Chief Executive Officer's Report

SUPER GROUP’S STRATEGY IS ROBUST AND WITH ITS HEALTHY BALANCE SHEET, THE GROUP CONCLUDED FIVE STRATEGIC BUSINESS ACQUISITIONS DURING THE 2017 FINANCIAL YEAR, WITH TWO FURTHER ACQUISITIONS POST YEAR-END.

Introduction

The financial year ended 30 June 2017 has been a challenging period on many fronts. The SG Fleet and Dealerships businesses, both locally and in the UK, performed exceptionally well, with Supply Chain Africa’s major businesses being negatively impacted by prevailing tough economic conditions. Supply Chain Europe, in Euro-terms, reported satisfactory results, and Fleet Africa, as expected, reported a decline in results despite having improved margins. The foreign earnings are subject to exchange rate volatility and with the strengthening of the Rand against all the major currencies, especially the Great British Pound and Euro, the Group’s reporting results were negatively impacted.

In the previous comparable year the earnings included, after taxation and non-controlling interests, a once-off foreign exchange profit of R98.3 million on the SG IN tIME forward exchange contract as well as lower B-BBEE expenses of
R12.7 million compared to the current year’s R25.6 million.

During the 2017 financial year, the Group expanded its geographic footprint and market share with SG Fleet’s acquisition of Fleet Hire and Motiva, providers of contract hire, salary sacrifice, short-term rental and fleet management services in the UK. These acquisitions established SG Fleet in the Top 20 fleet management service providers in the UK market. Locally, the Group acquired nine Western Cape dealerships, primarily Mercedes-Benz dealerships, and a strategic property from Sandown Motor Holdings, effective 1 September 2016. Effective 30 September 2016, Super Group acquired a 75% interest in Legend for a purchase price of R110.5 million. Dealerships UK acquired Essex Auto Group effective 1 March 2017 for R407.0 million. During the year, Super Group also acquired the 49.2% minority interest in SG Coal for R167.3 million.

As a result of the various strategic acquisitions made, the non-South African businesses contributed 40% and 61% to revenue and EBITA, respectively, for the year under review. These acquisitions made during the year are referenced in more detail in the Divisional Review section.

On 9 September 2016 and 31 October 2016, the JSE granted Super Group a listing of its second and third issuance, SPG002 and SPG003, senior unsecured notes, in terms of its Domestic Medium Term Note Programme dated 22 October 2013. The total value of the DMTN’s issued and listed was R204 million. The authorised DMTN programme size is R2 billion.

I am pleased to announce that Fleet Africa appointed Mr Bonisile Makubalo as CEO on 1 June 2017. Bonisile was the Chief Operations Officer of the Taxi Financing business of Transaction Capital prior to joining Super Group and he has already demonstrated his capabilities by concluding a FML contract in East Africa. As a result, we managed to realise one of the Group’s stated opportunities as set out in the 2016 Integrated Report.

FINANCIAL PERFORMANCE

Group revenue increased by 15.1% to R29.9 billion (June 2016: R25.9 billion) primarily due to the inclusion of nlc and SG IN tIME for the full year, the acquisitions as well as the commendable turnaround in SG Coal’s results.

EBITA was up by 10.1% to R2 292.4 million (June 2016: R2 082.5 million). The amortisation of PPA intangibles increased by 35.1% to R176.4 million (June 2016: R130.5 million) mainly as a result of the inclusion of the results of nlc and SG IN tIME, Fleet Hire for 11 months and Motiva for seven months.

Operating profit increased by 8.4% to R2 116.1 million (June 2016: R1 952.0 million), largely due to the acquisitions and the improved performance by SG Coal within Supply Chain Africa.

The increase in net finance costs of 10.0% to R280.0 million (June 2016: R254.7 million) is attributable to the funding of the various acquisitions, the funding of the working capital for and the properties of the Western Cape dealerships and the Essex Auto Group as well as the FML borrowings in the SG Fleet United Kingdom acquisitions. The average interest rate paid on borrowings was 6.2% (June 2016: 6.0%) and the average interest rate earned on cash was 3.7% (June 2016: 3.7%).

Profit before tax increased by 8.2% to R1 836.1 million (June 2016: R1 697.3 million). The effective tax rate increased to 27.4% (June 2016: 25.8%) primarily as a result of the increase in profits in territories that have higher corporate tax rates.

EPS and HEPS decreased by 3.9% to 285.0 cents (June 2016: 296.6 cents) and 1.4% to 288.5 cents (June 2016: 292.6 cents), respectively, due to the impact of the increased weighted number of shares and the once-off foreign exchange profit on the SG IN tIME forward exchange contract in the prior comparable period. Core HEPS increased by 7.8% to 332.0 cents (June 2016: 308.1 cents). Core HEPS in the prior comparable period also excluded the once-off profit made on the foreign exchange contract. The increase of 4.8% in the weighted average number of shares in issue was due to the rights issue and book-build concluded in October 2015 and December 2015, respectively, to fund the SG IN tIME and nlc acquisitions.

The increase in total assets of 9.1% to R24.9 billion (2016: R22.8 billion) is mainly as a result of the newly acquired assets of Fleet Hire and Motiva by SG Fleet, the nine Western Cape dealerships, property related to the dealership transaction and the interest in Essex Auto Group during the year under review. The Group has taken a decision to modify the calculation of net operating assets by including the interest-bearing Dealerships’ floorplan liabilities. As a consequence, the Group’s RNOA, after tax, was 12.2% (June 2016: 15.7%).

Super Group’s net debt position at 30 June 2017 increased by 56.2% or R1 117.0 million to R3 105.7 million, with R537.6 million attributable to property and other borrowings relating to Dealerships SA and Dealerships UK. The Group’s gearing, as at 30 June 2017, was 31.5% (June 2016: 21.4%). The net asset value per share increased by 9.0% for the year to 2 394.1 cents at 30 June 2017 (June 2016: 2 196.4 cents).

Operating cash flow increased by 17.3% for the year to R3 111.4  million (June 2016: R2 651.5 million) mainly due to the increase in earnings before interest, taxation, depreciation and amortisation. Cash generated from operations, after working capital, increased by 10.3% to R3 194.3 million (June 2016: R2 897.0 million).

The Group would rather re-invest the cash generated in its operations in acquisitions or to repurchase shares and therefore no dividend for the year ended 30 June 2017 has been declared.

DIVISIONAL REVIEWS

Revenue contributions for the year to June 2017 reflect that the Dealerships division generates 53% of the Group’s turnover, the same as the previous year. The revenue contributions for the Supply Chain business segment was down to 35% (2016: 36%), with the Fleet Solutions segment up at 12% (2016: 11%).

The EBITA contributions from the Fleet Solutions operations increased to 50% (2016: 48%), Dealerships remaining stable at 20% and the Supply Chain business contribution declining in comparison by 2% from 32% in 2016 to 30% in 2017.

The decline in revenue and EBITA contributions for the Supply Chain division was mainly as a result of the poor results reported by SG Consumer, SG Convenience and African Logistics, as well as SG IN tIME’s results in Rand-terms.

For a comprehensive overview of each division and business, refer to Supply Chain, Fleet Solution and Dealerships of this Integrated Report.

SUBSEQUENT EVENTS

Effective 4 July 2017 SG IN tIME acquired an 89.5% interest in Ader, a Spanish courier and express transport operator, for €11.6 million. Since starting in 1992, Ader has grown into a business with 17 offices throughout Spain and 15 operations in the Eurozone, 120 employees and annual revenue of about €40 million. The company’s current owner and founder, Emilio Ropero, has stepped down and Torsten Prelle, CEO of SG IN tIME, joined the management board of Ader. We were encouraged by a large OEM to establish a direct presence in Spain in order to service the increase in locally manufactured parts volumes in the Iberian environment and since Ader has been SG IN tIME’s local network partner in Spain for 15 years, it made sense to acquire them. SG IN tIME now has an established and direct presence in Spain.

Dealerships UK acquired Slough Motor Corporation effective 4 July 2017 for £24.0 million. SMC owns six Ford dealerships and two Suzuki dealerships in Kent and Berkshire.

Effective 25 August 2017, Bluefin Investments Limited acquired an additional 1.63% in SG Fleet for R175.9 million, increasing the Group’s holding to 54.0%. Effective 11 September 2017, SG Fleet issued 4 136 925 shares on exercise of vested options granted as long-term incentive awards under SG Fleet’s Equity Incentive Plan, diluting the Group’s holding to 53.14%.

Super Group acquired the remaining 45.0% minority interest in Digistics, on 18 September 2017, for R102.7 million.

GOVERNANCE AND SUSTAINABILITY INITIATIVES

Super Group, across both our African and international operations, invests in our employees through individual development, equality and performance-based advancement to ensure that we maintain a balanced and highly skilled workforce. Super Group is also committed to high standards of honesty, integrity, behaviour and ethics in dealing with all stakeholders. All directors and employees of the Group are encouraged to subscribe to the Super Group Code of Ethics and Business Conduct, which requires them to maintain high personal ethical standards and to act in good faith and in the best interests of the Group.

Super Group recognises the essential need to actively contribute to the social upliftment of previously disadvantaged communities. Although we have invested in numerous projects, set out in more detail in the Divisional Review of each business, I would like to single out our partnership with Rays of Hope, a community-based non-profit organisation that operates in the Alexandra Township. On 22 May 2017, we donated two Toyota Quantum vehicles to them. Rays of Hope transports 70 children to and from their Homework Club; volunteers doing Home-Based Care; learners to and from Sparrow School in Melville each day; as well as people and supplies from their home office at Rosebank Union Church to various points in Alexandra. We are proud of this relationship as the work they do in Alexandra is excellent and matches our corporate social investment philosophy.

The Group continues to focus on environmentally friendly business practices. Many of these initiatives make good business sense in that they form part of the Group’s continuing drive to improve efficiencies. The Group continues to ensure that its vehicles are properly maintained and not overloaded. Along with continuous driver training, this ensures that carbon emissions from all vehicles meet manufacturers’ specifications.

For more detail on the Group’s corporate governance and sustainability practices, refer to the Group’s website.

PROSPECTS AND STRATEGY

Super Group is expecting significant headwinds for the remainder of 2017, with muted growth prospects anticipated for its Southern African operations. The outlook for Australia, UK and Europe is more positive, except for the uncertainty around the impact Brexit might have on trade agreements between the UK and the Eurozone.

Supply Chain Africa continues to focus on retaining its existing client and customer base, as well as securing new long-term contracts at acceptable margins. Given the competitive trading environment, this is one of the major challenges faced by this business. African Logistics has been streamlined and although it remains a tough environment, it is well positioned for any growth going forward.

Supply Chain Europe has concluded the Ader acquisition and similar opportunities in Western and Eastern Europe will be explored.

Fleet Africa secured a new fleet management contract in East Africa with the potential of similar contracts in this region being concluded. Fleet Africa is now the sole distributor of the E-1 fire engine, a premium brand, which will positively contribute to the business’ product offering.

SG Fleet continues to grow through acquisitions as well as organically. Its focus will remain on securing meaningful contracts, both with Government and corporates. Product innovation and differentiated service propositions are also key in expanding the Group’s presence in the UK and New Zealand.

The Dealerships SA business is anticipating difficult trading conditions to continue as consumers remain under pressure. The interest rate cut announced in July 2017 is not expected to make a significant difference.

Dealerships UK is expecting a slowdown in growth in the new vehicle market given the uncertainty pertaining to the effect of Brexit and the speculation regarding the change in government policies on shifting diesel technology used towards the latest cleaner Euro 6 diesel standard. Since April 2017, there has been a marked decline in new vehicle registrations. The acquisitions of Essex Auto Group and Slough Motor Corporation are complementary to Allen Ford’s existing businesses.

Super Group’s position as an innovative, integrated mobility solutions company remains compelling and the Group is committed to the growth of its core businesses, both organically and through strategic and focused acquisition opportunities, locally and internationally.

ACKNOWLEDGEMENTS

I would like to thank my fellow Board members and Exco for their support and collaboration during a challenging year. I also wish to thank our employees for all their hard work and commitment towards making Super Group the great company that it is. Your contribution has laid a foundation for sustainable earnings growth going forward.

To our shareholders, customers, suppliers, advisers and business partners, thank you for your ongoing support.

  
Peter Mountford 
Chief Executive Officer 
 
20 September 2017 

The Group continues to focus on environmentally friendly business practices. Many of these initiatives make good business sense in that they form part of the Group's continuing drive to improve efficiencies.