RECONCILIATION OF HEADLINE EARNINGS – see pdf in financial section

ABRIDGED CONSOLIDATED BALANCE SHEET – see pdf in financial section




Discontinued operations and non-current assets held for sale

Discontinued operations as disclosed in the group income statement relates to the following:

• The convention business of Gallagher Estates which the group has been ordered by the competition commission to dispose of. The group is currently awaiting the Commission`s response to proposals by the group regarding the manner of disposal; and

• The financial services companies of the Mettle Group which were disposed of during the year.

The non-current assets held for sale, as disclosed in the group balance sheet, relate to the following:

• A subsidiary of Johnnic Holdings USA, Montauk Energy Capital LLC, has taken a decision to dispose of certain of its non-material passive landfill sites in the next 12 months; and

• Certain assets of the Seardel Group which has been committed to being disposed of.



Group results

The group results reflect an overall increase of 27% in basic earnings attributable to HCI shareholders and a decline of 54% in headline earnings. These results have been somewhat skewed by the occurrence of the following once off non-recurring events:

• Fair value losses incurred due to the mark to market of Tsogo Sun`s initial investment in Gold Reef Resorts;

• Fair value losses resulting from the collapse of Lehman Brothers resulting in impairment of natural gas put options held by Montauk; and

• the consolidation of the Seardel Group, who have reported significant losses for the period under review. HCI has structured its exposure to this company on a basis of limiting its downside to R50 million while retaining 80% of the upside.

Growth in the media businesses together with the first-time consolidation of Seardel and the Cullinan Hotel were the most significant drivers of growth in revenue with the growth in trading expenses being largely in line with growth in revenue, the result of which has been a marginal increase in EBITDA despite the negative impact of the acquisition of Seardel. The increase in depreciation and amortisation largely reflects the group`s increased level of investment in fixed assets.

Finance costs for the year have increased significantly primarily as a result of the increased level of group borrowings. The decrease in the group`s share of the profits of associates has decreased as a result of the results of the Cullinan, previously accounted for as an associate, now being consolidated; and the group`s current year share (R2,3 million) of the loss of Clover Industries Limited compared to the group`s share (R129 million) of its profits in the prior year.

Negative goodwill released relates primarily to the excess value of the assets over the purchase price in Seardel.

Included in investment surplus are the profits on the disposal of the financial services businesses in the Mettle Group of companies and a purchase price adjustment in respect of the group`s disposal of its interest in Africa on Air (Pty) Limited in the 2004 financial year.

Asset impairments relate primarily to property, plant and equipment impaired by Seardel.

The fair value adjustments of financial instruments relates primarily to the following:

• R132 million fair value losses charged by Tsogo Sun to its income statement. These fair value losses relate to the mark to market of the Tsogo Sun`s initial 5% investment in the issued share capital of Gold Reef Resorts Limited (“GRR”). These losses remain in headline earnings. Following the acquisition by Tsogo Sun of a further 18% interest in GRR, the investment has been accounted for as an associate, with Tsogo Sun holding a 23% interest in GRR at year-end;

• The group`s USA subsidiary, Montauk Energy Corporation LLC (MEC) had as part of its price hedging strategy purchased natural gas price put contracts from Lehman Brothers Commodity Services, Inc. (“LBCS”). On 3 October 2008, LBCS filed a petition in the United States Bankruptcy Court seeking relief under Chapter Eleven of the United States Bankruptcy Code, triggering default under the terms of the contracts. On 8 October 2008 MEC exercised its right under the terms of the contracts to terminate the remaining put option contracts with LBCS and claim early termination damages from LBCS of approximately $6,6 million. The bankruptcy filing of LBCS was the culmination of publicised defaults by LBCS relating to other third party claims prior to 30 September 2008. As a result of the uncertainty that existed at 30 September 2008 relating to the creditworthiness of LBCS, MEC has effectively, as of 1 April 2008, discontinued the hedge accounting that had previously been applied to the LBCS put contracts and as at 30 September 2008, fully impaired the carrying value of the LBCS put contracts. The total pre-tax loss recognised by MEC relating to the LBCS hedges amounted to approximately $8,6 million (R76 million) which remains in headline earnings. The impairment of goodwill and investments relates primarily to the impairment of by MEC of its investment in the Magellan joint venture, by an amount of R60 million, which has continued to produce losses. The net result of all of the above has been a 54% drop in headline earnings to 255 cents per share while basic earnings per share increased 26% to 890 cents per share with negative goodwill released being the main contributing difference between the basic and headline earnings.

Group balance sheet

As stated above, the group has consolidated Seardel for the first time, as a result of which the group`s assets have increased by R2,6 billion with liabilities increasing by R1,2 billion and attributable group equity increasing by R1,26 billion largely due to the negative goodwill released through the income statement on the acquisition of Seardel. The group has also raised significant amounts of borrowings to fund its acquisitions of the remaining Johnnic minorities and its investment in Gold Reef Resorts, which is in line with its strategy to grow the gaming and hotel businesses. As part of the consideration paid to the Johnnic minorities, 1 005 744 shares were issued.


Media and broadcasting

Sabido Investments (Pty) Limited (“Sabido”)

Sabido has performed very well despite the general decline in economic activity. Television adspend continues to increase over the period, albeit at a slower rate. continued a steady gain in market share of that spend. Its audience share likewise continues to creep up slowly. A key part of Sabido`s results is also the performance of the e-News channel which has been operating for almost a year now. While took some five years to become profitable, it is expected that e-News will turn positive in the near future. It is a credit to the broadcast skills that have been developed in that the news channel was able to emerge, broadcasting 24 hours a day live news without any noticeable glitches. Costs across all media operations, as always, have been tightly controlled and all foreign currency obligations completely hedged. Gaming, Hotels and Leisure

Tsogo Sun Holdings (Pty) Limited (“Tsogo Sun”)

The financial results for the year to 31 March 2009 represents a solid performance with growth in group revenue to R5 921 million (8% above the prior year) and EBITDAR of R2 623 million (2%) despite the economic slowdown impacting hotels and gaming and the reduction of the Montecasino market share in Gauteng as a result of the opening of Silverstar casino on the West Rand of Johannesburg.

In South Africa, different markets have experienced differing results with the Western and Eastern Cape most severely impacted. However, the overall casino industry has continued to grow.

The contraction in the local economy has pressurised the South African tourism and hospitality industry in the second half of the financial year. After a number of years of unprecedented growth in room rates and rooms sold, demand in the key corporate, leisure and special tour operators (“STO”) markets has declined significantly. To date, the government, group and conference segments have maintained prior year levels.

Importantly, the three major sporting events in the first half of F`10,including the IPL cricket tournament, the British and Irish Lions tour and the Confederations Cup will assist occupancies and ensure the group is well prepared for the FIFA World Cup in 2010.

A segmental analysis of the Tsogo Sun Group`s revenue and EBITDAR is as follows:

– see pdf in financial section In addition to major maintenance and refurbishment capital expenditure, the group has undertaken a number of corporate activities during the financial year which will position the group to benefit substantially from the economic recovery, when it arrives. These activities include:

• The addition of five hotels to the portfolio (StayEasy Rustenburg – opened, and Southern Sun Hyde Park, Southern Sun Montecasino, StayEasy Witbank and Southern Sun Ikoyi – all under construction);

• The acquisition of the Century Casinos Caledon and Newcastle operations (subject to regulatory approval);

• The acquisition of the 23% (33% voting) interest in Gold Reef Resorts. Gold Reef Resorts has been accounted for as an associate with effect from October 2008. Accordingly, R45 million has been included in the group’s equity earnings during this financial year;

• The mixed use development at Montecasino, now officially named The Pivot, which is under construction and includes offices, parking and the Southern Sun Hotel mentioned above; and

• Redevelopment and expansion of The Ridge Casino including a new Prive, cinemas and the StayEasy Hotel.

The Tsogo Sun Group remains focused on a growth strategy and will continue to pursue opportunities to develop and enhance its core Hotels and Gaming businesses.

Vukani Gaming Corporation (Pty) Limited (“Vukani”)

The business continued to grow significantly despite a small decline in average gross gaming revenues per machine with the machine base growing to 2 972 at 31 March 2009. Significant growth in revenues has not translated into growth in EBITDA due to certain non-recurring expenses, the costs of the Gauteng office incurred in anticipation of the Gauteng license and the start up costs incurred in establishing the ATM and VPlay divisions, all of which were expensed.

Vukani won a license to operate in the key Gauteng area and is in the process of starting to rollout machines there despite a challenge from a party that contested for a license but failed to succeed. We do not anticipate this challenge will seriously hamper the roll out of our operations there. Our own contest with the award in the Free State is likely to be heard in court in the last quarter of this financial year. In the meantime all LPM operations in the Free State remain interdicted. During the year we also bought out a competitor, the effect of this transaction is that we effectively increased our machine base somewhat and also acquired a second license in KwaZulu-Natal. All these developments continue to entrench Vukani as the market leader in the LPM industry.

The rollout of machines remains frustratingly slow. The eighth region (North West) has issued an RFP for LPM operators but the local requirements are so extensive that it is unclear whether Vukani can operate profitably there and no decision has been made yet as to whether or not to bid for this license. The roll-out of 20 and 40 machine sites have taken longer than expected due to the requirement that the National Gaming Board is required to approve the applications, which approvals were obtained subsequent to year-end. With the assistance of the regional gaming boards these sites should be operational in the near future.


Golden Arrow Bus Services (Pty) Limited (“GABS”)

Golden Arrow Bus Services continued to be run well. The cost pressures through the escalation of diesel prices were managed carefully and our decision to tighten our belt rather than try to pass on these costs in their entirety was rewarded by the fact that there was no disruption of our services, which continued to grow steadily with some 5% increase in passenger numbers.

The company has provided transport to the public in Cape Town for 147 years and during that time has had several moments where change swept through such services. We are currently rapidly approaching another of these moments with two key pressures unfolding simultaneously, namely the introduction of the BRT system into Cape Town over the next period and major efforts by Government to reduce the cost of bus subsidies. The BRT is an opportunity in the long term to modernise the city`s transport system, which, if successful could significantly reduce congestion through private motor vehicles over the next two decades. It should also shorten the time it takes to travel to work and back in peak periods for hundreds of thousands of commuters in Cape Town. GABS is committed to participating in this system and generally doing its best to make it a success. Nevertheless, we believe the timetable for the first phase of its implementation is too tight for the World Cup soccer and GABS has as a result purchased buses for an upgrade in our inner city service, which will ensure that any delay in the implementation of the first phase of the BRT does not cause serious congestion during the World Cup. Secondly, we believe the advice on which government is relying, namely that the system will ultimately run without subsidies as is the case in several South American cities, takes insufficient account of the low density nature of our cities and resultant long distances people have to be transported. Hopefully these issues will be dealt with appropriately and the difficulties of introducing such a modern public transport system will be overcome over the period of its introduction.

On the other hand, the decision by Government to simply withhold amounts contractually due to GABS under its main contract resulted in the company being driven to litigate with the state in regard to approximately R100 million revenue so withheld, as were other bus operators similarly afflicted. While this litigation was successful, we are still no nearer resolving the underlying issue. It seems Government is heading down a path obliging the curtailment of bus services nationally. This is an issue that is completely destabilising the industry and if implemented as thoughtlessly as has been the case to date, will in due course, cause significant retrenchments, commuter dissatisfaction, and disruption to many businesses dependent on people who travel to work by public transport. Hopefully the newly elected government will act decisively to resolve this impasse with due care for passengers.

Food and beverages

Clover Industries Limited (“Clover”)

The company has had a difficult year financially. It has continued to drag its feet over a necessary capital restructuring for a further year. HCI has as a result lost confidence this will ever happen and is contemplating reducing its exposure to the company.


HCI Khusela Coal (Pty) Limited (“HKC”)

HKC has had several difficulties in the start up phase of its operations. In the case of the Palesa mine, after some delay, the mine has started production of raw coal to supply to Eskom under its current contract. In the next few months the completion of the construction of its wash plant will allow it to increase production significantly but we currently believe it will only be at full production levels in the second half of our financial year.

In the case of the Mbali mine the inexplicable granting of a key portion of the mining right to CEF, despite our prospecting right, has resulted in us having to redesign the placement of slurry ponds and this in turn requires further environmental approvals before mining can be commenced. We have in addition challenged the decision of the DME to withhold the portion concerned and expect this decision to be reviewed by court over the coming year.

We have nearly completed the prospecting on the Nokuhle property and shall be lodging a mining right application in the near future.

Clothing and textiles

Seardel Investment Corporation Limited (“Seardel”)

During the year, HCI took over the Seardel Group by acquiring about 70% of its issued share capital through underwriting a major share issue in that company funded primarily by non-recourse ringfenced debt. In essence the opportunity is a turn around one. The company has an NAV per share backed by large industrial properties significantly higher than where the share trades but operates a business that currently generates enormous losses.

In the four months since taking over the group, we have introduced new management personnel, announced the closure of the manufacture of the textile production facility at New Germany which was generating completely unsustainable losses, and taken a number of key steps to limit the overhead of several clothing factories within the group. While the past philosophy was essentially to leave each factory as a freestanding business entity, the new direction of the group intends these units to function as a single integrated production platform for the group. It is our commitment to raise the standards of the group to being a world class operation that is demonstrably better able to provide the local manufacturing requirements of all major clothing and textile retailers.

We anticipate the loss-making operations of the group will be turned around or curtailed over the next six months and that the second half of the financial year will see the group`s continuing operations producing profitably. While we appreciate there is a fair amount of market scepticism in this regard, we are satisfied that we have the right vision, dedication and the right management to make a go of the turnaround. We believe it is a vital contribution to the reversal of fortune of an industry that has shed more jobs than it has created over the last decade. Jobs, frankly, that the country cannot afford to lose.

Nevertheless, it goes without repeating, the future of the Seardel group depends on the success of the turnaround.


Montauk Energy Corporation LLC (“Montauk”)

As has been previously stated, this business has been badly hit by the collapse of Lehman Brothers which was a counterparty to various puts the company held to protect it against very low gas prices such as are available at present. The demise of our counterparty left the business greatly exposed in the short term and unquestionably loss-making. Besides issues related to the gas price, however, the business remains steady with slow increases in the volumes of gas it produces. A renegotiated contract to supply electricity from the Monmouth operation will result in electricity prices doubling from July 2009. The future gas curve, and US drill rig data, suggests that the current low prices for gas should begin to ease significantly by calendar year-end and that next year should see the company again producing a positive EBITDA. We have negotiated with debt providers in the US to reduce the level of third party debt in the business to more manageable levels to stabilise the business through the current period. We have also sent a South African engineering team to the USA to strengthen its management team and to ensure continued focused effort to increase production levels from existing gas fields.

Exhibitions and property

Gallagher Estate Holdings Limited (“Gallagher Estates”)

The resolution of the complexities of the Competition Tribunal`s order that we must dispose of the exhibition business of Gallagher Estates remains outstanding though we anticipate it will be to hand shortly. In essence the matter is with the Competition commission who are considering whether it will support the solution offered, namely to unbundle the exhibition business to HCI shareholders who will lease the premises from Johnnic. The business is currently independently managed and would continue to be so after the contemplated unbundling.

Information technology

Syntell (Pty) Limited (“Syntell”)

The company has won a significant contract to operate cameras in Cape Town with effect from July 2009.

Otherwise its other contracts continue to provide stable earnings for the company which remains a well run operation.


Formex Industries (Pty) Limited (“Formex”)

This business has been heavily affected by the world downturn in the motor assembly industry and had been obliged to retrench several hundred of its staff to meet the curtailed opportunities in the industry. While these are exceptionally difficult times for a business such as Formex, the general clean up it is forced to confront will hopefully stand it in good stead when the cycle turns.


There were no changes in the year under review.


These results have been reviewed by the company`s auditors, PKF (Jhb) Inc. Their unqualified review opinion is available for inspection at the registered office of the company.


Your directors have resolved not to declare a dividend at this time.

For and behalf of the board of directors

MJA Golding Chairman

JA Copelyn Chief Executive Officer