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Unaudited results for the six months ended 31 August 2019

Adcorp Holdings Limited
(Adcorp or Adcorp Group or the Group)
Registration number 1974/001804/06
Share code: ADR, ISIN: ZAE000000139

Short-form announcement
Unaudited Group results for the six months ended 31 August 2019

Salient features
– Revenue for the period decreased by 10% to R7 billion (H1 2018: R8 billion)
– EBITDA for the period decreased by 29% to R151 million (H1 2018: R212 million)
– Loss after tax of R447 million compared to a net profit after tax of R99 million in the prior half year period
– Loss per share of 413,3 cents per share compared to an earnings per share of 90,2 cents per share in the prior
half-year period
– Headline earnings per share of 5,1 cents compared to 88,3 cents per share in the prior half-year period
– Days sales outstanding (DSO) improved to 51 days from 52 days
– Cash generated by operations declined by 69% to R110 million (H1 2018: R358 million)
– The gearing ratio increased to 50% from 35%
– A final dividend of R106 million (relating to the financial year ended 28 February 2019) has been paid to all shareholders on 19 August 2019. No dividend has been declared for the six-months period ended 31 August 2019 (2018: Nil).

The Group is disappointed to report, for the half-year ended 31 August 2019, a net loss of R447 million compared to a R99 million profit for the same period last year. The decline in performance can be attributed to a combination of challenges in our trading environments, unsatisfactory operating performance and impairments amounting to R452 million.

Group revenue declined by R784 million during the period. The largest contributors to this decline were the Industrial Services (R291 million decline) and Support Services (R210 million decline) businesses in South Africa, and the Industrial Services (R263 million decline) business in Australia.

A large portion of the revenue decline in the South African Industrial Services and Support Services
businesses was a result of a combination of the poor macroeconomic conditions and the final effects of the July 2018 Constitutional Court ruling on the “deeming” provision in the Labour Relations Act (LRA) flowing through our client base. As the market leader in the South African staffing industry, it goes without saying that we are directly impacted by South Africa’s economic and employment woes. In the first half of this year, unemployment increased to 29%, business confidence fell to the lowest level in over two decades and the post-election economic relief, which many of our corporate clients were holding out for, has not materialised.

This has resulted in our clients rebasing their business projections, leading to higher than anticipated volume reduction in our South African Industrial Services and Support Services businesses. In addition to these cyclical factors, the Support Services business has been impacted by a technological disruption in areas such as call centre staffing. In both these businesses, we are stepping up our level of interaction with clients, refining our value proposition and reducing our costs-to-serve. The most significant impact on the half-year results was not so much the decline in our revenue, but a decline in our gross margins which was not matched by a timely response to rationalise our related fixed cost base. We believe these interventions are reasonably within management control, and remedial measures have already commenced.

We are encouraged by the positive performance in our Training business, which has more than doubled in earnings, as we adopt a more commercial focus and rationalise the business.

Financial Services revenue decreased by 22% primarily due to the fact that prior year numbers include
revenue for the FNDS 3000 business that was sold in Q1 of FY2019. Revenue in the Financial Services division has also been negatively impacted by the reduction of TES headcount which affects the Employee Benefits business. Excluding these factors, revenue for the FMS part of the business was up 12% and continues to perform well.

The revenue decline in the Australian Industrial Services division was largely as a result of drought
conditions and floods that materially impacted the Labour Solutions Australia (LSA) business, which
primarily provides staff to the agricultural sector. We have already started seeing some recovery in
this business in the second half, but the events further highlight the urgent need to diversify the
LSA business and this remains a key strategic focus.

In light of the deterioration in financial performance, management undertook a review of the significant
goodwill and intangible assets balance. We have impaired R452 million worth of goodwill in Paracon, BLU, CYNERGY, DAV and LSA given the significant slowdown in these businesses over the period under review.

Despite the impairment, these businesses remain cash generative and profitable. The impairment is primarily an accounting requirement, and management do not believe that this reflects a permanent loss of value or decline in the long-term prospects of the businesses.

Despite the operating difficulties reflected in the half year results, Adcorp remains South Africa’s largest
staffing provider with a blue-chip client base that includes South Africa’s leading companies in
telecommunications, financial services, energy, manufacturing and general industrials. The bulk of our
volume reductions have been driven by clients pulling back on their volumes. We, therefore, remain focused on delivering high quality service to our clients to ensure that we remain our clients’ top choice when the cycle eventually turns.

Despite the disappointing financial and operational performance for the half year period under review, the business is fundamentally sound and will be able to meet all its commitments and deliver on its strategic plans, albeit over a longer timeframe.

In South Africa, our focus over the short term will be the implementation of tactical interventions to claw back on the losses incurred in the first half of this year. We have also begun simplifying the grouping of our different business units in line with our go-to-market strategies to ensure that businesses that serve the same client base and have similar processes operate under the same pillar and benefit from synergies and collaboration. As noted above, we anticipate our businesses to be agile in responding to revenue and margin pressures through rightsizing their cost bases as well as offering better customer propositions. The Group will also be spending more time on customer-centric activities compared to the past two years, which have been dominated by internal restructuring efforts.

A key focus of the strategic transformation is the realignment of our Training business so that we can
effectively leverage our assets, which include numerous accreditations and campuses across the country, to deliver value in reskilling and upskilling of South Africa’s workforce. Developments in our Training business are exciting as we work with an increasing number of our clients to deliver demand-led requirements that enhance their workforce skills requirements in a growing age of digital through our IT Certification business, TorqueI T. The need for skilled artisans is an imperative for our South African market and we are harnessing our capabilities within our businesses, Adcorp Technical Training (ATT) and Production Management Institute (PMI), to partner with our clients in the heavy industrials, mining and logistics industries.

While we are seeing a marginal uplift in headcount volumes in our LSA business, we do not expect a full recovery in the current financial year. Diversification away from agriculture had already been identified as an area of focus and we are investigating our options in this regard within Australia. Paxus, which had been impacted by a slowdown in volumes in response to the May general elections in Australia, is anticipating a stronger second half of the financial year.

Positioning ourselves to remain competitive as we support our clients as they navigate their human capital and workplace needs remains a priority for the business, and we remain committed to unlocking value for our shareholders while we provide a positive impact in the countries and communities where we work.

This short-form announcement is the responsibility of the directors and is only a summary of the information contained in the full announcement and does not contain full or complete details.

The full announcement is available on the JSE website and on the Group’s website.
Copies of the full announcement may also be requested from the Group’s registered office and at the office of the Group’s sponsors during office hours 08:00 to 16:00, Monday to Friday at no cost at the contact details below.

Any investment decision should be based on the contents of the full announcement available on the JSE’s website and the Group’s website.

On behalf of the Board

GT Serobe CJ Kujenga
Chairman Interim Chief Executive Officer

16 October 2019

Executive director: CJ Kujenga (CFO/Interim CEO)

Independent non-executive directors:
SN Mabaso-Koyana, FS Mufamadi, H Singh, MW Spicer, R van Djik

Non-executive directors:
GT Serobe (Chairman), GP Dingaan, C Maswanganyi, S Sithole, MM Nkosi

Physical address:
Adcorp Place, 102 Western Service Road, Gallo Manor Ext 6, 2191. Telephone: 010 800 0000

Interim Company Secretary:
FluidRock Governance Group (Pty) Ltd

Transfer secretaries:
4 Africa Exchange Registry (Pty) Ltd, Cedar Woods House, Ballywoods Office Park,
33 Ballyclare Drive, Bryanston, 2191

Nedbank Corporate and Investment Banking, a division of Nedbank Limited, 3rd Floor, Block F,
135 Rivonia Road, Sandown, Sandton, 2196

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