Investment reviews

Infrastructure


  • GRINDROD LIMITED (GRINDROD)

    Grindrod has a December year-end, but its results for the twelve months to 30 June 2014 have been included in Remgro’s results for the year under review. Headline earnings attributable to Remgro for the year under review amounted to R108 million (2013: R144 million). This decrease is mainly attributable to lower profit from its trading division due to poor results in the agricultural commodities sector.

    Grindrod’s reported net profit for the six months to 30 June 2014 increased by 30% to R694 million (2013: R533 million). The net profit for the period under review includes a once-off profit of R431 million generated as a result of the change in control on the acquisition of interests previously held by the group’s long-term BBBEE partners and an impairment of R80 million on the transport fleet. Headline earnings which, inter alia, exclude the impact of the aforementioned item, however, decreased by 29% to R321 million (2013: R450 million).

    This decrease is mainly attributable to weaker operating performances from the commodity trading division and these operations are in the process of being wound down and sold according to plan.

    Capital expenditure for the six months to 30 June 2014 amounted to R1.4 billion, of which 94% was expansionary and the rest for maintenance and replacement purposes. Future capital continues to be committed to the expansion of terminal capacity, rail infrastructure, locomotives and ships. Following its capital raising during the period under review, the group is confident that it has adequate funding for all capital commitments through its cash resources and bank facilities.

  • COMMUNITY INVESTMENT VENTURES HOLDINGS PROPRIETARY Limited (CIV group)

    Remgro has an effective interest of 50.7% in the CIV group, which is active in the telecommunications and information technology sectors. A restructuring of the CIV group has been implemented with effect from 1 April 2014, reducing the multiple entry points of investors to a single entry point through CIV Holdings Proprietary Limited. The group has decided to focus on the telecommunications infrastructure market and as a consequence the company is in the process of disposing of companies that are not directly aligned with this vision. The key operating company to remain is DFA, which constructs and owns fibre-optic networks.

    The CIV group has a March year-end and therefore its results for the twelve months ended 31 March 2014 have been included in Remgro’s results for the year under review. The CIV group’s contribution to Remgro’s headline earnings for the year under review amounted to R58 million (2013: R59 million), of which the major contributors were DFA (R30 million) and CIE Telecommunications (R16 million).

    DFA’s revenue for its year ended 31 March 2014 increased by 29% to R879 million (2013: R683 million) mainly as a result of solid growth of 38% in annuity revenue. DFA has thus far secured a healthy annuity income in excess of R55 million per month with the majority thereof being on long-term contracts with customers.

    DFA lowered its average cost of funding through the refinancing of its debt of R3.5 billion with a consortium of lenders from a project finance structure to a more corporate debt-type structure consisting of R2.5 billion of long-term debt and R1 billion of short-term debt. One of the main operating challenges that DFA faces is the slower than anticipated site build/last mile by customers that affects DFA’s ability to link mobile operator base station sites or enterprise customers to the fibre network, which causes a delay in annuity revenue generation to offset increasing depreciation and finance charges incurred on network rollout costs. To reduce the risk of the slow last mile roll out DFA acquired Conduct Telecommunication on 1 April 2014. Conduct specialises on the last mile build and has completed dark fibre infra­structure access to more than 900 buildings. Most of DFA’s customers extended their initial contract periods of five years to either 10 or 15 years. The network uptime for the period under review was an excellent 99.99%.

    Once a section of network is completed, the asset is recognised and then depreciated on the full infrastructure cost and finance charges incurred. The current book value of the fibre-optic network is in excess of R4.6 billion.

    DFA owns fibre network rings in Johannesburg, Cape Town, Durban (expanding to Pietermaritzburg), Midrand, Centurion and Pretoria. During the past year, the network has been expanded to a further 17 smaller metros, including East London, Polokwane, Tlokwe, Emalahleni and George to name a few. The Johannesburg ring is regarded as one of the most important communication rings in Africa. At 31 March 2014, a total distance of 7 759 km (2013: 7 340) of fibre network has been completed in the major metropolitan areas and on long-haul routes. Long-haul routes include Durban to the SEACOM landing station in Mtunzini, which route was extended through Empangeni to Gauteng. DFA also completed building a long-haul route to link Cape Town to the West African Cable System (WACS) undersea cable landing station at Yzerfontein and built a route to link the North West province to Gauteng during the year.

    In 2010 DFA commenced with the fibre-to-tower project linking mobile operators’ base stations to the core com­munication rings, and the project will continue through 2014 and beyond as demand for mobile backhaul increases due to, amongst others, a strong growth in data demand by smartphones and Long Term Evolution technology.

    Mobile backhaul is a major growth driver for DFA due to the increased demand for mobile broadband. DFA has 5 618 (2013: 4 276) base transceiver station sites on the network that cover three of the four mobile operators. DFA monitors and maintains a total of 7 348 (2013: 4 665) customer circuits. The next growth drivers for DFA will be the enterprise market and the public sector which have shown a definite increase in demand in the last 12 months. DFA is also part of a consortium that will provide fibre connectivity to the Gauteng government.

    DFA has signed commercial lease agreements with 56 (2013: 41) customers that have Electronic Communication Network Licences ranging from the largest incumbents, to banks, to small niche operators. The revenue model is flexible to adapt to the customers’ needs, and DFA either sells an indefeasible right of use agreement which is a lump sum in advance, or on an annuity basis with multi-year contracts of mostly up to 15 years. Presently, approximately 68% of total revenue is annuity revenue. The future value of the current annuity contract base is in excess of R8 billion.

  • SEACOM capital Limited (SEACOM)

    Remgro has an effective interest of 25% in SEACOM which launched the first undersea fibre-optic cable to connect Southern and Eastern Africa with Europe and Asia in July 2009. The cable connects South Africa, Mozambique, Tanzania, Kenya and Djibouti with the rest of the world via landing points in France (and onwards to London) and India. Landlocked countries (Uganda, Rwanda, Ethiopia, etc.) are connected by terrestrial backhaul.

    SEACOM has a December year-end, but its results for the twelve months ended 30 June 2014 have been included in Remgro’s results for the year under review. SEACOM’s contribution to Remgro’s headline earnings for the year under review amounted to a loss of R6 million (2013: Rnil). SEACOM is, however, cash flow positive and Remgro has received dividends of R81 million from SEACOM during the year under review, bringing the cumulative dividends received since the acquisition of VenFin Limited to R361 million.

    SEACOM provides high-capacity international bandwidth services to customers in the form of International Private Line circuits and IP Transit Services. These services are sold as leases and as 15 to 20-year indefeasible right of use agreements, including maintenance charges, whereby the revenue is accounted for over the full term of 15 or 20 years.

    SEACOM maintains a proactive approach to ensuring profitability, by implementing various cost-saving initiatives and more diversified product offerings in response to increased competition from competing cable systems.

    Fortunately, with affordability improving, demand elasticity is playing its part positively ensuring that demand grows above expectations. Furthermore, ongoing reductions in terrestrial costs (mobile operator deals and other operators such as Dark Fibre Africa and FibreCo) and increased de-mand for reliable protected routes around Africa are also leading to increased demand. SEACOM’s ability to change with the rapidly evolving market and respond to demand faster than others is critical to maintain its ongoing competitive positioning.

  • Other infrastructure interests