Financial highlights

Kagiso Media delivered credible results, considering the harsh economic environment in which it operated during the 2009 financial year. The group reported a 19% increase in total revenue to R854,8m (2008: R715,9m) with operating profit rising 9% to R294,3m (2008: R269,3m). Kagiso Media’s broad range of media assets provided strong diversification benefits during the year, helping to bolster the operating margin which declined marginally across the board to 34,4% from 37,6% in the comparable period last year. A strong focus on managing costs during the year also played a significant role in retaining the group’s profitability.

Headline earnings per share increased by 6% to 126,7 cents (2008: 119,6 cents) with the group declaring dividends of 62 cents (2008: 59,0 cents) per share.

Cash flow from operations increased by 19,9% during the year, while cash and cash equivalents at year-end increased by R35,6m to R173,4m.

Kagiso Media’s balance sheet remains solid, underpinned by cash reserves of R173,4m (2008: R137,8m) and long-term borrowings of R219,0m (2008: R209,2m), being the preference shares issued and deferred consideration liabilities. Net asset value per share increased by 69 cents to 376 cents per share (2008: 307 cents per share).

Operational highlights

Broadcasting

Once again, Kagiso Media’s broadcasting assets continued to show resilience despite the adverse economic backdrop, with revenue increasing by 1,1% to R481,6m while operating profit declined marginally to R238,6m. Although East Coast Radio’s revenue declined, it maintained its margins while the revenue and profit performance of the other radio assets was constant, showing a marginal increase year-on-year. During the year, Jacaranda 94.2’s core audience remained stable, despite its cumulative past seven-day audience being down. Its Gauteng listenership, however, was relatively unaffected and the station has continued to maintain its market leadership in Pretoria and its environs.

A key challenge for the management team was to maintain its operating profit margins against the economic tide. Both Jacaranda 94.2 and East Coast Radio worked hard to improve efficiencies in their operations, maintaining operating profit margins.

The Broadcasting division made good progress with regard to its stated objective of increasing revenue generation from new media applications. This has been heightened by the establishment of a new division, Kagiso Media Convergence, during the year, to add value to the existing assets and to act as an in-house incubator for the group’s new media capabilities. It is indeed pleasing to report that even in this short space of time, the revenue attributable to the division (adjusted for minorities) grew to R14,7m from R3m and it delivered operating profit of R1,5m. The revenue sources associated with this gain range from subscriptions, digital media services and online advertising to Premium SMS. Noteworthy in this performance is Gloo Digital Design’s contributions which, albeit from a small base, was commendable.

Information services and solutions

Even LexisNexis, usually a solid performer, could not escape the challenges of the economic downturn in 2009. Notwithstanding these difficulties, the business still posted good results with revenue increasing by 8,1% to R405,6m and operating profit growth of 14,0% to R133,1m. The quality of earnings is reflected in the operating margin which improved to 32,8% from 31,1%, defying the downward pull of the market. LexisNexis continued to extend its products and services in the online environment and also focused on building its content capability across the African continent, a positive attitude which we believe will hold them in good stead when the market eventually turns.

Given LexisNexis’ migration from old-form content presentation to digital and electronic, significant synergistic opportunities will be explored in conjunction with our Kagiso Media Convergence division.

Content

Kagiso Media acquired a controlling interest in Urban Brew Studios in November 2008. During the year under review, the business benefited from its more diversified revenue base which resulted from the decision taken a year ago to broaden its business model by expanding into Africa.

Urban Brew Studios delivered results which exceeded expectations despite revenue being under severe pressure. It contributed revenue of R129,5m and operating profit amounting to R26,0m. With immense pressure exerted on the industry by a recessionary economic environment, and alongside the challenge of dealing with unpredictable circumstances primarily occasioned by the financial difficulties at the SABC, Urban Brew Studios was nevertheless able to achieve credible profit margins. During 2009, Urban Brew Studios continued to entrench its position as one of South Africa’s foremost television studios and content providers, and focused on building its capacity to take on new opportunities on the African continent.

Outdoor

The outdoor division has been treated as an asset for sale as of 1 January 2009. The division’s revenues amounted to R40,4m for the six months to 31 December 2008 (12 months to June 2008: R83,8m). Operating profit for the six months amounted to R5,1m (12 months 2008: R19,8m).
Kagiso Media’s disposal of its 65% stake in Kagiso Outdoor is still in progress.

Exhibitions and events

A strategic review of the exhibitions and events business informed Kagiso Media’s decision to wind down the business by disposing of assets. In May 2009, the group disposed of its 50% shareholding in the Johannesburg International Motor Show to the National Association of Automobile Manufacturers of South Africa (NAAMSA). The division has also divested of its other exhibition-related assets, with the exception, by arrangement, of a contract with South African Tourism which expires in 2010. Mobil Alliance in contrast, delivered revenue of R5,0m (2008: R0,7m) and returned to profitability, contributing profits of R1,0m to the group. It is still positioned to extract some benefits related to the FIFA 2010 Soccer World Cup.

Business environment

Despite initial expectations that South Africa would be partially shielded from the downstream effects of the global credit squeeze, the impact has been significant with the local economy contracting by 3,6% year-on-year in the second quarter of 2009. While there are indications of “green shoots” in the global economy, it is widely expected that the local recovery will only gain momentum early in 2010.

Although the retail and financial services sectors showed resilience, Kagiso Media continues to sense caution in the marketplace, with major advertisers remaining conservative in their approach to spending. In addition to lower overall spending, advertisers are concentrating their budgets in the major centres to the detriment of secondary urban areas, confirming the 2008 trend.

Although the group’s two directly owned radio stations, East Coast Radio and Jacaranda 94.2, experienced pressure on revenue, concerted management focus on protecting margins paid off. This was prompted in December 2008, as Kagiso Media took cognizance of market indications that the ensuing six months would be characterised by a significant contraction in advertising spend.

While the advent of digital television holds the prospect of significant opportunities, it has at the same time been clouded in regulatory uncertainty. At the time of writing this report, two prospective operators had initiated court proceedings, seeking to bring the process to a halt for review.

Strategy

Kagiso Media’s strategy is to deepen its ability to deliver content and it is also focused on extending its reach into visual media. This will facilitate its move beyond radio onto these online and mobile platforms which are defining the future media landscape. The group is also committed to diversifying its revenue streams to reduce its reliance on advertising revenue which remains notoriously cyclical. This was set in motion two years ago and the group has since extended its multimedia capabilities by acquiring several niche online media companies. In 2009, it generated R14,7m in revenue from these new media activities, up from R3m in the previous period. Gloo Digital Design, a specialist digital agency purchased in January 2009, is already delivering significant benefits while Urban Brew Studios is performing well against a challenging backdrop. With its broadening suite of assets across the broadcast and new media value chain, Kagiso Media has steadily begun reducing the advertising-induced cyclicality profile of its earnings as demonstrated by the 2009 results which have been achieved amid the most uncertain economic environment in living memory.

In support of the group’s macro-diversification strategy, the operations are actively working to enhance their value propositions. Broadcasting is continually extending its reach into online media, with targeted acquisitions which will improve its web and new media competency, to leverage the radio broadcast assets. LexisNexis is focused on extending its online suite of products and expanding its network in Africa. Prior to its acquisition by Kagiso Media, Urban Brew Studios was already exploring proposals to diversify its business model on the African continent as well as securing media real estate, and continues to do so.

The imminent digitisation of the visual broadcast environment will undoubtedly change the face of television. Investments are being made to ensure compatibility with new digital standards and Kagiso Media will continue to evaluate opportunities to carry its new media strategy through into the television broadcast arena. The recent commissioning of the Seacom undersea cable will enhance the online delivery of content, including digital content, and the group will bring to bear its diverse resources to ensure its participation in these developments.

Kagiso Media is confident that it has the resilience to thrive in the long term, despite the current challenges. It is gearing up to take its business forward, pursuing diversification opportunities to create long-term value for shareholders.

Prospects

While the short-term outlook remains uncertain, the group is confident that in the first quarter of 2010, visibility will start to improve. The 2010 Soccer World Cup is expected to precipitate an upturn in advertising revenue, while in the longer term government’s public infrastructure investment programme is gaining momentum and it should be a catalyst for growth throughout the economy.

Kagiso Media is actively recalibrating and refining its businesses to ensure that it is optimally positioned to benefit from the economic recovery. The management team is committed to optimising those things that are within its control – evaluating the evolving market to ensure that the group is positioned to grow its base and enhance its competitiveness, while managing costs and continually eliminating inefficiencies to ensure optimal profitability. In terms of its value proposition, the group will continue to make investments to ensure its leadership in both the traditional and the new media environments.

MURPHY MOROBE
CHIEF EXECUTIVE OFFICER