Chief financial officer’s report

CHIEF FINANCIAL OFFICER’S REPORT

Growth is never by mere chance; it is the result of various forces working together

ENHANCING SHAREHOLDER RETURNS DESPITE A CHALLENGING OPERATING ENVIRONMENT

The financial capital we source from our equity and debt investors and our retained earnings enables our business continuity and growth, including making strategic investments. Our value is created and preserved through:

increasing NAV, returns on investments, dividends and share price;
maintaining a robust balance sheet to protect against downside risk (as was evident during the COVID-19 pandemic);
investing in and growing our client franchises and our employees sustainably; and
following good ESG practices that ensure a sustainable business for the long-term.

OPERATING IN AN UNPRECEDENTED MACROECONOMIC ENVIRONMENT

During the 2021 financial year, we went through the most radical transformation the world has ever seen. The outbreak of the COVID-19 pandemic led to a change in workforce behaviour and continues to impact businesses due to the various lockdowns.

The lockdowns led to a slowdown in global growth, which severely impacted economic activity, with businesses and individuals coming under severe pressure with some recovery starting to occur. Nevertheless, we navigated the COVID-19 pandemic and remained resilient with a robust balance sheet. Although our profitability was impacted with lower than expected revenues and increased impairments, we managed our cash flow and expenses to remain resilient.

As we continue to navigate this “new normal”, we lock arms (virtually) to find new ways of working and surviving.

AEEI’s sustainability and business model will continue to be resilient, flexible and adaptable to the “new normal.” AEEI, as a diversified investment holding company, has delivered and reinvented itself as a Group for the financial year ending 31 August 2021.

“You can’t control what happens, but you can learn resilience in the face of change.” Robyn Conley Downs

The South African economy recorded its fourth consecutive quarter of Gross Domestic Product (GDP) growth, expanding by 1.2% for the 2021 financial year. However, despite the gains made during the year, the economy is 1.4% smaller than before the COVID-19 pandemic.

South African GDP
Source:TRADINGECONOMICS.COM | STATISTICS SOUTH AFRICA

Equal opportunity and equal treatment in the labour market are at the core of decent work. The unemployment rate in South Africa stands at 34.4%, and many job creation investments are needed to stimulate economic growth. Unfortunately, women in South Africa and worldwide still face additional challenges that hinder them from accessing employment.

South African unemployment rate
Source: TRADINGECONOMICS.COM | STATISTICS SOUTH AFRICA

According to the South African Revenue Commissioner (SARS), the tax revenue collection outlook for 2021/2022
looks positive, despite the crippling effects the COVID-19 pandemic continues to have on the country’s economy

COVID-19 IMPACT ON THE FINANCIAL PERFORMANCE AND POST-PANDEMIC RECOVERY

Due to the proliferation and pervasive nature of COVID-19, the business world has been disrupted like never before. This has paved the way for technology to play a dominant role and has accelerated the Fourth Industrial Revolution (4IR) for developed and developing economies.

AEEI, like any other business, has been impacted by the COVID-19 pandemic. As a result, our financial performance reflects the challenging operating environment. However, despite the challenges, we maintained a strong balance sheet, capital and liquidity. We limited our capital expenditure as far as possible without harming our ability to operate now and in the future.

We have right-sized our businesses to match trading conditions to ensure sustainability. We will continue to work closely with our stakeholders, find innovative ways to sustain our businesses, and proactively support our employees, service providers, and suppliers while managing potential risks and challenges.

DELIVERY ON OUR KEY FOCUS AREAS

2021 FINANCIAL OVERVIEW

INCOME STATEMENT

DIVISIONAL REVENUE - 2021 IMPACT

FISHING AND BRANDS DIVISION

Premier Fishing and Brands Ltd, the fishing and brands division, delivered an astonishing performance after last year’s results. Revenue growth in 2021 increased by 27.37% The squid sector delivered excellent results, with catch rates increasing by 46% for the year under review compared to the prior year’s adverse rate of (47%) primarily due to changes in climatic conditions. The lobster sales increased by 5%. These increases had a material impact on their revenue for the 2021 financial year.

TECHNOLOGY DIVISION

Due to the volatile economic climate, AYO Technology Solutions Ltd’s (AYO) revenue decreased by 41% to R1.7bn. Clients across industry verticals and sectors switched into cash preservation mode and suspending infrastructure expenditure. As a result, AYO’s fixed nature covering human capital costs and reduced working capital requirements resulted in a net loss after tax of R258m.

AYO acquired Kathea Communications (Pty) Ltd in March 2021, becoming the largest distributor of headset equipment in Africa, positioning AYO to capitalise on available opportunities brought about by work-from-home and other changes in workforce behaviour.

AYO’s balance sheet remains buoyant, with total assets approximating R4.2bn and robust cash reserves. The AYO Board remains confident that its solid asset base will ensure that AYO weathers future lockdown restrictions.

EVENTS AND TOURISM DIVISION

The revenue of the events and tourism division decreased due to the COVID-19 pandemic restrictions, which led to the cancellation of events and large public gatherings, including the annual Cape Town International Jazz Festival, also known as “Africa’s Grandest Gathering.” Due to the postponement of events and the Cape Town International Jazz Festival, the company will incur a small loss for the year under review.

The third wave of COVID-19 severely impacted the travel business with very little corporate and leisure travel taking place, resulting in the closure of the Inbound Travel sector. However, despite little income from traveling, the company reduced its debt drastically during the year under review by streamlining operations, thus freeing up cash to service debt. As a result of the above, the company will make an operational loss for the year under review. A renewed interest has been shown post-financial year-end after travel restrictions were relaxed.

Magic 828 (Pty) Ltd experienced a tumultuous financial year, with the COVID-19 pandemic negatively impacting sales revenue and a decline in advertisement income. In addition, the hard lockdown severely impacted them with a constrained cash flow, leading to the cancellation of advertising contracts, a cost-cutting exercise including reducing their marketing expenses and right-sizing their operations. Unfortunately, the impact of the COVID-19 pandemic resulted in staff retrenchments in this division.

HEALTH AND BEAUTY DIVISION

Orleans Cosmetics (Pty) Ltd had a particularly challenging year and made an operating loss at the EBIT level of R0.76m. However, they benefitted from a revaluation of intangible assets of R3.65m (2020 impairment of R3.65m) as distribution agreements with the overseas Principals have been renewed or extended. The overall EBIT was, therefore, a profit of R2.8m.

The impact of the COVID-19 pandemic affected their operating results for the financial year. In addition, the recent unrest affected their revenue for July by 25% compared to June, resulting in an EBIT loss of R399k, leading to the year-end financial results being lower than expected.

AfriNat (Pty) Ltd operates in three sectors: agriculture which includes pre-and post-harvest, hygiene and sanitation, and food preservation, focused on providing sustainable solutions in food production and processing from seed to table.

Before the COVID-19 pandemic lockdown in 2020, we saw a spike in hygiene and sanitation sales, which subsequently reduced in 2021, with alcohol sanitisers being commonplace. Despite our superior product, it was not widely used as the Department of Health mandated alcohol sanitisers as the preferred option.

We saw a growth of over 15% on the agricultural sales side, which would have been higher if our imported raw materials were not delayed from Europe. Unfortunately, we were unable to meet all the orders before the financial year-end and are still receiving delayed orders that will only move into production post year-end.

The overall revenue for 2021 is R13.1m with a profit of R65k. The revenue and overall loss are primarily attributed to the delay in raw materials and a few territories that saw late rains, which delayed purchases. In addition, in some regions, we could not get price increases because of input cost pressures which were residual effects of the previous year.

RESEARCH AND DEVELOPMENT DIVISION

The research and development division is engaged in product development phases at different stages, including developmental work on the dendritic cell vaccine (DCV) for cancer immunotherapy and communicable diseases such as extreme drug-resistant tuberculosis.

There was very little progress during 2021, mainly due to the second and third waves of the COVID-19 pandemic, which prevented work from being done at Groote Schuur Hospital. In addition, our legal teams have registered and maintained the IP registrations into new territories worldwide for the maturation of the dendritic cells, which is the basis of this technology.

STRATEGIC INVESTMENTS

AEEI disposed of its investment in SAAB Grintek Defence (Pty) Ltd during the current financial year. As a result, the debt was settled from the profit on the sale.

GROUP FINANCIAL POSITION

CASH FLOW

MATERIAL MATTERS THAT HAVE AFFECTED OUR PERFORMANCE

We identified our material matters in terms of relevance from our risk assessment process, which included uncertain events that could potentially negatively affect the Group. In addition, it took into account the legitimate and reasonable needs, interests and expectations of all material stakeholders in the best interests of the Group. Refer to Materiality, Risks and Opportunities on pages 32-38 for detailed information.

FINANCIAL OUTLOOK

Our fishing and brands division remains on track to deliver an improvement in the squid catch landings, as actual catch rates for the 2022 financial year are already looking very promising. The Fishing Rights Allocation Process (FRAP), coming up before the end of 2021, may potentially impact the business. Management is addressing this issue with a potential ground-breaking B-BBEE transaction in Premier Fishing SA (Pty) Ltd that will increase their B-BBEE significantly.

The work from home and eCommerce markets have shown to be resilient, with a substantial number of consumers seeing the value of online shopping and working from home. With its diverse basket of products, AYO directly addresses this shift and is well-placed to be an ICT partner of choice to help businesses achieve their own goals.

The health and beauty division withstood the COVID-19 pandemic to deliver positive results in 2021, and the trajectory is looking extremely positive for the 2022 financial year.

SPECIAL THANKS AND APPRECIATION

A special thank you goes to our incredible team and the employees in the Group. We could not have done it without you. Thank you for making our year a success despite all the challenges to ensure the sustainability of our business with minimal distraction from outside forces and remaining focused.

During this challenging year for AEEI and its subsidiaries, our team, associates, partners and stakeholders, I would like to thank you graciously for your unwavering loyalty and support during one of the most turbulent years.

CONCLUSION

This year, AEEI has demonstrated that it is well-positioned to mitigate risk, flexible enough to change strategic direction in the face of adversity and remains focused on further growth by improving its profitability and delivering greater value to its

JOWAYNE VAN WYK

Chief financial officer

POST-BALANCE SHEET EVENTS

On 23 September 2021, AYO subscribed for 30% of ordinary shares in Crealpha (Pty) Ltd (Crealpha) for a nominal amount. As part of the shareholders agreement AYO has also provided Crealpha with a R30m working capital loan to enable the company’s expansion. Crealpha is a cloud data services business that enables the Group to expand its service offering as part of the Group’s go-to-market strategy.

On 1 October 2021, AYO subscribed for an additional 30 ordinary shares in 4Plus Technology Venture Fund Africa (Pty) Ltd (4Plus) for a subscription price of R24m. AYO now holds a total of 28% of the ordinary shares in issue of 4 Plus.

On 1 November 2021, AYO concluded an asset for share agreement in which AYO disposed of its 100% shareholding in Puleng Technologies (Pty) Ltd (Puleng) for a consideration of R20m in exchange for redeemable and cumulative preference shares from the purchaser for a total consideration of R20m. Puleng is a cyber security company which focuses on the development of efficient Governance, Risk and Compliance (GRC) programmes and providing data centre infrastructure which effectively protects sensitive client data.

A final dividend of 10 cents per share was approved by the Board of directors of AEEI in respect of the financial year ended 31 August 2021. The dividend is payable on 3 January 2022 to shareholders recorded in the register of the Company at close of business on 31 December 2021.