AYO headline earnings up 11% as interest from R3.6bn cash pile grows

AYO Technology Solutions grew its headline earnings per share by 11% in the year to end August, as it continues to be locked in a  legal tussle with the Public Investment Corporation over a R4.3bn investment. 

The JSE-listed IT group declared a dividend of 51c - up 70% from the dividend of 30c declared in the previous year. Revenue growth more than tripled from R639m to R1.9bn, while profit after tax increased 47% from R195.9m to R288m.

The group said it earned R316m from finance income in 2019. In 2018 it earned R226m. It has a bank balance of R3.68bn, which is held at nine banks. The majority - R2.7bn - is held with Absa bank, while R501m is held at the Bank of China. 

The group, which falls under businessman Iqbal Survé's Sekunjalo group of companies, said it employs over 1 200 people with operations in South Africa, Mauritius, East Africa and the United Kingdom.

The PIC invested R4.3bn in the IT group when it first listed in late December 2017. However, the value of the transaction has since been questioned due to alleged misrepresentations in AYO's pre-listing statement, the PIC Commission of inquiry heard. AYO has denied that it did anything wrong, or that the investment is at risk. 

The commission was appointed by President Cyril Ramaphosa to investigate irregularities at the PIC, and one of the transactions it probed was the investment in AYO.

The PIC, meanwhile, has lodged a court application to recover the R4.3bn with interest. AYO is opposing the application.

In its annual report, AYO acknowledges the litigation – indicating it received a summons issued by the PIC and the GEPF on May 31, 2019 which seeks a declaration that the subscription agreement entered into by the PIC and AYO be declared unlawful and set aside.

Restructure

AYO said that if the PIC and Government Employees Pension Fund are successful in their application the company may have to be reconfigured into a pure investment holding company.

"AYO has several subsidiaries that have been in existence for more than 20 years, delivering both satisfactory trading performance and dividend income for AYO. These subsidiaries are expected to continue trading at an optimal level independent of the PIC funding," the group said in its annual report.

Furthermore, AYO acknowledges claims made in former CEO Kevin Hardy's testimony before the inquiry that the 2018 interim financial results were tampered with.

"The JSE Limited requested AYO's external auditors, BDO, to perform a factual findings report on the 2018 interim financial results, as a result of management identifying certain misstatements resulting in a Reportable Irregularity being identified.

"Management believes that their improved governance processes not only ensured that the Reportable Irregularity as reported in the 2018 interim financial results did not continue. Management is of the opinion that the issues noted are isolated to the 2018 interim financial period," AYO said.

As per Hardy's testimony, provided in an affidavit, he claimed the interim results for the period ended February 28, 2018 had been misstated. Furthermore, "verbal interactions with representatives of AYO" on 11 and 12 April 2019 have suggested that certain numbers were adjusted in the interim financial results too – although AYO believes the adjustments were valid, the report read.

"AYO has addressed the JSE's concerns on the governance of the Company and remains committed to continue to improve its governance processes," the group said.

'Significant customer'

The group said it is in another pending legal battle with a "significant" customer over an ICT Master Service Agreement concluded in May 2018. It did not name the company.

According to the agreement AYO was to render ICT services to the customer from July 1, 2018 for an "indefinite period," provided the services are accounted for in the agreement.

However, on October 1, 2019, the customer gave AYO six-months notice of its intention to terminate the agreement. "AYO disputes this significant customer's right to cancel the agreement. By virtue of the dispute, AYO has invoked the arbitrations provisions under the agreement and anticipates the matter being arbitrated in the first quarter of 2020," the group said.

Financial performance

Despite the legal battles, AYO said its earnings per share increased 15% from 47.2c to 54.29c, while headline earnings per share increased 11% from 48.32c to 53.53c.

"The improved financial performance was predominately from significant organic growth as a result of a contract with a multi-national company that commenced in July 2018 and acquisitive growth in relation to the acquisitions of Sizwe IT Proprietary Limited and SGT Solutions Proprietary Limited," the group explained in its annual report.

Going forward, the group will focus on additional acquisitions and diversifying its service and product offerings.

"AYO has been operating in an extremely difficult market environment, exacerbated by the current narrative arising from the PIC Commission of Inquiry as well as the litigation instituted by the PIC and CIPC against the Company.

"These trying conditions are significantly impeding on our acquisition growth plans and operational performance," AYO warned.

"To reach its objectives for all stakeholders, AYO believes that it can work closely with all of its major stakeholders to find a way to end the negative and unwarranted media attention that it is currently exposed to.

"AYO remains of the opinion that it has done nothing wrong and continues to attempt to deliver on its prospects as outlined in its Pre-Listing Statement and beyond," the group asserted.

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