Etion widens losses

13th August 2020

By: Natasha Odendaal

Creamer Media Senior Deputy Editor

     

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JSE-listed Etion has reported a significant widening of its loss after tax for the year ended March 31, on the back of economic weakness, one-off restructuring costs and write-offs and impairments.

The group posted a 1 237% plunge in loss after tax, from a loss of R2.7-million in the prior year to a loss of R37.1-million in the year under review.

Earnings before interest, taxes, depreciation and amortisation declined 132%, falling into the red at a loss of R9.6-million.

Etion’s basic loss a share and headline loss a share widened from 0.53c in the year ended March 31, 2019, to a respective loss of 6.4c and 0.87c during the year under review.

On a normalised basis, the group’s headline earnings a share improved 415% to 3.04c.

The group’s normalised profit, after excluding exceptional costs relating to the writedown of inventory, writedown and impairment of intangible assets and retrenchments costs totalling R64.2-million, increased to R17.1-million.

Revenue declined 4% to R572.9-million, while cash generated during the year under review increased 120% to R82.6-million.

“The past financial year tested Etion's resilience in extremely challenging operating conditions, with significant one-off operating costs being incurred following the strategic reorganisation of the Safety and Productivity Solutions and Digital Network Solutions businesses,” Etion group CEO Teddy Daka said.

Etion Digitise and Etion Connect, which experienced one-off restructure costs and goodwill and inventory impairments respectively, were heavily impacted by sustained economic weakness in South Africa, even before the impact of the Covid-19 lockdown in March.

Etion Digitise proved to be unsustainable in its current form, exacerbated by the depressed market conditions within its target markets, resulting in a strategic restructuring to remove noncore activities from the business unit, reduce its monthly run rate costs by about 82% and transferring a small team of remaining employees with critical engineering capability into Etion Create.

“These interventions provide a stable platform to ensure that service delivery and maintenance support to Etion Digitise's key rail customer continues and positions us to respond to new, emerging customer demands,” the group explained.

Meanwhile, the economically driven slump in demand for installation of fibre to homes and offices since 2017 caused a three-year decline in Etion Connect's revenue, making its cost base unsustainable in the current environment.

Etion Connect's profit margin was impacted by competition and the rising cost of imported components owing to the Rand's steady decline and, while the customer base was diversified and its costs realigned, revenue generation remained a major challenge in a low-growth, highly competitive market, where the realisation of growth depends on economic recovery.

“Within this context, management proactively initiated a strategic review of Etion Connect to explore the opportunity to implement a reorganisation of the business with the objective of ensuring the long term sustainability and profitability of the business.”

Meanwhile, Etion made encouraging progress in its international expansion strategy and grew its cybersecurity offering through the acquisition of LAWTrust, which had been incorporated into Etion Secure.

“We benefitted from the strong financial performance of LAWTrust, while Etion Create remained cash-generative and continued to invest in new intellectual property and international expansion for future growth, despite lengthy delays in major project awards.

“LAWTrust focused on building a digital business that delivers solutions online or supports its customers remotely. This, combined with the effective implementation of its international expansion strategy, enabled the business unit to more than double revenue and profits,” Daka pointed out.

Meanwhile, at Etion Create, the completion of certain large multi-year contracts and a delay in expected orders from the defence sector in the Middle East led to a decline in revenue.

Despite this, Etion Create remained cash-generative and profitable, albeit at a lower level, owing to disciplined financial and operational management.

“The business unit continued to invest in design and engineering capability for the development of export products. By carefully balancing product margins and maintaining cost discipline, Etion Create increased its gross margin in difficult market conditions,” Daka commented.

“While the challenges ahead of us are significant, we have established the foundation for sustainable growth by preparing our businesses for leaner, less predictable times, while ensuring we capitalise on growth opportunities, particularly in international markets,” he continued.

Edited by Creamer Media Reporter

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