Exchange rates

The strength of the rand measured against the dollar has remained volatile throughout the financial year. The year commenced in October 2008 at an exchange rate of R8,24, the rand weakened to around R11,50 and the best rate at which the rand traded was R7,30, a spread of more than 50%. The closing rate for the year was R7,56.

A strong rand has a negative impact on our businesses with increased competition from European and Far Eastern imports. Furthermore CBI-electric has export sales at 14% of revenue and Reutech at 50% of revenue, which would benefit from a weaker rand. Total exports amounted to R854 million, an increase of 8% from R791 million achieved in 2008. The Nashua group benefited from the stronger currency which enabled a reduction in prices to their franchise channels and the consumer.

This volatility affects all our businesses but also presents opportunities to manage currency risks.

All imports are covered with foreign exchange contracts. Significant exports are covered on an individual basis.

Commodities

Commodity prices peaked in 2008, with our factories running at full capacity. The collapse of the financial markets internationally led to an abrupt turnaround in 2009, leading to significantly lower demand and shorter and more expensive production runs.

The lack of sustained global demand has lowered commodity prices. With decreased volumes, product prices were affected negatively.

Infrastructure

The local economy has benefited from increased public infrastructure projects such as the Gautrain and the national freeway improvement initiative. We are cautious of a slowdown in capital expenditure when these projects end as well as financial constraints and operational challenges at certain municipalities and parastatals.

By carefully managing our relationships with these entities, we will continue to deliver value-added products and services and fulfil our role in the supply chain.

Higher cost of electricity is already affecting input costs and will in future be a significant cost driver. The group’s commitment to research and development, together with innovation and discipline, will improve efficiencies in our operations.

Corporate activity

Reunert acquisitions in the financial year amounted to R69 million.

Subsequent to the year end, the 60% in SEC that we did not own was acquired. This business has high market shares in the PABX and call centre markets and management is confident that under Reunert’s guidance, this business will flourish and achieve the returns that they are capable of delivering.

Capex

The following capital expenditure was incurred in respect of property, plant and equipment:

Shareholders’ statistics

Reunert shares continued to trade actively on the JSE during the past year. Fund managers and investors have an active interest in the group, mainly due to its exposure to the infrastructure spending through its electrical operations. Some 107,7 million shares were traded in over 71 000 transactions. The total value of shares traded amounted to R4,7 billion resulting in over 47% of the market capitalisation of the company being traded during the year. The majority of shares are held by pension funds, unit trusts and mutual funds. On 25 September 2009 the offshore shareholding was just under 16%.

NSN

A change of ownership internationally of our associate company NSN resulted in changes to our shareholder agreement in 2007. The income from the investment now arises out of commission on sales which was included in other income and operating profit in 2008 and is now included in revenue and operating profit.

Business cycle

The South African economy contracted by 1,5% during our financial year, compared to an average growth of 5% for the previous four years. Reunert anticipated this; controlling input costs and reducing working capital employed. Going forward we expect the base to increase marginally from the current low level.

To stimulate growth the South African Reserve Bank has lowered interest rates by five percentage points from a high of 15,5% in 2008 to the current 10,5% in September 2009. Consumer confidence from the FNB/BER index declined to a relatively neutral confidence level at the quarter ending September 2009.

Reunert has large market shares in the markets in which it operates. Growth over the last number of years has mostly been organic with smaller bolt-on acquisitions adding product and services to existing operations.

With the challenging economic environment, opportunities for meeting the group’s investment criteria have increased. Sellers will be more realistic in their price expectations. Cash balances are increasing and, excluding RCCF assets and borrowings, the balance sheet is ungeared. Small acquisitions have realised fruits in the current year and the group is in a favourable position to consider a sizeable deal.

Reunert has improved its cost structure and will continue to control these costs and improve working capital in the next financial period.

David Rawlinson
Financial director

Sandton
17 November 2009