Divisional performance 2019 financial year:
Security and Risk Solution:
Integration and consolidation of security acquisitions made during 2018 took longer than anticipated. Pressure on consumer spending and the increase in fuel prices had a significant impact on this sector. In addition, the set-up costs and initial operational losses of approximately R5,5 million were incurred as a result of the new centralised control room in Pretoria, which contributed to the decrease in operating profit. CSG expects to realise the benefit of these investments in infrastructure and operational capacity over the longer term.
The loss-making business of Hi-Tech White River was sold after year end, effective 1 May 2019 and contributed a loss of earnings of approximately R4,2 million for the 2019 financial year. The Hi-Tech guarding division realised some losses, but management have been successful in turning this business around and it is back on track and performing as budgeted. The remainder of the Hi-Tech Group performed in line with the previous year.
CSG established a centralised security structure, which included the bolstering of our operational infrastructure (to open new branches in Port Elizabeth, Durban, etc) in Revert Risk Management to the cost of approximately R3,8 million. In addition, an amount of approximately R6 million has been provided for in 7 Arrows in relation to the recoverability of bad debt that accrued during the integration period of this business.
Facility Management:
Both CSG Foods (which now includes the remote sites business) and Afriboom Cleaning continued to perform well as a result of a combination of organic growth, cost savings initiatives and effective procurement.
Afriboom's greenfield project, CSG Hygiene, had a minor negative impact on earnings.
Global Industrial Projects' earnings declined significantly from the previous year, due to a substantial mining contract that could not be retained as a result of the mining charter's focus on local procurement. This contract was awarded to a local BEE start-up company, following the 8 years of service from Global Industrial Projects.
Staffing Solutions:
The performance of the Staffing division during the 2019 year was substantially down from the previous year due to a number of reasons. Some of the most important being fraudulent activities and malpractices, of approximately R9 million over a period of time, by a senior manager in BDM Staffing (corrective action has been taken), a sizable BDM Staffing contract coming to an end, bad debts mostly from the construction industry written off in both BDM & M&S Projects, as well as the initial adverse effect of management changes in ConinghamLee and CSG Skills Institute.
Balance sheet:
Group gross debt has been maintained at similar levels to those reported for September 2018. CSG is continuously pursuing avenues to optimise its capital structure and bolster its balance sheet.
Overall economic climate and outlook for 2020
The current business environment and trading conditions remain challenging. However notwithstanding same, the Group is well positioned for growth as a result of its successful diversification strategy, the creation of the centralised services within the security division, various other solid growth platforms created and new greenfield projects commenced. CSG is confident that certain negative once-off events which occurred in the 2019 financial year, communicated to shareholders, will not reoccur in the 2020 financial year.
Security and Risk Solution Division
Security remains an important aspect of all walks of life with a move towards the use of both the human element and technology to curb new crime tendencies.
The signing of certain new technical security and technology contracts have been deferred due to the delay in the operational status of the centralised control room in Pretoria, which has had a negative impact on the Company's performance in the short term. All design, planning and operational issues have now been rectified and management is of the view that this will improve the outlook for this division in the coming years. The centralised control room currently has a promising pipeline, the benefit of which is expected to flow through in the 2020/2021 financial years. The initial estimate was that this unit should start to be profitable towards the end of 2019. It is now evident that the J-Curve is much deeper than anticipated, however is expected to turn positive over the long run.
Creation of the new operational structure was necessary to grow into a national service provider with offices in all the main areas in South Africa in order to service national blue-chip companies. To support this operational structure and also to be able to service a much bigger anticipated security grouping, a strong back office and support infrastructure was created with spare capacity. The new structure (combining Revert Risk Management and 7Arrows) allows the Company to place more focus on vertical divisions, being guarding, armed response, technical, centralised expense controls and sales and marketing. As a result of this structure, we also created a mining division within the security cluster, focussing on providing security services at mines. Revert Risk Management obtained two mining security contracts with the most recent contract being on 1 February 2019. These two contracts have a combined turnover in the region of R4 million per month.
Both Revert Risk Management and 7Arrows Security have promising pipelines, in excess of R30 million.
Facilities Management ("FM"):
The companies in the FM division have strong management structures in place, are controlling overhead expenditure, have promising sales pipelines and are investing in various innovative projects to diversify their business models.
CSG Foods invested in an events & function business for a total purchase consideration of R8 million, focussing on the vibrant tv & film industry. This Cape Town based business has a well-equipped kitchen as well as mobile kitchens, which also create a platform for CSG Foods to launch its centralised kitchen strategy to not only provide their existing contracts with pre-made meals but also to provide food products to clients without kitchen facilities.
CSG Foods has a solid client base including residences at the Universities of Stellenbosch and Wits, Northern Academy Curro, Steve Biko, Pretoria Urological- & Vergelegen Medi Clinic hospitals, to name a few.
Afriboom Cleaning's momentum in securing new contracts continues, landing MAN Trucks (nationally), Michael Angelo Hotel (Sandton) , Deloitte (nationally), Legacy Hotels, Cornwall Hill College and a number of Curro schools, to mention a few. Although Afriboom remains a leading supplier to the hospitality industry, it is diversifying successfully into the commercial and health markets.
Afriboom's greenfields project, CSG Hygiene, is being well received in the market. This business is growing exceptionally and should be profitable by the end of the next financial year. The hygiene division was started as an additional service that added to the existing full facility management basket of services that CSG would like to offer it's clients. The start-up was decided on as suitable acquisitions at the right price and fit could not be secured.
Staffing Solution:
CSG's Staffing Division diversified away from traditional labour broking into businesses that focus on other employee service models like professional contracting (above the threshold), permanent recruitment, training and BEE consulting.
Leadership of both ConinghamLee and CSG Skills Institute changed during the last 6 months. The new management completed overhauls of the companies, changing the cultures, structures, systems and processes to improve the efficiencies and position the businesses for growth.
M&S Project's performance remains solid. It has been re-focussed to supply professional contractors (above the threshold) mostly to the petrochemical and oil industry. Management is excited about the opportunities in this sector.
BDM Staffing experienced a difficult year with fraudulent activities and misrepresentation of information by a senior manager. Processes, structures and systems of this business were overhauled in the last few months. Accordingly, we are expecting improved financial performance in line with previous years.
Expected date of release of results:
Historically, CSG published reviewed provisional results within two months of its year-end and the annual integrated report within six months of its year-end. The JSE rules were changed so as to allow companies only four months within which to release the annual integrated report. The CSG board has therefore resolved to publish the annual integrated report, including audited results going forward within three months of its year-end, and to no longer publish reviewed provisional results. Accordingly, it is anticipated that CSG will be publishing its audited results for the year ending 30 March 2019, together with its annual report, on or about 28 June 2019.
As mentioned in the initial trading statement issued on 20 March 2019, a further trading statement will be issued as soon as there is a reasonable degree of certainty as to the likely range within which the Company's earnings per share and headline earnings per share are expected to decrease.
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