audited condensed consolidated financial results
TRANSCRIPT
Condensed segmental analysis
Corporate informationTransnet SOC LtdIncorporated in the Republic of South Africa.Registration number 1990/000900/30.
Waterfall Business Estate9 Country Estate DriveMidrand, 1662
Executive directorsMr MS Mahomedy (Acting Group Chief Executive)Mr MD Gregg-Macdonald (Acting Group Chief Financial Officer)
Mr SI Gama’s employment contract was terminated on 28 October 2018.Mr T Morwe was appointed in November 2018 and his contract expired on 30 April 2019.Mr MS Mahomedy was appointed during May 2019.Mr MD Gregg-Macdonald was appointed during May 2019.
Independent non-executive directorsDr PS Molefe (Chairperson), Ms UN Fikelepi, Ms RJ Ganda, Ms DC Matshoga, Mr LL von Zeuner, Ms ME Letlape, Adv OM Motaung, Ms GT Ramphaka, Mr AP Ramabulana, Dr FS Mufamadi.
Ms V McMenamin resigned on 28 February 2019.
Professor EC Kieswetter resigned on 06 May 2019.
Acting Group Company SecretaryMs K Naicker
AuditorsSizweNtsalubaGobodo Grant Thornton Inc.20 Morris Street East, Woodmead, Johannesburg, 2191
Short-form announcementThis short-form announcement is the responsibility of the Transnet Board of Directors. It is only a summary of the information contained in the integrated report and annual financial statements and does not contain full or complete details. Any investment decision should be based on the integrated report and annual financial statements available on the Transnet website at www.transnet.net. The integrated report and annual financial statements are also available for inspection at the registered office of Transnet.
OverviewThe technical recession experienced during the second quarter of 2018, coupled with a decline in the agriculture, transport and manufacturing industries, as well as reduced activity in government sectors and trade, contributed to a marginal GDP growth rate of only 0,8% for the 2018 calendar year.
Amidst these trying economic conditions, Transnet had to address numerous allegations of fraud and corruption, performing its own forensic investigations and collaborating with various law-enforcement agencies to determine the extent and impact of reported incidents. The current leadership made significant progress in addressing each allegation, instituting the requisite remedial actions and taking steps to stabilise the organisation. The finalisation of these cases is taking longer than anticipated but the engagement with state agencies is ongoing to ensure the most effective closure of these matters.
Numerous other operational challenges impeded the Company’s ability to achieve the planned volumes and operational efficiency targets. The resultant lower-than-targeted revenue was, however, more than offset by stringent cost-containment measures, that resulted in a marginal decline in operating costs compared to the prior year.
Governance and complianceIn terms of the Public Finance Management Act, 1999 (PFMA) of South Africa, the Company is required to report the quantum of irregular expenditure incurred, which is expenditure that was incurred in contravention of procurement legislation, notwithstanding that value was received.
In the prior year, the audit opinion was qualified due to external audit being unable to obtain sufficient audit evidence that the disclosure of irregular expenditure was complete and accurate.
During the year under review, management made a significant effort to improve and establish adequate controls to maintain complete and accurate records of irregular expenditure. The vast majority of the irregular expenditure reported in the current year relates to expenditure in prior years arising from contracts entered into in prior years, which is indicative of both the identification of PFMA contraventions in the past, and the improvement in the procurement control environment that is now limiting new incidences of non-compliance.
The Transnet Board, together with the Department of Public Enterprises, appointed the Auditor-General of South Africa to provide additional oversight in respect of PFMA compliance during the audit process of the year under review.
The amount of irregular expenditure reported in the current year is significant due to the progress made in identifying incidents of non-compliance in the past, specifically the inclusion of R41,5 billion expenditure on the locomotive contracts, entered into prior to 2015, that was the subject of several investigations at the time of finalising the prior year report.
www.transnet.net
* Compound annual growth rate.
Revenue increased by 1,6% to R74,1 billion for the year, supported by a 9,1% increase in petroleum volumes.
Operating expenses were contained to R40,3 billion, which represents a R6,8 billion saving against planned costs.
EBITDA increased by 3,8% to R33,8 billion, with the EBITDA margin Increasing from 44,6% to 45,6%.
Profit for the year increased by 24,7% to R6,0 billion.
Cash generated from operations increased by 0,7% to R35,2 billion.
Gearing of 44,5% and cash interest cover at 2,9 times were both comfortably within loan covenant requirements.
Capital investment of R17,9 billion for the year, brought expenditure over the past seven years to R183,5 billion.
2,5% of labour costs was spent on training, focusing on artisans, engineers and engineering technicians.
B-BBEE spend amounted to R29,93 billion or 92,62% of total measured procurement spend per DTI codes.
DIFR performance of 0,71 against a tolerance of 0,75, which is exceptional by international standards, and is the eighth consecutive year that a ratio below 0,75 has been achieved with the global benchmark being 1,0.
Audited condensed consolidated financial results for the year ended 31 March 2019
FreightRail
43 5
82
Engineering National PortsAuthority
Port Terminals
50 000
40 000
30 000
20 000
10 000
0(R
milli
on)
Pipelines
43 7
09
10 5
2411
250
12 4
5011
699
13 0
8612
393
5 26
24
488
20192018
Segment revenue
FreightRail
19 50
6
Engineering National PortsAuthority
Port Terminals
25 000
20 000
15 000
10 000
5 000
0
(5 000)
(R m
illion
)
Pipelines
20 47
3
(737
)(1
39)
8 317
7 196
4 541
4 172
3 996
3 192
20192018
Segment EBITDA
Highlights
Freight Rail
Pipelines
National Ports Authority
Port Terminals
Engineering
Outbound services / South African businesses moving products to international markets.
Inbound services / Bringing products to South African markets.
Export iron ore volumes railed.
Container volumes at ports.
Pipelines petroleum volumes.
Export coal volumes railed.
58,4mt
General freight volumes railed.84,7mt 4 534 341 TEUs 17 825 Mℓ
72,0mt Automotive volumes at ports.743 350 units
0
80 000
70 000
60 000
40 000
10 000
61 152 62 167 65 478 72 887 74 070
2015 2016 2017 2018 2019
50 000
30 000
20 000
Revenue 4,9%*
R m
illio
n
0
40 000
10 000
35 564 35 917 37 921 40 372 40 320
2015 2016 2017 2018 2019
50 000
30 000
20 000
Operating expenses 3,2%*
R m
illio
n
0
35 000
30 000
20 000
5 000
25 588 26 250 27 557 32 515 33 750
2015 2016 2017 2018 2019
25 000
15 000
10 000
EBITDA 7,2%*
R m
illio
n
0
7 000
6 000
4 000
1 000
5 302 393 2 765 4 851 6 047
2015 2016 2017 2018 2019
5 000
3 000
2 000
Profit for the year 3,3%*
R m
illio
n
Condensed statement of financial positionAudited
31 March 31 March(in R million) 2019 2018
Non-current assets 339 422 352 333Current assets 16 078 17 490Total assets 355 500 369 823 Capital and reserves 148 631 156 874Non-current liabilities 173 782 158 036Current liabilities 33 087 54 913Total equity and liabilities 355 500 369 823
Condensed statement of cash flowsAudited
31 March 31 March(in R million) 2019 2018
Cash flows from operating activities 21 930 22 958Cash flows utilised in investing activities (20 124) (24 891)Cash flows utilised in financing activities (2 030) (109)Net decrease in cash and cash equivalents (224) (2 042)Cash and cash equivalents at the beginning of the year 4 380 6 422 Total cash and cash equivalents at the end of the year 4 156 4 380
Condensed income statementAudited
(in R million)31 March
201931 March
2018
Revenue 74 070 72 887Net operating expenses excluding depreciation and amortisation (40 320) (40 372)Profit from operations before depreciation, derecognition, amortisation and items listed below (EBITDA) 33 750 32 515Depreciation, derecognition and amortisation (14 274) (13 686)Profit from operations before items listed below: 19 476 18 829Impairment of financial assets (444) (681)Impairment of non-financial assets (2 244) (761)
Post-retirement benefit obligation expense (287) (268)Fair value adjustments 3 271 410 Income from equity-accounted investees 19 9Profit from operations before net finance costs 19 791 17 538Finance costs (11 597) (10 211)Finance income 387 302Profit before tax 8 581 7 629Tax (2 534) (2 778)Profit for the year 6 047 4 851
Despite the abovementioned corrective action, the external auditors have expressed the view that Transnet’s implementation of certain of the Preferential Procurement Regulations, 2017 relating to tender pre-qualification criteria was inconsistent with the legislation. However, management was of the opinion that the affected expenditure was not irregular, as the use of the tender pre-qualification criteria was aimed at assisting the Company to achieve the competitive supplier development targets set by the shareholder. The Company ceased using the tender pre-qualification criteria in June 2018.
This matter has been considered in detail and, with input provided by various technical and legal experts, it appears that there are divergent views on whether the affected expenditure should be reported as irregular expenditure, as defined in the PFMA. This matter is still under investigation. Ultimately, however, the Company was not in a position to satisfy external audit that the reporting of this category of irregular expenditure is complete and accurate and, accordingly, the external auditors have issued a qualified opinion, that is specific to the completeness and accuracy of the reported irregular expenditure, as required by the PFMA.
The qualified opinion is not related to compliance with International Financial Reporting Standards nor the Companies Act of South Africa, 2008 and accordingly, has no bearing on the financial strength and sustainability of Transnet as depicted in the annual financial statements. Transnet holds the view that the qualified opinion will not result in any negative action related to the debt
book, and is satisfied with the adoption of the going concern assumption in the preparation of the annual financial statements.
ProspectsIn emerging from a year marked by several distractions, defined in large part by the Board and management’s efforts to remediate the wide-spread effects of corruption on the business, the way forward is clear. While experiencing operational challenges, particularly in the port environment, Transnet is confident that the continued efforts of the current leadership to enhance internal controls, improve operational efficiency and customer service, and to shape the ethical cultural bedrock required to set the Company on its new growth trajectory, will deliver the quality and reliable service needed to build a globally-competitive national freight system.
Despite the challenges experienced in the year’s difficult business and operational climate, it is heartening to note instances of record-breaking performance across the Company, evidence of the continued commitment of the many dedicated Transnet employees across South Africa.
The Company is expected to continue to generate strong cash flows, to maintain affordable levels of debt without any Government support, and to continue to report year-on-year improvement in financial performance. More importantly, Transnet will continue to strive to contribute to the overall efficiency and growth of the South African logistics environment and, in turn, have a positive impact on the economic growth of the country.