Commentary

OVERVIEW

JENS MONTANANA, CHIEF EXECUTIVE OF DATATEC, COMMENTED:

"Datatec showed great resilience during a period of unprecedented Covid-19-related disruptions. Our divisions provide many of the products and services required to support a remote IT networked based way of doing business, an increasing trend that we see continuing well beyond the current pandemic.

"EBITDA performance improved, when excluding the impact of a tax credit in the prior year's first half, supported by several multi-year investments in advanced technology systems that underpin our internal processes and operational initiatives.

"Working capital has been well managed and liquidity continued to improve considerably during the period. Our ability to refinance facilities on substantially improved terms in the current environment reflects the improvement in fundamentals across the business over the last few years.

"Whilst the path of Covid-19 remains uncertain, Datatec is well positioned to support its customers' requirements and we anticipate the positive momentum experienced during the first half to continue throughout 2020 and into 2021."

Group activities

Datatec is an international ICT solutions and services group operating in more than 50 countries across North America, Latin America, Europe, Africa, Middle East and Asia-Pacific. The Group's service offering spans the integration and managed services, technology distribution and consulting sectors of the ICT market.

Datatec operates two main divisions:

  • Logicalis: ICT infrastructure solutions and services; and
  • Westcon International: Technology distribution of security and networking products.

The specialist activities of Management Consulting and Datatec Financial Services are included with the corporate head office functions in the "Corporate, Management Consulting and Financial Services" segment of the Group.

Strategic overview

Datatec's strategy is to improve shareholder returns over the medium term through a combination of corporate and business development actions aimed at enhancing the competitiveness and profitability of its subsidiaries and operating divisions.

The Group achieved a solid operational performance in the six months ended 31 August 2020 ("H1 FY21") with all divisions showing resilient trading with strong operating cash flows and significantly enhanced liquidity. This was achieved despite the challenging socio-economic environment resulting from the declaration of Covid-19 as a pandemic by the World Health Organization on 11 March 2020, at the start of the Group's new financial year.

Following this declaration and subsequent lockdowns, the Group's immediate priority was to keep employees safe in accordance with government guidelines in all geographies of operation. This typically involved maximising working from home, social distancing and implementation of advised measures to limit the spread of Covid-19.

The multi-year investments in Westcon International's advanced systems and business automation enabled business continuity plans to be deployed effectively with almost the entire workforce switching to remote working. Most of Logicalis' global workforce was also able to work remotely, limiting operational disruptions during lockdown periods.

Although some delays and supply disruptions were experienced, especially in countries with highly restrictive lockdowns, the business operations coped very well and performed ahead of the expectations set at the start of the year.

Group revenues were US$2.03 billion in H1 FY21, down by 1.2% on the US$2.06 billion revenues recorded in the six-month financial period ended 31 August 2019 ("the Comparable Period" or "H1 FY20"). In constant currency*** terms, Group revenues increased by 2.8%.

The EBITDA in the Comparable Period included a tax credit in Logicalis Brazil of approximately US$14 million relating to certain overpaid indirect taxes and interest income included approximately US$7 million in regard to those overpaid taxes ("The Tax Credit").

EBITDA for H1 FY21 was US$60.7 million' representing a 13.3% decrease on H1 FY20 (US$70.0 million) or 8.4% increase when excluding The Tax Credit in H1 FY20. Adjusted EBITDA** excluding H1 FY21 restructuring costs was US$66.7 million (H1 FY20: US$70.0 million).

Underlying* earnings per share ("UEPS") were 3.9 US cents in H1 FY21 compared to underlying* earnings per share of 5.3 US cents for H1 FY20 which also reflected the impact of The Tax Credit.

The Group ended H1 FY21 with enhanced liquidity and the Group statement of financial position remains strong with net debt at 31 August 2020 of US$73.2 million compared to US$139.9 million at 29 February 2020 ("FY20"). Excluding lease liabilities, net cash was US$75.6 million (FY20: net debt US$10.4 million).

Logicalis

Logicalis is the largest contributor to the Group in terms of profitability. The division also has the widest geographical exposure and Datatec intends to continue to develop and grow Logicalis globally, both organically and through acquisitions.

Logicalis revenues reduced by 10% to US$700.2 million compared to US$779.9 million for H1 FY20. In constant currency*** Logicalis revenues reduced by 1.9%. Revenues increased in Europe but declined in other regions with Latin America particularly impacted by adverse currency translation. Operating costs were lower than in the Comparable Period. Adjusted** EBITDA was US$45.2 million compared to US$56.0 million in H1 FY20 which included the impact of The Tax Credit. Excluding The Tax Credit, adjusted** EBITDA increased by 7.6% despite currency headwinds and some Covid-19 impact.

Even though global trading uncertainties are expected to persist for the short to medium term, Logicalis is confident in its ability to continue to respond to market needs caused by Covid-19 disruptions. The technology segments that Logicalis specialises in are key parts of the remote access computing solutions necessary for enterprises to adjust.

Whilst the potential listing of Logicalis' Latin American business on the Brazilian stock exchange remains of high interest, current market conditions make the timing of any potential listing undeterminable.

Westcon International

Westcon International revenues increased by 4% to US$1.30 billion (H1 FY20: US$1.25 billion) on strong demand for networked cloud computing, remote access solutions for home working and virtual office environments, unified communications and enhanced network security. In constant currency***, revenues improved by 5.4%.

Operating costs were lower than in H1 FY20, resulting in adjusted** EBITDA of US$23.0 million (H1 FY20: US$19.1 million).

Westcon International remains focused on continuing to improve profitability by driving business improvement through revenue growth and margin expansion supported by cost controls. Whilst a number of macro-economic risks exist, including those related to Covid-19 and Brexit, the H1 FY21 results highlight Westcon International's ability to respond effectively in challenging circumstances.

As indicated in June, Westcon International's strengthened standalone statement of financial position following Datatec's decision to convert US$80 million of intercompany loans to equity would enable the division to obtain a better credit rating and improved commercial terms. The Group completed significant refinancing arrangements after the period:

  • A two-year US$80 million new receivables securitisation facility for its subsidiary, Westcon International Limited's Asia-Pacific subsidiaries ("Westcon APAC"). The new facility has been entered into with Westpac Banking Corporation, replacing Westcon APAC's financing facilities in Australia, New Zealand and Singapore.
  • A EUR275 million new banking facility for its subsidiary, Westcon International Limited's European subsidiaries ("Westcon Europe"). The new facility was entered into with a European banking syndicate, led by Crédit Agricole Leasing & Factoring.

Westcon International was 90% owned by Datatec following the sale of Westcon Americas to SYNNEX Corporation ("SYNNEX") together with 10% of Westcon International in FY18. Effective 19 June 2020, Datatec Plc (an intermediate holding company), increased its shareholding in Westcon International to 92.1% as a result of a capitalisation transaction, resulting in a reduction of the minority interest of SYNNEX from 10% to 7.9%. The Group's strategy for Westcon International remains set on continuing to improve profitability.

Current trading and outlook

The positive momentum of the first half continued into the second half of the year with a strong performance recorded in September. The Group's backlog and order intake have remained solid. The Group provides many of the solutions and services required for an increased IT networked way of doing business, such as remote working, cloud access and fixed or mobile secured networking and the business is currently benefiting from this.

Operationally, the Group's focus remains on optimising business performance and internal processes for the current environment. Priorities in the second half will include digital transformation and restructuring initiatives to align the business model and drive the benefits of the investments in advanced technology systems rolled out over the past few years.

The refinancing of the major subsidiaries of Westcon International on more favourable terms will improve liquidity and reduce interest expense going forward.

The path of the Covid-19 pandemic remains uncertain and the unpredictable business and economic effects arising may materially affect the consolidated results of the Group for the rest of the FY21 financial year. Accordingly, Datatec will not be issuing any forward-looking guidance.

Group results

All divisions delivered solid performances as falling operating costs offset the effect of lower gross profits due to a change in revenue mix that saw an increased exposure to the lower margin distribution segment. Overall revenues were broadly flat with modest growth in Westcon International and a decline in Logicalis.

Emerging markets such as Brazil, Mexico and South Africa were impacted by local currency weakness in H1 FY21 which reduced their Dollar reported contribution to the results. Sustained emerging markets currency weakness is expected for the near term.

Revenue

Group revenues for the period were US$2.03 billion (H1 FY20: US$2.06 billion) and are shown by division below.

  • Contribution to Group revenue

  • Contribution to Group gross profit


Group gross margins in H1 FY21 were 16.0% (H1 FY20: 17.5%) with the headline decrease being caused by The Tax Credit in H1 FY20. Gross profit was US$324.2 million (H1 FY20: US$359.8 million).

Overall operating costs were US$263.5 million (H1 FY20: US$289.8 million). Included in the H1 FY21 operating costs were total restructuring costs of US$6.0 million as the Group initiated its response to Covid-19 and transformation initiatives to bring the business model in line with the new structures and processes rolled out over the past few years.

EBITDA was US$60.7 million (H1 FY20: US$70.0 million including The Tax Credit of US$14 million) and included US$2.2 million of foreign exchange losses (H1 FY20: gains of US$0.6 million). EBITDA margin was 3.0% (H1 FY20: 3.4%). Excluding restructuring costs, adjusted** EBITDA was US$66.7 million (no restructuring costs in H1 FY20).

Foreign exchange losses consisted of unrealised foreign exchange gains of US$4.1 million (H1 FY20: unrealised foreign exchange losses of US$4.2 million) and realised foreign exchange losses of US$6.3 million (H1 FY20: realised foreign exchange gains of US$4.8 million). Unrealised foreign exchange differences are excluded from underlying* earnings per share.

Depreciation decreased by US$3.2 million to US$25.3 million (H1 FY20: US$28.5 million). Amortisation was US$7.5 million (H1 FY20: US$7.5 million).

Operating profit was US$28.0 million (H1 FY20: US$34.0 million).

The net interest charge increased to US$13.4 million (H1 FY20: US$8.0 million) and profit before tax was US$15.4 million (H1 FY20: US$26.2 million). The main reason for the higher net interest charge in H1 FY21 is approximately US$7 million interest income recognised by Logicalis Brazil in H1 FY20 pursuant to The Tax Credit.

A tax charge of US$10.0 million has arisen on half year profits of US$15.4 million. The effective tax rate of 64.8% continues to be adversely affected by losses arising in Westcon International's Asia operations for which no deferred tax assets have been recognised and its UK operation for which deferred tax assets are only partially recognised at a low rate of tax credit. As at 31 August 2020, there are estimated tax loss carry forwards of US$224.8 million with an estimated future tax benefit of US$49.6 million, of which only US$19.5 million has been recognised as a deferred tax asset.

Underlying* earnings per share were 3.9 US cents (H1 FY20: 5.3 US cents). Headline earnings per share were 1.6 US cents (H1 FY20: 2.3 US cents). Earnings per share were 1.6 US cents (H1 FY20: 2.9 US cents from continuing and discontinued operations). The H1 FY20 earnings reflected the impact of The Tax Credit.

Cash

The Group generated US$134.2 million of cash from operations during H1 FY21 (H1 FY20: US$77.8 million) and ended the period with a net debt of US$73.2 million (FY20: US$139.9 million; H1 FY20: US$193.7 million). Excluding leases, net cash would have been US$75.6 million (FY20: net debt US$10.4 million; H1 FY20: net debt US$60.9 million). The net debt has been calculated as: cash of US$135.6 million (FY20: US$83.4 million; H1 FY20: US$37.5 million); short-term borrowings and current portion of long-term debt of US$71.8 million (FY20: US$109.5 million; H1 FY20: US$127.9 million); and long-term debt of US$137.0 million (FY20: US$113.8 million; H1 FY20: US$103.3 million).

Acquisitions

Effective 1 April 2020, Analysys Mason acquired 100% of the shares in Allolio&Konrad for EUR7 million cash (the equivalent of US$7.8 million). The consideration paid included EUR6 million to settle debt of Allolio&Konrad with the seller. Allolio&Konrad is a consultancy based in Bonn, Germany with an extensive track record in the telecommunications industry and long-term client relationships with Europe's leading telecom operators. Due to the timing of this acquisition, the acquisition accounting has not been finalised. Acquisition-related costs of EUR0.2 million (the equivalent of US$0.3 million) have been incurred.

As a result of this acquisition, goodwill and other intangible assets combined increased provisionally by US$6.7 million. The fair value assessment of assets and liabilities acquired and the amounts recognised as goodwill and intangible assets have not been finalised. None of the goodwill recognised is expected to be deductible for income tax purposes. The revenue and EBITDA included from this acquisition in H1 FY21 were US$5.1 million and US$2.5 million respectively; profit after tax included from this acquisition was US$1.4 million. Had the acquisition date been 1 March 2020, the revenue and EBITDA would have been approximately US$6.2 million and US$3.0 million respectively. It is not practical to establish profit after tax that would have been contributed to the Group if it had been included for the entire period.

Effective 31 July 2020, PromonLogicalis Latin America Limited ("PLLAL"), a 65% owned subsidiary of the Group, acquired 30% of the shares in Cirrus Participações S.A. ("Kumulus") for BRL6 million cash (the equivalent of US$1.2 million). Kumulus is based in Brazil with 80 employees specialising in Microsoft cloud and data managed services. There is a put and call option for PLLAL to acquire an additional interest of 20.1% in Kumulus for BRL6 million.

Liquidity and borrowing facilities

In light of the Covid-19 crisis, particular attention has been given to assessing the outlook for liquidity across the Group and ensuring that sufficient cash will continue to be generated to settle liabilities as they fall due.

In January 2020, Logicalis completed a new three-year US$155 million banking facility for its subsidiaries. This senior facility covers Logicalis' operations throughout the world, excluding Latin America, which has its own separate credit facilities. The facility is used to fund working capital requirements and also includes a new acquisition credit line. Subsequent to H1 FY21, Logicalis successfully renegotiated the covenants under this facility, to ensure greater covenant headroom. In addition, the Latin American credit facilities are considered adequate in the current environment.

In August 2020, Westcon Europe entered into a EUR275 million new banking facility with a European banking syndicate, led by Crédit Agricole Leasing & Factoring. This invoice assignment facility replaced Westcon Europe's previous invoice financing facility of US$224 million with effect from 1 October 2020. The new committed facility will be for an initial period of three years. It will be used to fund Westcon Europe's working capital requirements and will bear interest at a reduced rate compared to the previous facility.

Westcon APAC also entered into a two-year US$80 million new receivables securitisation facility with Westpac Banking Corporation, replacing Westcon APAC's previous financing facilities in Australia, New Zealand and Singapore. This will provide an incremental US$25 million working capital facility for Westcon APAC, compared to its previous uncommitted facilities and will be at improved interest rates. This became effective on 25 September 2020.

The Group performed covenant projections for the next 12 months to confirm that banking covenants are likely to be met.

The new financing facilities, as well as the very strong operating cash flow generated during H1 FY21, significantly improved the Group's liquidity position.

Dividend policy

The Group's policy is to maintain a fixed three times cover relative to underlying* earnings when declaring ordinary dividends. Given the small H1 FY21 earnings, no interim dividend is proposed. A final full year dividend for FY21 will be considered at year end based on the full year results and the economic outlook at that time.

Foreign exchange translation

Losses of US$11.9 million (H1 FY20: US$24.0 million) arising on translation to presentation currency are included in total comprehensive loss of US$6.2 million (H1 FY20: US$8.9 million). The majority of these losses arise from weakening in the Rand/US$ exchange rate from 15.61 at 29 February 2020 to 16.59 at 31 August 2020 and weakening in the Brazilian Real/US$ exchange rate from 4.47 at 29 February 2020 to 5.39 at 31 August 2020.

Divisional reviews

Logicalis

Logicalis accounted for 34% of the Group's revenues (H1 FY20: 38%).

Logicalis is an international multi-skilled solution provider of digital enablement services helping customers harness digital technology and innovative services to deliver powerful business outcomes.

Revenue from operations decreased by 10.2% to US$700.2 million (H1 FY20: US$779.9 million). However, expressed in constant currency*** terms, Logicalis' revenue decreased by only 1.9% in H1 FY21 compared to H1 FY20. Services revenues were down 3%, with steady annuity revenue but lower professional services revenues due to local restrictions around Covid-19. Revenue contribution by geography is shown below:

Logicalis revenue % contribution by geography

Revenue increased in Europe in absolute terms due to large contracts secured in the Spanish and German operations and contributions from the Cilnet and Orange Networks acquisitions completed at the end of H1 FY20. The decrease around the rest of the globe was attributable to the difficult trading conditions caused by the Covid-19 pandemic as well as worsening exchange rates in many regions which exacerbated the decline in revenue in US$ terms.

Logicalis' gross margin was 25.3% (H1 FY20: 27.0%). Underlying gross margin percentage remained solid with the headline decrease being caused by The Tax Credit in H1 FY20. Gross profit was down 16.1% to US$176.9 million (H1 FY20: US$210.8 million).

Logicalis' gross profit contribution by geography is shown below:

Logicalis gross profit % contribution by geography

Operating costs decreased to US$133.9 million (H1 FY20: US$154.8 million). The H1 FY21 results include US$2.2 million of Covid-19-related restructuring costs necessary to adjust the business for the environment.

EBITDA was US$43.0 million (H1 FY20: US$56.0 million including The Tax Credit), with a corresponding EBITDA margin of 6.1% (H1 FY20: 7.2%). Adjusted** EBITDA, excluding the restructuring costs, was US$45.2 million. Operating profit was US$23.1 million (H1 FY20: US$31.8 million).

Argentina continued as a hyperinflation economy during H1 FY21, although the impact on the Group results was not material.

The net interest charge increased by US$6.7 million, reflecting the effect of interest receivable on The Tax Credit in Brazil in H1 FY20.

Net debt of US$89.7 million (FY20: US$156.7 million; H1 FY20: US$182.7 million) consisted of: net cash of US$54.1 million (FY20: net cash US$12.6 million; H1 FY20: net overdrafts US$5.7 million); short-term borrowings and current portion of long-term debt of US$60.8 million (FY20: US$100.8 million; H1 FY20: US$106.1 million); and long-term debt of US$83.0 million (FY20: US$68.5 million; H1 FY20: US$70.9 million). The decrease in net debt compared to FY20 was driven primarily by working capital improvements.

Logicalis continues to have a contingent liability in respect of a possible tax liability at its subsidiary in Brazil.

On 31 July 2020, Logicalis acquired a minority stake in Brazil-based Cirrus Participações S.A., which trades under the Kumulus brand. Kumulus is focused on delivering high value, impactful services and solutions to its customers' businesses, through cloud and data solutions.

Logicalis continues to develop its capabilities within cloud, IoT, software, security, data management and intelligent networks in support of its strategy to provide full lifecycle services around IT infrastructure solutions to its customers.

Whilst it is certain that technology will be even more firmly embedded in customers' operations following the pandemic, the exact impact of Covid-19 on Logicalis' short to medium-term trading is difficult to establish at this stage.

Regional leadership teams have prepared action plans to respond to a range of scenarios. At the same time, each region has put together compelling offers to customers and markets, including rapid remote deployment of essential solutions and services. These are designed to support customers in the areas that are most relevant to them right now, including secure remote working solutions, collaboration packages and improvements to IT resilience.

Logicalis remains confident about the long-term prospects for the industry and its positioning within it. Emerging markets currencies are expected to remain volatile over the short term.

Westcon International

Westcon International accounted for 64% of the Group's revenues (H1 FY20: 61%).

Westcon International is a value-added speciality distributor of industry-leading cyber security and network infrastructure, unified communications products, data centre solutions and channel services with a global network of service providers, systems integrators and speciality resellers. Westcon International has operations in 50-plus countries and goes to market under the Westcon and Comstor brands. Westcon International's portfolio of market-leading vendors includes: Cisco, Palo Alto Networks, Check Point, F5, Extreme Networks, Avaya, Broadcom and Juniper.

Westcon International's revenues increased by 4.0% to US$1 298.9 million (H1 FY20: US$1 248.4 million) with higher revenue across all regions. The revenue growth was largely driven by increased revenue in the Security segment. In constant currency*** revenues grew by 5.4%.

Westcon International's gross margins decreased to 10.3% (H1 FY20: 11.0%) as Covid-19-related pricing pressure drove lower margins across all regions. As a result, Westcon International's gross profit decreased by 2.3% to US$133.9 million (H1 FY20: US$137.0 million) with the lower margins seen across all regions.

  • Westcon International revenue % contribution by geography

  • Westcon International gross profit % contribution by geography


Operating costs decreased to US$114.7 million (H1 FY20: US$117.9 million). The H1 FY21 results include US$3.8 million of restructuring costs primarily related to initiatives in Europe (H1 FY20: US$nil), as well as US$5.0 million of foreign exchange losses (H1 FY20: US$2.5 million). Excluding those costs, operating expenses decreased 8.2%. Central costs of US$13.0 million were incurred in H1 FY21 which is 5% lower than H1 FY20 (US$13.7 million) and management expects that the full year costs for FY21 will be below the previous year's total of US$29 million.

EBITDA was US$19.2 million (H1 FY20: US$19.1 million). Excluding restructuring costs, adjusted** EBITDA of US$23.0 million reflected an improvement across all regions.

Net working capital days decreased to 17 days (FY20: 22 days; H1 FY20: 23 days) as a result of strong working capital management reducing days sales outstanding ("DSO") and increasing inventory turns. Net debt was US$33.5 million (FY20: US$48.7 million; H1 FY20: US$91.9 million).

The net debt consisted of: net cash of US$22.2 million (FY20: net overdrafts US$4.5 million; H1 FY20: net overdrafts US$47.3 million); short-term borrowings and current portion of long-term debt of US$9.5 million (FY20: US$6.6 million; H1 FY20: US$19.8 million); and long-term debt of US$46.2 million (FY20: US$37.6 million; H1 FY20: US$24.8 million).

Westcon International continues to monitor and respond to the Covid-19 pandemic with its priority on maintaining the health and welfare of its staff in compliance with relevant government directives while limiting business impacts for channel and vendor partners.

Westcon International's key logistics centres in the UK, Netherlands, Middle East, South Africa and Asia-Pacific remain open and are being managed under strict measures to assure the wellbeing of logistics and warehousing teams while maintaining service levels. This has enabled the division to take an active role in servicing the needs of critical business sectors alongside partners during the pandemic.

The multi-year investments in Westcon International's advanced systems and business automation enabled business continuity plans to be deployed seamlessly with almost the entire workforce continuing to work remotely.

Westcon International's strategy is to bring to market industry-leading fixed or wireless-based networking solutions, including: unified communications, security, virtualisation, remote access and cloud computing products. While the near term remains uncertain, current conditions are driving demand for technologies that Westcon International sells.

Corporate, Management Consulting and Financial Services

This segment accounted for 2% of the Group's revenues (H1 FY20: 1%).

The Management Consulting unit comprises Analysys Mason, a provider of strategic, trusted advisory, modelling and market intelligence services to the telecoms, media and technology industries.

The Management Consulting unit delivered an excellent performance in H1 FY21. Management Consulting revenues were US$31.8 million (H1 FY20: US$27.4 million). Gross profit increased to US$13.1 million from US$11.5 million in H1 FY20. EBITDA increased to US$5.7 million (H1 FY20: US$4.8 million) and EBITDA margins improved to 17.9% compared to 17.5% in H1 FY20.

Effective 1 April 2020, Analysys Mason acquired 100% of the shares in Allolio&Konrad, a consultancy based in Bonn, Germany with an extensive track record in the telecommunications industry and long-term client relationships with Europe's leading telecom operators.

Analysys Mason has a strategy focused on specialisation in the TMT sector where increasingly the industries of telecommunications and information technology are converging and driving rapid digitisation across many industries often brought about by the move to cloud computing.

Datatec Financial Services provides financing/leasing solutions for ICT customers. The business recorded revenues of US$0.3 million in H1 FY21 (H1 FY20: US$0.6 million) and an EBITDA loss of US$0.4 million (H1 FY20: US$0.6 million loss).

Corporate includes the net operating costs of the Datatec head office entities which were US$7.4 million (H1 FY20: US$11.0 million). These costs include the remuneration of the Board and head office staff, consulting and audit fees. In H1 FY21, foreign exchange gains were US$0.6 million (H1 FY20: US$1.7 million).

As at 31 August 2020, Datatec head office entities held cash of US$55.1 million of which US$10.3 million (including R87.5 million held in ZAR) is held in South Africa and subject to the SA Reserve Bank regulations. These cash balances decreased by US$12.4 million from the year ended 29 February 2020 mainly as a result of an inter-group loan to fund the purchase of Allolio&Konrad and US$2.8 million for treasury shares purchased for share-based payments settlements.

Subsequent events

On 30 September 2020, Logicalis acquired the minority stake in NubeliU Limited which then became a 100% subsidiary of PLLAL.

Changes to the Board committees

As previously announced: Stephen Davidson, the Group Chairman, and John McCartney stepped down from their committee roles on the Audit Risk and Compliance Committee and Remuneration Committee on 31 May 2020; and Ekta Singh-Bushell was appointed to the Remuneration Committee effective 31 May 2020.

Appointment of auditor

At the Annual General Meeting of the shareholders of Datatec held on 29 July 2020, PricewaterhouseCoopers ("PwC") were appointed as the new independent external auditor of the Group.

Basis of preparation

This interim financial report was prepared in accordance with and containing the information required by IAS 34: Interim Financial Reporting and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting pronouncements as issued by the Financial Reporting Standards Council. This interim report complies with the Listings Requirements of the JSE Limited and the requirements of the Companies Act, No 71 of 2008, of South Africa. This report was compiled under the supervision of Ivan Dittrich CA (SA) (Chief Financial Officer).

Accounting policies

The accounting policies applied in the preparation of these interim financial statements are in terms of IFRS and are consistent with those accounting policies applied in the preparation of the previous consolidated annual financial statements.

New standards effective for annual periods beginning on or after 1 January 2020

No new standards, amendments to published standards and interpretations which became effective for the year commencing on 1 January 2020 had an impact on the Group's accounting policies.

New standards' amendments to existing standards and interpretations that are not yet effective and have not yet been early adopted

The Group did not early adopt any new, revised or amended accounting standards or interpretations. The accounting standards, amendments to issued accounting standards and interpretations, which are relevant to the Group but not yet effective at 31 August 2020, are being evaluated for the impact of these pronouncements, and are not expected to have a material impact.

Critical accounting judgements and key sources of estimation uncertainty

The results of the Group have many areas where key assumptions concerning the future, and other key areas of estimation could have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the financial year.

The results contain sources of estimation and uncertainty in the following areas:

  • estimates made in determining the recoverable amount of goodwill included in the statement of financial position;
  • estimates made in determining the probability of future taxable income justifying the recognition of deferred tax assets;
  • estimates made in determining the level of provision required for obsolete inventory and the accounting for rebates from suppliers;
  • estimates made in determining the amount or timing relating to restructuring, legal claims, taxes, pension and dilapidation obligations; and
  • estimates made when measuring the expected credit losses.

Going concern

The directors have reviewed the future profit and cash flow projections in conjunction with the current economic climate as well as banking facilities in place to support all the operations, in order to express an opinion on the adequacy of working capital and the ability to continue as a going concern for the foreseeable future. These projections covered future financial performance, solvency and liquidity for a period of 12 months from the date of the release of these results.

The directors have concluded that the Group will continue to be a going concern for the foreseeable future and therefore the interim results have been prepared on a going concern basis.

Disclaimer

This announcement may contain statements regarding the future financial performance of the Group which may be considered to be forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty, and although the Group has taken reasonable care to ensure the accuracy of the information presented, no assurance can be given that such expectations will prove to have been correct.

The Group has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements and there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. It is important to note, that:

(i) unless otherwise indicated, forward-looking statements indicate the Group's expectations and have not been reviewed or reported on by the Group's external auditor;
(ii) actual results may differ materially from the Group's expectations if known and unknown risks or uncertainties affect its business, or if estimates or assumptions prove inaccurate;
(iii) the Group cannot guarantee that any forward-looking statement will materialise and, accordingly, readers are cautioned not to place undue reliance on these forward-looking statements; and
(iv) the Group disclaims any intention and assumes no obligation to update or revise any forward-looking statement even if new information becomes available, as a result of future events or for any other reason, other than as required by the JSE Listings Requirements.

On behalf of the Board

SJ Davidson
Chairman

JP Montanana
Chief Executive Officer

IP Dittrich
Chief Financial Officer

22 October 2020

Directors

SJ Davidson# (Chairman), JP Montanana# (CEO), IP Dittrich (CFO), M Makanjee, JF McCartneyo, CRK Medlock#, MJN Njeke, E Singh-Bushello
oAmerican #British

* Excluding impairments of goodwill and intangible assets, profit or loss on sale of investments and assets, amortisation of acquired intangible assets, unrealised foreign exchange movements, acquisition-related adjustments, fair value movements on acquisition-related financial instruments, restructuring costs relating to fundamental reorganisations and the taxation effect on all of the aforementioned.
** Adjusted EBITDA excludes restructuring costs which have arisen as a result of Covid-19. In H1 FY20 there was no difference between EBITDA and adjusted EBITDA because there were no restructuring costs.
*** The pro forma constant currency information, which is the responsibility of the Datatec directors, presents the Group's revenue for the current reporting period had it been translated at the average foreign currency exchange rates of the prior reporting period. This information is for illustrative purposes only and because of its nature, may not fairly present the Group's revenues. This information has not been reviewed and reported on by the Group's external auditor.

To determine the revenues in constant currency terms, the current financial reporting period's monthly revenues in local currency have been converted to US Dollar at the average monthly exchange rates prevailing over the same period in the prior year. The average exchange rates of the Group's material currencies are listed below:

Average US Dollar exchange rates H1 FY21   H1 FY20  
British Pound/US Dollar 1.26   1.26  
Euro/US Dollar 1.13   1.12  
US Dollar/Brazilian Real 5.31   3.94  
Australian Dollar/US Dollar 0.68   0.69  
Singapore Dollar/US Dollar 0.72   0.73  
US Dollar/South African Rand 17.38   14.50  


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