With the South African economy moving into recession, Allied Electronics Corporation (Altron) experienced a challenging six months to 31 August 2009.
A slowdown in the construction and mining sectors in particular, has dampened the demand for power cables, while the increased competition in the information and communications technology (ICT) market has put pressure on margins in that sector.
Altron released interim results today, revealing an 8% decline in revenue to the comparable period in 2008. Profit for the period fell sharply from R800-million in the first six months of last year to R405-million in the first six months of 2009. Headline earnings per share dropped by 51% to 93c per share, from 192c per share.
"The South African economy entered into a recessionary period in the second quarter of 2009, creating a challenging operating environment for Altron," says Frost & Sullivan ICT analyst Mpho Moyo. "Competition has intensified as companies have had to differentiate themselves from their competition in order to retain customers.
"Other challenges include the appreciation of the rand, which has resulted in foreign exchange losses, a fall in commodity prices and a decline in orders in the building and construction industry. In addition, IT budgets have increasingly come under pressure as companies have adopted cost-optimising strategies due economic uncertainties. This has affected the performance of Bytes."
The most significant decline in profit was recorded by the Powertech Group, which reported operating profit of R158-million for the period, down from R562-million in the first six months of 2008. Operating profit for the Powertech Cables Group fell by 92%.
Altron noted that supply in the local power cables market currently exceeds demand, but that the group is working on cost reduction and working capital management programmes. It believes that these measures will position Powertech favourably when markets recover.
Moyo does, however, see strong positives in the performance of the Altech group.
"Despite, the general economic slowdown, Altron has taken advantage of its diversified product portfolio delivered through its subsidiaries, Powertech, Altron and Bytes," she says. "This has proved to be a successful strategy, as the decline in revenues from Powertech and slow in revenue growth rates from Bytes have been somewhat offset by the consistently good performance by Altech."
Altron has taken a cautionary approach by holding back infrastructure investment in South Africa, in line with the general trend with the economy. However, Frost & Sullivan expects that the company is likely to re-evaluate its decision as the South African economy enters a recovery phase.
East Africa has also been a key focus for Altech, and this continues to yield positive results.
"Several undersea cable projects are underway to increase the availability of bandwidth, which will enable the provision of advanced technology and services in Africa," Moyo adds. "Altech entered into a strategic partnership with SEACOM to invest in bandwidth capacity. This is a pre-emptive move by the company to competitively position itself within the telecommunications market, in anticipation of increased demand for internet services in the East African region. This is expected to complement the rise in Altech's stake in a leading internet services provider, Kenya Data Networks."
Altron notes that the strength of the rand will remain a concern for the group, considering the impact this has on translating results from foreign operations and the competition it creates from foreign companies able to import at lower cost. The group expressed expectations that the second half of the year would however show an improved performance.