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Adcorp holds its own in a challenging environment

Adcorp holds its own in a challenging environment
Listed human capital management group, Adcorp Holdings Limited, announced today that Group revenue of R 5.4 billion for the financial year ended 28 February 2011 was 7% ahead of revenue generated in the prior year.
Headline earnings of 195.7 cents per share (2010: 195.9 cents) were flat compared to the prior year.

The Group declared a final dividend of 121 cents per share (2010 final dividend: 115 cents) resulting in total dividends declared for the year of 175 cents which represents a 6% increase compared to the prior years declared dividends.

Normalised earnings for the period of 290.2 cents per share (2010: 315.3 cents) which exclude non-trading IFRS accounting adjustments were some 8% down on normalised earnings per share for the comparative period.

Normalised after-tax profits for the year of R 174 million (2010: R 170 million) were 3% ahead of the prior year.

Commenting on the results, Adcorp CEO, Richard Pike said: The Adcorp Group has achieved much over the past financial year, although the year was not without its challenges. In particular, an economic environment struggling to reenergise and regain confidence following the recent global financial crisis as well as the sustained political and regulatory pressure on the temporary employment services industry, made for a difficult operating environment. Considered in this context, the Groups performance and successes over the past year are most encouraging.
A highlight of the Groups financial performance has been cash management, said Pike.
Free cash generated by operations of 376.9 cents per share (2010: 222.4 cents) reflected a significant 69% increase compared to the prior year, reflecting managements focused attention on cash management.

In this regard, the Group converted 129% (FY2010: 92%) of operating profit into cash compared to a Group target of 90% by dropping outstanding debtors days to 36 (FY2010: 38 days).
As a result, the Groups debt gearing level has dropped significantly from a level of 31% a year ago to its current level of 12%.
The blue-collar flexible-staffing businesses which provide the engine room for the Group generally continued to perform well off a high base of achievement in the prior year. These businesses were able to gain market share in the wake of the ongoing debate regarding labour broking whereby, a number of clients have consolidated their supply of labour with larger, reputable suppliers. With the exception of one operating entity, the white-collar flexible-staffing and permanent recruitment operations of the Group recorded good year-on-year profit growth.

This solid performance which has continued into the new financial year has been the result of market share gains as well as a more buoyant recruitment market, particularly with regard to scarce skills, commented Pike.

The Business Process Outsourcing (BPO) and training operations experienced mixed fortunes with the training operations reporting significant year-on-year growth.

The prospects for the training operations are extremely positive given the current prevailing skills shortage, the focus of Government on pushing the training agenda and the unique and highly relevant business model of our training operations, commented Pike.

EBITDA margins declined to 4.8% (2010: 5.5%) reflecting continuing pricing pressure as well as a mix swing in favour of lower margin blue collar business. Margins have also been impacted due to greater expenditure incurred on delivering learnerships, the benefits of which are reflected in the lower effective tax rate of 11% (2010: 14%) due to specific tax deductions relating to these learnerships.
During the year, the Group facilitated approximately 7 000 learnerships of which, specifically, 605 artisans were trained.
The Group acquired Gold Fields External Training Services (GFETS) during the year for an amount of R5 million which has now been successfully integrated into the training operations of PMI and renamed Adcorp Technical Training. Post-acquisition profits from Adcorp Technical Training were slightly ahead of expectation. Given the strategic positioning of this business with its specific focus on artisan training, the acquisition further strengthens the Groups positioning as a leading provider of scarce technical skills.
The Group also announced that it has agreed in principle to proceed with the acquisition of iSolve Business Solutions subject to the fulfillment of various conditions precedent. iSolve is an information technology consulting, training and development business and the maximum purchase price payable by the Group has been agreed as R27 million.

Following a protracted debate on the future of the Temporary Employment Services (TES) or Labour Broking industry whereby certain factions in the trade union movement as well as in Government have been calling for a ban of the practice, four draft Bills were released by the Department of Labour for public comment on 17 December 2010.

Pike commented: Whilst these Bills are an attempt to significantly regulatethe TES industry, if implemented, they would have far reaching implications for all employers in South Africa. As such, they have elicited much heated debate and controversy as well as a groundswell of opinion calling for their withdrawal.It is clear that should this raft of proposed laws be promulgated, they would be in direct conflict with the Governments primary, stated objective of job creation.

As such, a total rethink is required with regard to labour market policy in South Africa and, to this extent, the Department of Labour has agreed to engage with business and labour at Nedlac to progress this debate.

The likely outcome is that the proposed labour law amendments are likely to be centred on regulation rather than on a banning of TES, said Pike.
Given the lengthy process involved in the negotiations, it is unlikely that any revised labour legislation will be passed this year and that the process will spill over into 2012.

In the interim, it is not anticipated that there will be any immediate ormaterial impact on the business of Adcorp and, in the longer term, we remain confident that regulation of the industry will be to the ultimate benefit of the reputable and legitimate players in this industry, commented Pike.

Regarding future prospects, Pike said: Whilst, on the face of it, the labour market in which we primarily operate appears to be relatively stagnant due to an inability of the economy to create jobs on any meaningful scale, coupled with the regulatory challenges faced by the TES industry, these factors both contribute to providing the Adcorp Group with major opportunities.

There are undoubtedly certain good pockets of opportunity which the Group is able to take advantage of with regard to the placement of scarce skills, the training of such skills, the opportunity to present alternative, innovative value propositions to clients and the opportunities provided by the labour broking debate to engage clients at a strategic level.

The greater the level of legislative complexity and regulation, the more it favours a Group such as Adcorp which has the sophistication, reputation, know-how and financial capability to deal with such complexity.
These opportunities coupled with the adoption of technology as an enabler in the staffing space whereby, the Adcorp Group leads the way in this regard, all contribute to a high level of optimism with regard to the future prospects of the Group, said Pike.

Strategically, the Group is focused on managing its costs, driving economies of scale, delivering value for its clients, seeking out strategic acquisitions and increasing the level of sophistication and technological advancement it applies in its day to day operations. In addition, the Group has a strong and robust balance sheet.
As such, the Group is particularly well positioned for the future, concluded Pike.


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