. The dividend pay-out ratio has increased to 2.7 times (2017: 2.2 times) relative to normalised earnings.

With the continuing investment programme, which is expected to remain at elevated levels going forward, dividend cover is likely to be increased further in the years ahead as the group looks to preserve cash to fund this programme.


APPRECIATION

I would like to thank our shareholders and funders who have provided the means and support for us to carry out our expansion programme.

I would also like to thank the financial staff across all our divisions in the group for their commitment to accurate and relevant financial reporting. Your diligence and commitment is critical to our ability to provide high quality information that informs the decision-making of management, the board and our stakeholders.

Didier Oesch


Group Financial Director