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Can Ayo deliver, that is the question

The deal has been done, but is the PIC’s controversial asset capable of using the R4.3bn productively and profitably?
Grim reality … the PIC used pensioners’ hard-earned savings to buy into Ayo at R43 a share. Days earlier a BEE consortium bought into Ayo for R1.50 per share. The R41.50 premium per share certainly wasn’t based on the company’s prior financial performance. Image: Shutterstock

By 2017 Ayo Technology Solutions was riding the wave of the fourth industrial revolution. It had a vision of effecting real change in South Africa and transforming organisations across Africa through technology.

This vision may have been very impressive, and may have contributed to the decision by the Public Investment Corporation (PIC) to invest R4.3 billion in the company. However, an analysis of the company’s financial performance during the preceding years suggests the company did not perform anywhere close to a level that would warrant such an investment from pensioners’ hard-earned savings.

The financial analysis shows that Ayo managed to grow its assets from R107 million in 2016 to R292 million in 2017. This was predominantly achieved through acquisitions. However, during this period the company did not perform well operationally – it reported accumulated losses of R170 million in 2016 and R152 million in 2017.

How sustainable is the Ayo business?

Ayo’s financials further reveal that the company’s revenue was influenced by significant deal-making, with the group selling businesses unrelated to its core information technology and communications (ITC) focus, while acquiring the appropriate ITC assets from related parties.

The table below summarises Ayo’s income statement performance for its five most recent financial periods.

 

2018

2017

2016

2015

2014

Revenue

638 894

478 663

169 217

222 619

191 035

Gross income margin

30.98%

33.16%

33.17%

31.12%

29.03%

Operating income margin

-0.21%

9.77%

20.69%

11.14%

9.56%

Ebitda margin

*0%

10.48%

22.45%

11.97%

9.47%

Ebitda: Earnings before interest, tax, depreciation and amortisation. Note: Where there was a difference between the year-end figure and the figure used as a comparative figure the following year, the comparative figure was used.

* The costs related to the share issue were excluded.

From the analysis of the financials it is clear that the PIC’s investment could not have been more opportune for the company. The R227 million finance income Ayo earned in 2018 from the R4.3 billion cash injection wiped out the entire R152 million accumulated loss from 2017.

If this interest was excluded, it is clear that Ayo is struggling to contain its costs, as indicated by the figures below:

 

2018

2017

2016

2015

2014

 

Revenue (Rm)

638

478

169

222

191

Cost of sales as a % of revenue

68.97%

66.95%

66.86%

68.92%

70.68%

Operating expenses as a % of revenue

30.56%

26.15%

20.71%

21.17%

20.42%

Assets versus liabilities

The health of the balance sheet over the past few years is also less than stellar.

Up until 2015 Ayo’s liabilities exceeded its assets, with external auditors Grant Thornton noting in their audit report that the excess of liabilities over assets of R14 million indicated “the existence of a material uncertainty which may cast significant doubt on the group’s ability to continue as a going concern”.

 

2018

2017

2016

2015

2014

Total liabilities (Rm)

-202.1

-225.3

-90

-132.7

-135

Total assets (Rm)

4 671.1

292.4

107.1

118.7

111.2

 

4 469.0

67.1

17.1

-14

-23.8

A glance at the cash flow statement also reveals a few concerns.

The cash paid to suppliers and employees inexplicably spiked in 2017, as can be seen in the table below.

However, the injection of R4.3 billion in December 2017 placed the group firmly in a solvent position. It is too early to determine the impact on Ayo’s future growth.

Cash generated from operations (R000)

 

2018

2017

2016

2015

2014

Cash receipts from customers

306

459

253

215

179

Cash paid to suppliers and employees

365

406

231

201

163

Cash generated from operations

-59

53

22

14

16

Cash generated from operations as a percentage of cash receipts from customers

-19.3%

11.55%

8.7%

6.51%

8.94%

The group’s financial standing could further be negatively impacted by the introduction of new accounting statements based on International Financial Reporting Standards (IFRS) in 2019:

* The group will only introduce IFRS 9, which became effective on January 1, 2018, in 2019. The group does not however anticipate a major impact, but this can only be verified in the 2019 financial statements.

* IFRS 15, which also became effective on January 1, 2018, will also only be applied in the 2019 financial statements. IFRS 15 will impact how revenue is accounted for on long-term projects.

PIC pays more than fair value of shares

This rather precarious financial position also begs the question whether the PIC paid fair value for the nearly 100 million shares it acquired at R43 a share in 2017.

Read: PIC inquiry: R4.3bn Ayo deal approved in record 3 weeks

The issuing of shares in the days prior to this PIC investment saw Ayo issue 31 960 000 shares at R1.50 per share to a BEE consortium, raising R47.9 million for the company.

The consortium included the Police and Prisons Civil Rights Union (Popcru), the Southern African Clothing and Textile Workers’ Union (Sactwu), the Black Business Council, Federation of Unions of South Africa (Fedusa) nominees, the National Education, Health and Allied Workers’ Union (Nehawu) and the Social Entrepreneurship Foundation.

On the date of issuance of the shares at R1.50 to this consortium, Ayo put the fair value of its shares at R1.87. The exact date was not disclosed.

Within days of issuance, the PIC paid R4.3 billion or R43 each for 99 782 655 shares.

At fair value of R1.87 a share, the investment should have been around R187 million, or R4.1 billion less than what the PIC actually paid.

Ayo’s financial performance certainly doesn’t warrant such a premium.

 
 
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COMMENTS   15

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Not even worth analysing. Come on MW you can do better. There is nothing there! The PIC paid R4.3bn for nothing. Virtually the only earnings of this business is the interest on the self same money the PIC put in. To call it a Ponzi scheme would imply a level of sophistication that this bit of securities fraud does not have.

How Surve is still walking free is beyond me.

how Surve is walking free – his mates in the PIC allowed him to walk free after he deliberately misled them – they need to cancel the deal on the basis that they were misled and sue him for damages and fraud !!

come on Moneyweb – i used to respect your comment – HOW CAN YOU SAY THE DEAL IS “DONE” – nonsense !! Clearly, the deal can be “UNDONE” on the basis that Surve deliberately misled the PIC and he should be sued for being completely dishonest – cancel the deal, claim damages, lay charges of fraud – the PIC OWES IT TO THE GOVERNMENT EMPLOYEES TO STOP PROTECTING THEIR BUDDIES AND SUE SURVE !!!!!

Survey and Majila should be in orange overalls along with Nicky Newton_King

It’s so obviously a sweatheart, corrupt deal between Surve and Dan Matjila to loot public funds.

The IOL/Sagarmatha deal isnt much better either…

The article is definitely incorrectly focused although it summarizes information already out there nicely. As per an earlier comment this article should really be about what Surve himself did and what the exact actions are that are required to put him and the other parties to this fraud, at both Ayo and the PIC, behind bars.
This is not an operating company/group its a money laundering shell.

Seems a “safe pension” is no longer a reason to become a government employee.

I am sure we can all blame Apartheid in the end when pensioners will have not money left?

Come on, we all know is it Apartheid’s fault for this corruption 🙂

What stuns me is the JSEs silence about this deal. Not a word, nothing when it is clear that the price paid by the PIC is extraordinary. The JSE is becoming an irrelevant, poorly managed , shockingly lead banana republic exchange!

Legalized stealing! Daylight robbery! The BOARD at PIC should answer. They should be charged with Surve for fraud.

An investigation into the shareholders of the BEE corp that invested at R1.50, and within a few weeks had a 3000% return on their investment. It’s either a brilliant stroke of luck, a way to launder money or insider trading, 2 of 3 are illegal, and the first one is highly unlikely…

Where is Nicky Newton King.MIA,as usual.Reminds me of that other double barrelled surname Board Member of a Bank,Lucas-Bull.

Well said.
Two utterly unsuitable people for the positions they have.
Mrs Newton King remains clueless about Steinhoff and Ayo.
Mrs Lucas Bull should go back to hawking consulting fees-hopeless leadership of ABSA, no succession planning, lousy results, management in chaos-hopeless!

That the Public Investment Corporation (PIC) to invest R4.3 billion in the company without doing (it seems) due diligence of the most basic as evidenced in the article throws serious doubt on the PIC to manage the hard-earned cash of the nation,

Another case of FFFF ….. Free Finance For Friends …

What will Moodys say?

End of comments.

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