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South Africa – Adcorp predicts an -80% drop in earnings per share for H1

11 October 2013

South Africa’s largest staffing firm Adcorp (ADR: JNB) has advised shareholders that earning per share (EPS) and headline earnings per share (HEPS) are expected to decrease by between -80% and -84% for the first half of the year ending 31 August 2013.

The decrease in EPS and HEPS is due to International Financial Reporting Standards (IFRS); whereby ZAR 87 million (USD 8.8 million) has been charged to the company’s statement of comprehensive income in respect of a share based payment expense.

The IFRS 2 share based payment expense arises from the 2013 Broad Based Black Economic Empowerment (BBBEE) transaction that was finalised and implemented with effect from 27 August 2013. 

According to the South African Department of Trade and Industry: “BBBEE is an integrated and coherent socio-economic process that directly contributes to the economic transformation of South Africa and brings about significant increases in the numbers of black people that manage, own, and control the country’s economy, as well as significant decreases in income inequalities.”

In its circular to shareholders in April 2013 announcing the amended arrangement, the company stated: “Adcorp implemented its 2007 BBBEE Transaction in April 2007 prior to the global financial crisis, and the growth assumptions and other variables which were applied have subsequently turned out to be inappropriate for the post global financial crisis environment. As a result the 2007 BBBEE Transaction is unlikely to materialise any value to Adcorp’s strategic 2007 BBBEE Partners by 2017, which is the end date of that transaction.”

“In order to maintain Adcorp’s excellent BBBEE rating and its status as one of South Africa’s most empowered companies, Adcorp proposed to its shareholders the introduction of a new ten year BBBEE transaction (2013 BBBEE deal) and the unwinding of its 2007 Transaction.”

“The new 2013 BBBEE transaction retains the structure of the original 2007 deal but has certain revised economic parameters and metrics” said Anthony Sher, the Group Chief Financial Officer.

As a result, the company repurchased the 16,822,849 A shares from the 2007 BBBEE consortium at the original price of 2.5 cents each. The company then issued 16,822,849 unlisted B shares at 2.5 cents each to the BBBEE partners. The BBBEE partners remained unchanged and include a trust set up for the benefit of permanent employees of the group (comprising 40% of the shares), and two external partners, WIP SPV (35%) and Simeka SPV (25%).

The ZAR 87 million (USD 8.8 million) refers to the upfront recognition of the IFRS 2 modification cost attributable to the two external partners. In accordance with IFRS 2, the share based payment expense attributable to the employee trust is accounted on an annual amortised basis.     

Adcorp expects that the EPS and HEPS share prices will be between ZAR 0.20 (USD 0.02) and ZAR 0.25 (USD 0.03). On a normalised trading position, where non-cash flow IFRS adjustments such as the share based payment charges referred to above are excluded, Adcorp expects normalised earnings per share to increase between +4% and +8%, resulting in a value of between ZAR 1.73 (USD 0.17) and ZAR 1.80 (USD 0.18).  

According to the Johannesburg Stock Exchange (JSE) Listing Requirements, companies are required to publish a trading statement as soon as they become aware that the financial results for the reporting period will differ by at least 20% from the previous corresponding period. 

In trading today, the company’s share price dropped by -0.9% to ZAR 33.00 (USD 3.00), an increase of +22.4% compared with a year ago. Based on its share price, the company has a current market value of approximately ZAR 3 billion (USD 303.2 million).

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