AfroCentric Group

AfroCentric is a Level 1 black-owned JSE listed investment holding company, which owns and operates a diverse range of healthcare related enterprises, which include, specialised medical scheme administration, the supply of pharmaceuticals, including a range of healthcare products and services, to both the public and private healthcare sectors. A principal objective of the group, is to ensure the delivery of efficient health management services, the distribution of quality products, all at manageable and affordable cost, for the benefit of clients and scheme members. AfroCentric has been able to successfully broaden its interests in the industry, by continuing to pursue new opportunities, to expand and rationalise its presence in the healthcare sector.

The Board takes pleasure in presenting commentary on AfroCentric’s (“ACT”) operating performance for the financial year ended 30 June 2020. Apart from the risks and challenges presented by the outbreak of the Covid-19 pandemic during the third quarter, (dealt with later in this review), the annual results are characterised by the positive outcome of the group’s diversification strategy and the execution thereof. The success of the Group’s vision has helped to define and guide the corporate strategy going forward, suggesting further complementary links to the value chain, to maximise the purchasing power of the healthcare spend.

From the commencement of the Covid-19 lockdown, all of our business units were deemed essential services, demanding that business continuity plans be immediately put in place. The group has approximately 5 500 employees, many of whom worked and continue to work from home, with essential staff attending at the Group’s various premises, where protective devices and social distancing protocols were appropriately implemented.

It is now common cause that innovative system technologies and applications are accelerating at a rapid rate in the healthcare sector, demanding the review of traditional business models, revenue streams, client expectations, product and service offerings, including a review of legacy operating costs. This evolution is fortunately not new in our case as the group has for some time, focused its attention introducing innovative applications for greater efficiencies and quality of service to our customers, clients and their medical scheme members. The Covid-19 pandemic certainly amplified the benefits and importance of new technologies and accelerated the need for such deployment.

Our positive operating results for the year, are in some measure, due to the effective cost savings arising through our early investment in systems development and increased IT capacity, now being applied to greater scale and through improved procedural efficiencies. The early recognition for such investment could not have been more timely, considering an intended commencing process for certain digital migrations, coinciding with the lockdown restrictions.

• Medscheme won the 2019 FICO World Innovation Management Decision Award for its Fusion System Development.
• ACT’s Aid for Aids, won the PMR award for Managed Care.
• AfroCentric Health (Pty) Ltd, the Group’s main operating subsidiary retained its Level 1 B-BBEE rating.
• AfroCentric Investment Corporation Ltd, achieved its level 1 B-BBEE rating, in December 2019.

The financial results for the year, confirm the accretive expectations of the group’s deliberate diversification strategy, particularly evident when measuring the comparative impact in the synthesis of the Retail Segment, now productively integrated into a collective unit of group operations.

The pharma related component yielded significant growth during the year, contributing even more meaningful value and relief in meeting all stakeholder needs, particularly during the stressful time under Covid-19. The prudent and timely acquisition of the remaining shares in the Activo Health business during 2019, the impressive growth in Scriptpharm, including the increasing volume of activity in Pharmacy Direct, were the notable contributory factors, generating growth in comparative segmental operating profits in excess of 50%. Given the more heedful attention paid by patients reliant on chronic medication during lockdown, not least an obvious desire to stay healthy in general, the convenience of group deliveries during lockdown, at work/home, proved extremely valuable to those dependent on their chronic medications and other requirements.

The Services Segment, substantially comprising the medical scheme administration business, has also performed extremely well during the period under review. The group’s prior and continuing investment in IT capacity, systems development and more efficient operating cost control routines, started to reveal their value, through a net decrease in operating costs of 1.0% for the year, compared to industry related inflationary costs of approximately 5%. Our lower cost of IT operations in turn prompted processes in robotics, call centre management and customer/member contact via digital platforms. The group will continue with system renewals and upgrades to explore better and more efficient ways in servicing and engaging our customers/members. Apart from our stable and consistent fee structures in this business unit, as a result of the new measures and more effective cost controls described above, the Services Cluster was able to increase its operating profit by a satisfactory 13.2%.

Group profits before tax, increased by 16.1% amounting to R613.6 million (2019: R528.5 million). Group profits after tax (PAT) increased by 19.1% amounting to R458.6 million (2019: R385.0 million).

Given the nature and composition of the Group’s assets, mainly being goodwill and intangible assets, the cash generation ability of its various subsidiaries is the measure for valuation and/ or impairment of its historical cost. Management and the Board are satisfied with the cash flow models, the assumptions and estimates of the future growth in profits and cash flows, including the applied weighted cost of capital, to confirm the amount at which the intangible assets are stated. Notwithstanding the above, having regard to the future uncertain impact of Covid-19, the investment in Capex and exploratory project funding, will be more cautiously considered, focusing more specifically on earnings enhancing acquisitions and operational activities through digitisation, improved cost controls and margin protection.

AfroCentric has for some time focused on growth initiatives designed to create a value chain of healthcare enterprises to maximise the purchasing power of citizen’s healthcare spend. Through models of co-operative partnerships and collaboration, the objectives are to improve the affordability of patient care, with viable patient outcomes for easier accessibility to a broader community.

In keeping with that principal philosophy, during the period under review and prior to publishing these results:

• Scriptpharm Risk Management concluded two important contracts for more efficient Chronic Medicine and HIV management.
• ACT Healthcare Assets acquired the remaining 20% interest, that were not yet owned, in Scriptpharm Risk Management, the effective date being 1 August 2020.
• Medscheme concluded a contract to administer the MEDiPOS Medical Scheme the effective date being 1 April 2020.
• Afrocentric Health acquired 100% of the shares in the DENIS Group, a company specialising in dental benefits management. The transaction will enable the Group to focus on innovation and efficiency management in dental treatment offerings to all South African medical schemes and their members. The transaction became unconditional on 26 August 2020, the effective date being 1 October 2020.

Estimates and judgements in applying IFRS:

Estimates and judgements are continually evaluated and are substantially based on historical factors and experience, including expectations of future events, believed to be reasonable under the circumstances. The Group makes good faith estimates and assumptions concerning the future. These estimates and assumptions nevertheless could present significant risk of material adjustments required to be made to the carrying values of assets and liabilities within the next financial year:

Impairment of goodwill

Goodwill amounting to R1.37 billion (2019: R1.34 billion) arises from business acquisitions by the Group over the years and represents the excess cost of the acquisitions, compared to the fair value applied to the tangible net assets of the acquired businesses or companies. The carrying amount of goodwill is tested annually for impairment. The recoverable amount of the cash-generating units (“CGU”) has been determined based on value-in-use of the CGU, by discounting the best estimate of future cash flows attributable to the CGU. The key assumptions used in the calculation of the value-in-use were:

• The weighted average cost of capital (WACC) which is the discount rate that takes into account the yield on government bonds and a market risk premium
• A risk adjustment factor
• Forecast period
• An average growth rate

Capitalisation of internally generated software development costs and any impairment assessment for such software

During the current year, internally generated software development costs were incurred to the value of R203 million and capitalised. This, together with the value of prior internally generated and capitalised software amounts to R675 million (2019: R541 million). The Group’s policy is to perform an annual impairment assessment using a discounted cash flow forecast model on the value of all internally generated software, regardless of whether an indication of impairment exists or not. Key valuation assumptions applied by management in the cash flow forecast included the following:

• The estimated profits to be earned from the use of assets and the period over which those profits are projected;
• The weighted average cost of capital; and
• Risk adjustment factors used in deriving an appropriate discounted rate applied to future estimated cash flows.

The risk disclosures discussed under IFRS 7:

Currency risk
The Group has certain investments in foreign operations, whose net assets are exposed to a foreign currency translation risk. The most significant group exposures are to the Mauritian Rupee, the Botswana Pula, the Zimbabwean RTGS and the US Dollar. The Group is however not exposed to any foreign exchange risk in relation to its foreign operations in Namibia and Eswatini as the currencies of these countries are fixed to the South African Rand.

The impact of foreign exchange risk amounted to a loss of R380 000 in the 2020 financial year (2019: R3.9 million loss).

Cash flow and fair value interest rate risk
The Group is exposed to downside interest rate risk through the provision of certain external loans. The Group’s interest income arises from interest-bearing instruments and fixed deposits, and the Group’s interest expense arises from Nedbank borrowings facilities. A sensitivity analysis has been performed on the following assumptions:

• Changes in the market interest rates affect the interest income or expense of variable interest financial instruments; and
• Changes in market interest rates only affect interest income or expense in relation to financial instruments with fixed interest rates if these are recognised at their fair value.

Under these assumptions, a 2% increase in market interest rates at 30 June 2020, would decrease the Group profit before tax by R4.2million (2019:R1.5million).

Credit risk
Credit risk arises from borrowings, cash and cash equivalents and other investments (i.e. deposits with banks and financial institutions), as well as credit exposures to clients, including outstanding receivables and committed transactions. No credit limits were exceeded during the reporting period.

With regards to trade receivables, the Group uses an allowance matrix to measure the expected credit losses from individual customers. This is calculated by using both the weighted average loss rate and the time value of money loss. As at 30 June 2020, expected credit losses to the value of R35.2 million were recognised (2019: R30.0 million).

Capital risk management
The objective of the Group is to safeguard its capital and its ability to continue as a going concern in order to provide returns to shareholders, benefits for the other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Group monitors cash flow on the basis of its gearing ratio. During 2020, the Group’s strategy was unchanged from 2019, which was to maintain the gearing ratio within a range between 0% to 15%. As at 30 June 2020, the net debt to equity ratio was 6.7% (2019: 7.8%)

AfroCentric has once again delivered satisfactory operating results for the year ended 30 June 2020, particularly given the material disruption and national economic challenges posed by the Covid-19 pandemic. While almost all South Africans have in one way or another, been affected by Covid-19, the full impact of the pandemic on our economy is not yet measurable. News reports and company announcements have already disclosed, inter alia, the shedding of jobs, considerably increasing the rate of unemployment. While Health Scheme memberships were expected to fall dramatically, we are seeing members doing everything in their power to retain their existing health cover, not only for their own protection as breadwinners, but also for the health needs of their families.

It is obvious that any forecasts and expectations while the Covid-19 pandemic continues, are merely speculative. However, the Group remains comforted that ACT operational subsidiaries have for several years proved their value and resilience in the somewhat defensive healthcare sector. The nature and attraction of ACT’s businesses have maintained and expanded their market reach, have also continued to perform in South Africa’s declining economy before Covid, their affordable products and services, continuing their sustainable appeal even more so, during the Covid pandemic.

Accordingly, while mindful of the potential difficulties that could lie ahead, ACT is cautiously confident in the future of current group operations, hopefully to be enhanced going forward by the additional contributions of recent developments and the acquisition of the DENIS Group.

The financial position of the group remains sound, the group is sufficiently capitalised for its immediate needs and management will continue in the normal course, to promote organic growth and consider compatible bolt-on opportunities for acquisition. The impact and industry consequences of Covid-19 will be closely monitored, and the group will naturally consider any changes to its plans in response to any such events.

The following changes were made to the Board during the period under review:

• Mr I Kirk resigned as a Non-executive Director effective 12 September 2019, and was replaced by Mr G Allen on the same date (Mr Allen is a Sanlam representative with Healthcare experience).
• Ms HG Motau resigned as an Independent Non-executive Director effective 20 November 2019.
• Ms LL Dhlamini resigned as a Lead Independent Non-executive Director effective 31 March 2020.
• Ms AM le Roux was appointed as an Independent Non-executive Director effective 25 May 2020.
• Mr JB Fernandes, an existing Independent Non-executive Director assumed the role of Lead Independent Non-Executive Director effective 25 May 2020.
• Ms M Chauke was appointed as an Independent Non-executive Director effective 1 June 2020.
• Mr T Alsworth-Elvey resigned as a Non-executive Director effective 31 July 2020, and was replaced by Mr J Strydom effective 1 August 2020 (Mr Strydom is a Sanlam representative who is currently the CEO of Sanlam Personal Finance).

The Board has pleasure in announcing that in addition to the interim gross dividend per ordinary share of 17 cents, a final gross dividend of 17 cents per ordinary share has been declared for the year ended 30 June 2020. Dividends are subject to Dividends Withholding Tax. The payment date for the dividend is Monday, 16 November 2020.

• Dividends have been declared out of profits available for distribution.
• Local Dividends Withholding Tax rate is 20%.
• The gross dividend amount is 17 cents per ordinary share.
• Net cash dividend amount is therefore 13.60000 cents per ordinary share.
• The Company has 574 241 248 ordinary shares in issue as at the declaration date.
• The Company’s income tax reference number is 9600/148/71/3.

The salient dates relating to the dividend are as follows:

Share certificates for ordinary shares may not be dematerialised or rematerialised between Wednesday, 11 November 2020 and Friday, 13 November 2020, both days inclusive.

The financial information contained in this report is extracted from audited information, but is itself not audited. This announcement does not include the information required pursuant to paragraph 16A (i) of IAS34. The final report is available on our website (http://www.afrocentric.za.com/inv-reporting.php), or at our offices upon request. The Directors take full responsibility for the preparation of this report and the financial information has been correctly extracted from the underlying annual financial statements. The financial statements were audited by PricewaterhouseCoopers Inc. who expressed an unmodified opinion thereon. The audited financial statements and the auditor’s report thereon are available for inspection at the Company’s registered office.

On behalf of the Board