• Highlights
 • Income statement
 • Balance sheet
 • Cash flow statement
 • Other salient features
 • Industry segment analysis
 • Statement of changes in equity

Headline earnings of 853 cents per ordinary share were 77 per cent higher than in 2005.  This included a non-recurring boost of 210 cents per share as a consequence of the previously announced agreement with the AECI Pension Fund which became effective in October.  Without this once-off effect, headline earnings were 643 cents per share, an increase of 33 per cent on last year.  An increased final dividend of 141 cents per ordinary share has been declared compared to 121 cents in 2005 to bring the total dividends for the year to 205 cents from 175 cents. 

Group revenue increased by 16 per cent in 2006, of which some 5 per cent was attributable to acquisitions by Chemical Services (Chemserve).  Demand from the local mining and manufacturing sectors continued to improve in the second half in response to strong export markets and a somewhat weaker rand exchange rate.  Gross margins were under pressure for much of the year because of increased oil-based and other raw material costs with some relief evident only in the last quarter.  The operating margin improved to 10.8 per cent of sales from 10.1 per cent in 2005 and the return on invested capital (ROIC) for the Group, excluding revaluation of land, was 19 per cent compared to 18 per cent in 2005.

African Explosives (AEL) recorded a steady performance despite intense competition from local and Chinese-sourced shocktube initiators in the South African narrow reef market.  All other sectors delivered improved results with significant volume increases in open cast mines in South Africa and in other African markets.  The first phase of automated production of initiating systems at Modderfontein was commissioned successfully in the last quarter of 2006.

DetNet, the electronic initiating systems 50:50 joint venture with Dyno Nobel Limited, made disappointing progress.  Management and marketing arrangements have been restructured to enhance the pace of customer conversion to electronic detonation, and an improved performance is expected in 2007.

Chemserve posted an excellent result with operating profit 22 per cent up on 2005, supported by a strong recovery in the local mining and manufacturing industries and continued growth in consumer-driven sectors.  Substantial investments are being made to expand capacity in the high growth areas.  Operating margins were largely maintained despite high and volatile prices of oil-based raw materials.  Businesses acquired over the past two years have been integrated successfully into the Chemserve service model and accounted for around half of the growth in sales and profit for the year.

SANS Fibres (SANS) incurred a small loss in the year, a consequence of several adverse factors in the first eight months.  Production and quality performance were severely disrupted by the impact of power outages in the Western Cape, two incidents of force majeure by the major supplier of nylon polymer and a carbon dioxide shortage which reduced local peak season PET demand.  A substantial improvement in operations was sustained from August and the quality and productivity improvement programmes appear to be back on track.  International demand for SANS’s key light industrial yarns remained strong.  Early in 2007, Unifi Inc, the partner in the US-based joint venture gave notice of its intention to exercise its put option against SANS as provided for in the initial shareholders’ agreement, and to exit the business in the first quarter of 2008.  The opportunity will be taken to seek a strategic alliance with a partner which could add value to SANS’s business as a whole.

Dulux extended its impressive performance trend with volume growth of 10 per cent and a 19 per cent increase in operating profit.  Demand from the DIY market and the professional painting sector was particularly strong in the last quarter.  The operating margin was maintained despite a marked escalation in raw material costs.  Profits from African operations were lower due to currency effects and unfavourable market conditions.

The property activities managed by Heartland delivered outstanding results with operating profit at a record R314 million net of R66 million of remediation costs.  Net cash flow totalled R296 million after expenditure of R134 million on remediation.  Sales of 160 hectares of land for residential, commercial and light industrial use were recorded at Modderfontein, Milnerton and Somerset West.  In December an agreement regarding Gautrain was concluded with the Province of Gauteng.  This provides for appropriate connectivity between the various parts of Modderfontein and recognises the desirability of a station on the property at some future date.

The agreement with the AECI Pension Fund released R131 million from the existing post-employment medical aid provision and required the R196 million balance in the Employer Surplus Account in the Pension Fund at year-end to be recognised as an asset by AECI.  Collectively this boosted operating profit by R327 million.  Restructuring costs charged against profits totalled R5 million in 2006 compared to R23 million in 2005.

Expansion projects in AEL and Chemserve were the main components of net capital expenditure of R416 million which was R193 million higher than the Group depreciation charge.  In addition, Chemserve invested R155 million and Dulux R20 million in the acquisition of new businesses.  Group working capital increased to R1 745 million at year-end, which represents 17.1 per cent of annual sales from 15.7 per cent last year, and is a target for improvement in 2007.

The Group’s net borrowings of R940 million were R142 million higher than at December 2005.  Cash interest cover improved to 13 times and gearing reduced to 25 per cent of shareholder funds from 27 per cent at December 2005.  No repurchases of ordinary shares were undertaken during the year.

In addition to the previously announced acquisitions of Leochem, a producer of personal care intermediates, and Resitec, a producer of oleo-chemicals in Brazil, Chemserve also acquired four small local businesses during the year.  Dulux acquired Sent Packing, a supplier of specialist exterior coatings, with effect from July 2006.  All these businesses have met or exceeded expectation since acquisition.

In line with the Group’s strategy of growing its presence in the provision of specialist services to the global mining industry, the Board in November approved a R230 million project with potentially attractive returns in the mining chemicals segment of the Chemserve portfolio, and has this month approved in principle a second such project at a cost of R380 million.  Already approved expenditure of R180 million on AEL’s detonator automation programme is likely to be followed soon by a third and concluding phase at a cost of some R250 million.  This R1 billion investment programme would clearly increase the prominence of specialist mining-related services as a major core business of the Group over the next few years.

The favourable international environment of increasing industrial production and firm commodity prices should support the local mining and manufacturing sectors and underpin steady and more balanced growth in South African GDP.  Provided the rand exchange rate does not strengthen materially from recent levels, the Group’s operating businesses are well positioned to post further aggregate gains under these conditions. 

In the property segment, however, limited availability of land ready for release and sale during 2007 is likely to result in profit after tax from property activities being substantially below the record level of 2006.

Hence management does not expect headline earnings per share in 2007 to exceed the 643 cents per ordinary share which were achieved in 2006 excluding the non-recurring effect of the agreement entered into with the Pension Fund.

  Alan Pedder CBE
Schalk Engelbrecht
Chief executive


19 February 2007

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