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MICROmega grows revenue 53%

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MICROmega Holdings Limited has reported a 53% growth in revenue, a 33% increase in attributable profit per share and 34% growth in headline earnings per share to 42 cents for the financial year ended 31 December 2007.

According to Greg Morris, chairman of MICROmega Holdings Limited, the group’s balance sheet continues to strengthen with an increase of 31% in net asset value to 197 cents per share, and an increase of 39% in net tangible asset value to 136 cents per share.
“Of the 34% increase in headline earnings per share, 14% is as a result of acquisitions and 20% may be attributed to organic growth. The organic growth was negatively impacted by costs associated with the establishment of new business opportunities during the last quarter of 2007,” Morris explains.
The MICROmega chairman reveals that the group’s philosophy of affording its shareholders an opportunity to participate across a broad base of economic sectors remains at the forefront of its growth strategy.
“We remain convinced that our focus on diversification in the domestic economy will deliver the sustainability in earnings growth that we seek to achieve. We are undergoing a ‘change in shape’ within the sectors in which we have invested. Furthermore, there is greater uncertainty in terms of the broader economic factors that impact on those sectors.
"Despite this, we have been able to adapt to changing circumstances in a manner that both grows and protects our earnings without compromising future earnings growth,” he asserts.
MICROmega’s acquisitions and organic growth have to date been funded out of operating cash flows. Consequently, the group’s earnings have not been affected by rising interest rates. “Current cash reserves and strong cash-based earnings will continue to shield the balance sheet against any further adverse interest rate movements, and we anticipate a continued capacity for growing earnings without undue exposure to debt funding," Morris reveals.
While the group is certainly not immune to the volatility of the rand, Morris says that this has not had a significant impact on earnings. “While we do import certain products within our automotive sector, we are price makers on these specific items, and this shields us somewhat against rand volatility. We have consequently managed to maintain our gross margins on those products,” he explains.
Cash generated from operating activities has not improved year-on-year.
“This is specifically attributed to our decision to increase our investment in steel-based inventory as well as the cyclical increase in trade receivables. The decision to increase steel based stock holdings was motivated primarily by the anticipated escalation in the cost of steel, whilst the movement in trade receivables year-on-year is a result of the increased uptake of products and services from our support services sector in November and December,” Morris reports.
MICROmega operates within a number of industry-specific sectors – automotive, information technology, support services and financial services – and Morris believes that, based on the group’s results, this philosophy of diversifying activities to manage sustainable earnings growth without dependency on a specific sector of the economy has proved successful.
There are four businesses within the automotive sector, namely Deltec Power Distributors, Lubrication Equipment, BTM Manufacturing and the Automobile Radio Dealers Association.
According to Morris, this sector contributed 30% to total headline earnings.
“The growth in performance and contribution is largely attributed to the diverse nature of the businesses within it. We provide products and services to both the parts and accessories and the aftermarket sectors. Consequently, we have not been impacted by the slowdown in growth in new car sales experienced in the domestic market during the period under review. The need to continue enhancing our distribution capabilities remains important to the success of this sector and we anticipate further investments in this capability,” he says.
Morris foresees significant growth in the automotive sector. “We are continuing with our strategy to strengthen our strategic position in the automotive sector. Subject to Competition Commission approval, we have acquired a tier one original equipment market manufacturer, namely Kolbenco. This business is the sole manufacturer of automotive pistons in South Africa, manufacturing and exporting approximately one million units per annum.  Our confidence in the government’s continued commitment to the motor industry development program (MIDP) and prospects of significant domestic investment in the industry will undoubtedly ensure sustainable growth, not only in this business but in the sector as a whole."
There are three businesses within the information technology sector, namely MICROmega Revenue Management Solutions, Intermap, and Sebata Municipal Solutions.
This sector contributed 23% to total headline earnings. “We anticipated a far higher growth in earnings from this sector, which specialises in the provision of services to public sector South Africa. Unfortunately, the client procurement cycle during 2007 was the slowest we have experienced since the incorporation of this sector into the group,” Morris explains.
Despite this, MICROmega remains committed to this sector and has positive views on growth opportunities within it. As such, the group has two new businesses – Stable-Net and MICROmega Technologies – that focus primarily on providing services to the large network users in the public and private sector.
NOSA and MECS Africa are the two companies within the support services sector, which contributed 27% to total headline earnings. This sector continues to present a high growth opportunity for the group. “The current market demand for occupational health, safety and environmental services provided by NOSA bodes well. The demand for skills in the engineering and construction sectors, and the fluidity with which these skills transfer themselves within the domestic market continue to present opportunities to MECS Africa, our human resource outsourcing business,” says Morris.
The only company remaining in the financial services sector is MICROmega Securities, which contributed 20% to total headline earnings. This sector continues to leverage its earnings off the volatility in the foreign exchange, bond and derivative markets. “The business has renewed its ten-year trade and co-operation agreement with London-based Tullett Prebon for a further five years commencing January 1, 2008, and this will ensure sustainable access to both domestic and international markets,” says Morris. The sector has recently established brokerage services into the rest of Africa which will ensure an earnings diversification in future periods.
During the 2007 financial year, MICROmega acquired two companies, Lubrication Equipment  and the Automobile Radio Dealers Association (ARDA).
Lubrication Equipment is an industry leader in workshop lubrication installations, special lubrication projects and lubrication product supplies, while ARDA is a distributor of air-conditioning, car audio as well as automotive security to fitment centres throughout southern Africa.
In addition, three new businesses – Stable-Net, MICROmega Technologies and MICROmega African Money Brokers – were established. Stable-Net, which has been appointed as a Centre of Excellence for Cisco in emerging markets, provides business network optimisation services which ensure that the investment in information and communications technology by an organisation meets its specific business needs. MICROmega Technologies is a specialist distributor of business network performance solutions. MICROmega African Money Brokers was established to provide market participants on the African continent with access to transparent spot and forward foreign exchange prices.
“The aforementioned businesses were all established in the last quarter of 2007 and made no contribution to headline earnings for the period under review. The full economic impact of commissioning these businesses has, however, been taken against earnings in 2007,” Morris adds.