Acquisition integration hurts Faritec

Johannesburg, 28 Mar 2007

The impact of integrating acquisitions Enterprise Connection and Lechabile Storage Solutions was the low point in an otherwise strong interim performance from JSE-listed Faritec.

The company yesterday posted its interim results for the six months ended 31 December. The company said a combination of organic and acquisitive growth resulted in substantial increases in revenue, operating profit and net profit.

CEO Simon Tomlinson explained: "We are beginning to see the impact of our recent acquisitions on our revenue. This is the first time that we have been able to see the full contribution over a reporting period from Enterprise Connection. The last two months of the period saw the revenue contribution of Lechabile Storage Solutions."

Faritec's revenue for the period increased 82%, to R473 million, off R260 million in the first half of last year. Net profit climbed 53%, to R14 million, from R9 million.

Unlike last year, Tomlinson said he expects the company's performance to be stronger in the second half of the year.

"Last year was an anomaly, with the first half of the year bringing in a stronger performance from the early signing of deals. This year, we expect to return to our historical trend of a stronger performance in the second half of the year. Our deal pipeline supports this view."

Cost of acquisitions

While Faritec's income statement for the period was strong, its balance sheet and cash flow statement showed a different picture.

Goodwill increased from R127 000 in 2006, to R86 million; trade receivables doubled to R240 million, from R118 million in 2006; Faritec's bank overdrafts increased to R20 million, from R319 000; and tangible net asset value per share was at 4.7c, as compared to the previous 27.8c.

Faritec's cash flow statement reflected a net cash deficit of R49 million from its operating, investing and financing activities.

"These are the result of the acquisitions. We refinanced the Lechabile transaction, with a large portion of that coming from working capital. There has been a shift in the profile of some customers, which has had an impact on our debtors' book, and of course, our strong sales increased our tax payments," said Tomlinson.

The company also had to deal with the integration of the financial systems of the three companies, which had a short-term impact on its invoicing. However, Tomlinson noted the integration is almost complete and a new financial system would go live in the next few months.

"We are aware of the cash generation difficulties during the period, but we are satisfied that these will be ironed out by the end of the year. We are very happy with our operational performance, and continue to expect to meet our R1 billion revenue target in our full year results," concluded Tomlinson.

Faritec's earnings per share increased by 1.9%, to 6.7c, headline earnings per share (HEPS) climbed 11.4%, to 7.4c, and fully diluted HEPS grew 9.8%, to 6.9c.