Reunert CFO Nick Thomson: It's hard to report forward-looking implications during Covid-19
Despite Covid challenges, Reunert's ICT sector has reported good growth for the half-year.
Electronic and ICT infrastructure company Reunert has announced its results for the six months ended 31 March 2020, reporting challenging trading conditions.
According to CFO Nick Thomson, Reunert’s reporting term was made up of two parts. The first part consisted of normal reporting results, and the second part consists of Covid-19 and its forward-looking implications. “That made it a very difficult half to report on.”
He points out that South Africa was in a technical recession during the last quarter of 2019, which was Reunert’s first quarter. Then Covid hit in the first quarter of 2020, which was Reunert’s second quarter. Gross domestic product (GDP) was negatively impacted in both quarters.
“What’s really important for us, because we’re an infrastructure type business, was gross domestic fixed investment, which experienced a significant decline in the first and second quarters of our financial year,” Nick says. “Our normal operating results reflected the implications of that, and then we had Covid on top of that.”
The results include:
- 186 percent loss in profit from R377 million to R326 million
- 176 percent loss in earnings per share from 227 cents to 172 cents per share
- 130 percent loss in headline earnings per share from 253 cents to 76 cents per share
The initial shock of Covid-19
Covid-19 hit Reunert in two ways. First, the group lost a couple of weeks of trading because of lockdown. “But you can’t just turn a factory off, you have to prepare to shut it down, so we lost a total of two trading weeks,” Nick says.
He also had to deal with the forward-looking predictions, which was difficult because there was little data around the overall implications of Covid, lockdown and shutting down.
“We had to make a lot of assessments around what that means for expected credit losses,” Nick adds. “We also have a very big rental book and the majority of people we rent things to are smaller companies, so we had to make assessments around what Covid and the impact of shutting down, as well as the very slow gradual economic recovery, were, and what that would do to people’s capacity and capability to pay.”
Secondly, the reduced sovereign credit rating has implications for risk free rates and returns, which means cost to capital has also gone up. “You are then faced with the potential that your growth might not be as good as it was in the past, and once you add higher cost to capital where you discount future cash flows with, you implications are having to look at impairments.”
Despite the difficult trading environment, Reunert’s ICT segment reported significant growth and its applied electronics segment was in line with the group’s expectations.
‘Being an infrastructure business, the opportunities that we face involve any programmes of electrification,” Nick says. “In our applied electronics segment there were some great exports of what we call ‘tactical radio communication’ and also radars. So we had some great foreign purchases.”
Reunert also added new service suites onto its product ranges in its ICT segment, including PCs and internet connectivity. “We were very pleased by these segments,” he adds.
Challenges of operating during lockdown level 3
As lockdown gradually eases into Level 3, the segments of Reunert which hadn’t been classified essential at the start of lockdown have been able to return to full production.
“Our number one priority is to ensure that no one gets sick as a consequence of being infected at work,” Nick says. “We’ve been putting a lot of health and safety processes in place to make sure that people coming into the workspace are properly screened and able to practice the appropriate social distancing in factories.”
He explains that this isn’t as easy as it sounds, as most factory production lines aren’t necessarily set up to have a two-meter gap between each person. To ensure safe spacing, Reunert is only able to have half its staff at work at a time.
“The key challenge will be maintaining all of the disciplines in order to ensure the workplace remains healthy,” Nick says. “And when someone does get sick and exposes the rest of the staff to the virus, you need to react quickly and have the ability to recover from the lost time that you will have because of having to close down for a couple of days while you disinfect.”
He adds that the other part of managing the crisis will be working with the group’s supply chain and customers to make sure you can be supplied and resupply at the right rate, as well as making sure the cash flows work for everybody.
Another concern will be what happens to smaller and medium-sized businesses that don’t have the same reserves as bigger listed companies. “What are the implications of that going to be both from a supplier and a customer perspective?” Nick wonders.