We are pleased to submit our report to shareholders on the results and activities of KAP International for the year ended 31 December 2005.
Prevailing conditions in 2005 were very similar to those of 2004. The sustained strength of the rand, low interest rates and buoyant economic growth contributed to a favourable business climate in South Africa.
During the year, the group adopted International Financial Reporting Standards (IFRS), which has resulted in a restatement of the 2004 results as disclosed in the notes to these annual financial statements. All references to 2004 numbers in these annual financial statements refer to the restated numbers.
The board of directors is pleased to report on the results for the year ended 31 December 2005. Headline earnings per share increased by 36% to 46,1 cents compared to restated 2004 headline earnings per share.
Revenue increased from R1,9 to R3,0 billion, largely as a result of the inclusion of a full year's trading for the operations acquired on 1 July 2004. The operations of the group continued to deliver a solid performance, details of which are provided in the operations reports.
Operating profit increased from R140,6 million to R227,7 million as a result of full-year inclusion of the acquisitions of 1 July 2004, as well as a continued favourable business climate and further cost containment. Included in headline earnings for the year of R194,4 million (46,1c per share) is a once-off net credit of R35,9 million after taxation, being the group’s portion of a pension fund surplus before minorities.
The tax rate of the group remained relatively low at 18,6% (2004: 9,3%), mainly as a result of the raising of deferred taxation assets in respect of estimated taxation losses.
The balance sheet of the group remains strong, with an interest-bearing debt-to-equity ratio of 22,0% (2004: 20,7%) and an interest cover of 11,7 times (2004:13,3 times).
The apportionment of a pension fund surplus was authorised by the Financial Services Board during the year. The net surplus of R50,6 million, after R19,8 million was utilised to settle a portion of the post-retirement medical benefits liability, will be used as a contribution holiday in the amount of R5,6 million per annum.
A net working capital investment of R85,5 million included R32,9 million to increase the standing herd at Bull Brand in order to achieve economies of scale.
In addition to the R44,1 million spent to acquire the industrial buildings in the Automotive and Footwear Divisions, capital expenditure of R121,1 million was incurred during the year. Capital expenditure of R121,2 million (including R86,1 million of expansionary capex) is budgeted for 2006, which will be funded out of operating cash flows and borrowings.
Subject to the required shareholder approvals, the board has resolved to declare a distribution of 12 cents per share (2004: 5 cents). The distribution cover is 3,8 times (2004: 6,8 times). The policy of the group is to have a payout ratio of approximately 25% of headline earnings and to declare distributions annually after the year-end results have been finalised. After an initial period of consolidation by the group during 2004, an improved payout ratio was considered appropriate for 2005.
The industrial segment continued its solid performance in 2005.
Locally manufactured vehicle numbers increased by 14,5% to a record high of 497 000 units in 2005 (2004: 434 000 units) and were buoyed by the launch of three new models. The division achieved its profit target despite significant raw material price increases and production disruptions caused by the start-up of new contracts and installation of new technology.
Although under threat from imports in the safety footwear market, the industrial footwear division continues to produce acceptable margins on its products. To complement their locally manufactured product offer, a strategic decision has been taken to import footwear.
Profitability has improved significantly from the prior year, despite international pressure on dollar-denominated margins. However, management has successfully improved efficiencies by maximising production capacity to achieve good returns.
The sustained increase in worldwide demand for PET is expected to continue. Hosaf Fibres remains committed to further increase its PET output by increasing existing capacity.
The consumer segment continued to provide improved results on the back of the growth of the South African economy, low interest rates and the strong currency.
Retail sales have surged in the year to the benefit of Jordan’s main brands of Bronx, Jordan and Olympic. Intense margin pressure has been experienced as new importers have entered the market. Jordan continues to replace capacity in its own manufacture with increased footwear imports.
Strong local and export demand, underpinned by the largest ever generic beef advertising campaign, resulted in not only favourable red meat prices but also strong volume growth. Low maize prices also contributed to improved operating margins.
Continued growth in the South African economy fuelled strong consumer demand and a buoyant retail sector. Glodina also reaped the benefits of its three-year capital expenditure programme and sustained investment in staff training.
On 30 November 2005, Steinhoff Africa Holdings (Pty) Limited acquired a strategic equity stake of 21% in the group. Potential synergies exist between the two groups, and these are being identified.
In September 2005 the terms of an agreement were finalised in respect of the acquisition of the properties occupied by the Feltex manufacturing operations from Courthiel Holdings (Pty) Limited and Conrapp Properties (Pty) Limited, both related parties to KAP, for R44,1 million.
In July 2005 the group entered into an agreement to dispose of a non-core property to African Hide Trading (Pty) Limited, a related party to KAP, for R5,5 million.
In November 2005, Motseng Investment Holdings (Pty) Limited acquired a further 3% of the equity of the company, increasing the company’s BEE shareholding to 6%.
Rob Radford resigned from the group and the KAP board with effect from 22 September 2005. The board wishes to thank him for his contribution both to the board and the group, and in particular for his leadership of the Feltex group.
Danie van der Merwe (MD of Steinhoff Africa) and John Haveman were appointed to the board as non–executive director and chief financial officer respectively, with effect from 25 November 2005.
Markus Jooste resigned as chairman of the audit committee and was replaced by Len Konar, an independent consultant and professional director of companies, appointed on 3 March 2006. Jan van der Merwe, CFO of Steinhoff International Holdings Limited, was also appointed to the KAP audit committee on 22 November 2005.
We believe that the stabilisation of the economy and government’s commitment to growth will be highly favourable to both the industrial and consumer sectors of the economy.
Regarding the industrial sector, KAP International manufactures in two industries which have been identified as high-growth industries: the automotive industry, where the increase in vehicle build in South Africa is well publicised in the financial press. The second is the PET industry, where growth rates of 8 to 10% in the last three years have been experienced, and industry sources expect world markets and the South African market to grow by more than 7% and 10% respectively.
Regarding the consumer sector, our strong brands in the consumer division are well positioned to benefit from continued economic growth and strong consumer demand.
We wish to thank our shareholders, who have generated sustained interest in the group over the past year. We will continue to reward your loyalty.
In particular, we would like to extend an enthusiastic welcome to Steinhoff as a shareholder, and we are confident that they will be able to add significant value to the group.
We welcome our new board members and anticipate their valuable input into growing the business in the future.
We express our sincere appreciation both to management and staff in generating our most successful year on record.
To our customers and suppliers, our heartfelt gratitude for your continued commitment to the group. We look forward to a highly productive relationship with you in the future.
 |  |
| Claas Daun | Paul Schouten |
| Non-executive chairman | Chief executive officer |
| 10 March 2006 |
