ANNUAL REPORT – 2010/11

Enhancing Growth

14 October 2011

Outline

• Introduction

• Khula mandate

• Overview of 2010/11 activities

• Khula Direct implementation

• Financial results

• Outlook for 2011/12

• Concluding remarks

Khula’s Mandate, Objectives & Business Model

Maximise access to finance for SMEs─ Intervene in underserved segments of the SME finance market to increase access to finance

─ Attract private sector partners to join the sector

─ Narrow the financing gap facing SME (reach out to as many SMEs as possible)

Maximise development impactAll investment efforts must result in –

─ Sustainable job creation

─ Black Economic Empowerment (black-owned SMEs)

─ Women Empowerment

─ SME development in economically disadvantaged provinces and communities

Financial sustainabilityMaintain the capacity to be self-funding through –

─Pricing

─Optimal asset utilisation (capital, people, infrastructure) & leveraging resources of partners

─Diligent cost management and control

─Effective risk management

Khula Mandate

Objectives

Khula’s core business is to provide appropriately-structured financing to SMEs -

─ In form of loans, equity and indemnities

─ Provided through a network of partnerships

─ Offers SMEs business support services (pre and post investment)

─ Provides capacity building grants for intermediaries

─ Provides business premises to SME tenants to support their growth and development

Target market

─ To target South African SMEs that are Black-owned; owner-managed in need of start-up, development and/or expansion capital

─ To increase participation of women-led businesses in SME sector

─ To increase outreach in rural provinces

─ To target lower-end of the SME financing market (R10k – R3m)

Products and Services

Business loans - business loans to Retail Financial Intermediaries (RFIs) who on lend to SMEs

Credit indemnities – Khula assists SMEs to access private sector funding through banks & RFIs by indemnifying their loans

Joint Ventures – Khula partners with the private & public sector to finance SMEs.

Funds –Khula establishes a Fund that will facilitate loans to SMEs. The fund is managed by an experienced Fund Manager who does not contribute their own capital to the fund.

Mentorship Programme - Mentors are used for both pre- and post loan interventions as well as capacity building to the RFIs. Currently Khula has entered into an agreement with Institute of

Business Advisors of Southern Africa (IBASA) – to manage the mentors’ database.

Properties - is mostly located in previously disadvantaged areas. It provides operating space for small entrepreneurs at discounted rates. It encourages entrepreneurs to move away from operating in informal set ups to a much more formal environment.

   

Geographic distribution of Khula offices and partners

Khula regional offices

Financing partner location

Financing Partner

SME Financing Activity Geographic spread

True Group • Asset based finance • EC

Cape Capital • Asset based finance, trade finance and working capital

• WC

Supplyfin • Bridging finance for government contracts • LP

Mettle • Invoice discounting in the panel beating industry • National footprint

Marang • Group lending to micro and survivalist enterprises • EC, GP, KZN, LP, MP

Retmil • General SME financing • FS, NC

SEF • Group lending to micro and survivalist enterprises • EC, LP, MP

Shoprite • Financing of OK stores • WC

New Business Finance • Bridging finance for government contracts, term loans

• WC, GP, MP

RFI Portfolio

JV/Funds Portfolio

Fund Name Period Fund Size Khula’s Contribution

Financing Activity

Anglo American-Khula Mining Fund

2003-2013 R200m 50% Junior mining projects

Business Partners-Khula Start-Up Fund

2006-2015 R150m 80% Start-up & early expansion capital

Enablis Khula Loan Fund 2004-2014 R50m 40% Start-up & early expansion capital in ICT sector

Khula Enablis SME Acceleration Fund

2006-2016 R50m 80% Start up and early expansion capital

Identity Development Fund 2009-2016 R80m 94% Start up and early expansion capital primarily for women and youth owned enterprises

Utho Capital SME Infrastructure Fund

2011-2021 R65m 46% Early expansion construction companies

Khula SME Fund 2007-2012 R40m 100% Start up and early expansion capital

Khula Akwandze Fund 2009-2016 R100m 75% Small scale sugar cane growers and contractors with an off-take agreement with TSB

Overview of 2010/11 activities

Highlights

• Approval of Khula Direct Business Plan and securing funding for the pilot phase

• Establishment of the Post Investment Monitoring Unit

• Strengthen stakeholders relations

• Explore other avenues to secure funding

• Reposition the wholesale lending model

• Align Khula’s strategy with the New Growth Path

Cumulative disbursements in the last 5 years of R1,4 bn

2 605 SMEs financed through intermediaries in 2010/11

2 500 job opportunities created in 2010/11

80% of SMEs financed were black owned in 2010/11

34% of SMEs financed were women owned in 2010/11

Disbursements to intermediaries

• Level of approvals lower than budgeted largely driven by:

o Stricter lending criteria by commercial banks;

o Poor economic climate, especially affecting SMEs;

o Risk aversion by financing partners and

o Reduced funding from shareholder

Approvals to intermediaries

National Treasury Allocations

2010/2011 2011/2012 2012/2013 2013/2014 2014/2015

KEF (Lending) R40.0m R40.0m R40.0m R40.0m R40.0m

KIS (Capacity) R29.7m R33.9m R35.9m R40.1m R44.9m

Khula Direct n/a R55.0m ? ? ?

Total R69.7m R128.9m R75.9m +? R80.1m +? R84.9m +?

Business loans increased by 29% year on year

Funds increased by 4%

Credit indemnity decreased by 20%

Loan book growth

Property Portfolio

• Provide development properties for largely

black entrepreneurs

• Large number of properties located in

underdeveloped areas requiring larger

maintenance budget

• Estimated employment ± 6,000 jobs

Type of Properties

58%

7%35%

Industrial Light Industrial Retail

Sector No of Business Percentage

Industrial 449 44%

Retail 377 37%

Service 203 20%

Total 1029 100%

Community No of Business Percentage

White 106 10%

African 656 64%

Coloured 178 17%

Asian 89 9%

Total 1029 100%

Property Portfolio Performance

• Rentals billings R41.6m (2010: R39.3m)

• Property Portfolio expenditure and overheads R48.1m (2010: R36.9m)

• R15m in 2011 provided as doubtful debt for rental arrears

• 2011 carrying value R187.5m (fair valuation increase of 3% since 2010)

Current actions to improve performance:

Conversion of “gross leases” to “net leases”

Installation of utility metres in property units

Roadshow by Khula Chairman to visit tenant associations

Preparation of Portfolio Strategy (dispose/develop/maintain) for Board approval

Complement with existing SME investment portfolio

Factors affecting overall performance

• Adverse impact of economic crisis on SMEs

• Reduced allocation of capital by the shareholder

• Reduced lending through Khula’s intermediaries

• Focus by financing partners on distressed SMEs to ease effects of poor economic climate

• Higher than normal bad debt provision across the sector due to poor economic conditions

• Low interest environment affecting revenue streams

Khula Direct Implementation

Khula Direct Implementation

• Business case approved in December 2008

• Between 2008 and April 2010, Khula

undertook extensive research, study visits

and consultations with key stakeholders

• Business plan approved during 2010/11

financial year

• Funding secured for pilot in East London

and Tshwane offices

Actual -YTD Annual target

Approvals R5,4m R35m

SMEs financed 174 980

Black SMEs 93% 70%

Female owned 27% 40%

Youth owned 11% 30%

Rural/peri urban 100% 45%

Financial PerformanceFor the year ended 31 March 2011

Financial Performance  Group Actual

R’mCompany Actual

R’m

Revenue 161.2 18.82 %

131.5 13.25%

Operating Expenditure (before provisions and impairments) 144.53.2%

107.5 1.3%

Provision for bad debts and impairments 147.0179.5%

150.9178.9%

Profit before tax (before provision and impairments) 16.871.2%

24.143.55%

Loss before tax (after provisions and impairments) - 129.11583.9%

-126.81003.5%

Non-Current Assets 803.51.32%

816.41.34%

Loans and Advances 326.59.3%

212.417.4%

Investment Property Portfolio 187.52.4%

187.52.4%

Core business investments 115.02.0%

68.529.7%

Investments in Subsidiaries and Joint Ventures n/a 

177.67.5%

Current Assets 514.810.9

376.511.0%

Total Assets 1,318.23.8%

1,192.82.9%

Equity 1,216.53.3%

1,166.72.8%

Total Liabilities 101.79.1%

26.18.4%

Financial Performance (cont.)

Company Revenue down 13.25% correlating to decreased lending activity. Operating expenditure maintained by not filling staff vacancies, and

reducing variable overheads linked to lending activity. Provision for bad debts and impairments increased by 178.9% because of

write-offs in RFI’s and also RFI net book values impaired below investment values.

Impact on bottom line ~ Loss. Loans and advances (NBV) to RFI’s down 17.4% due to lack of shareholder

funding to grow the loan book. Khula’s equity and reserves decreased by 2.8% ~ erosion of capital base as

a result of lack of funding to generate growth in income and reserves. Uncommitted cash R110,9m (2010: -R53.6m neg/over-committed). No taxation payable due to assessed loss available.

Revenue

  Group  Company

 2011

Actual

R’000

2010 Actual

R’000

2011 Actual

R’000

2011 Budget

R’000

2010 Actual

R’000           

Revenue 161,215 198,601 131,534 119,479 151,627

Indemnity fees 7,946 10,811 - - -Interest from lending operations 46,240 45,451 33,713 29,072 35,525

Investment property rental income

41,591 39,313 41,591 45,275 39,313

Other income 11,097 10,834 15,456 12,553 14,942

Investment income 41,439 54,538 35,825 24,882 43,076

Net fair value gain on financial assets 12,902 37,654 4,949

 

7,757 18,771

Expenditure and Overheads

  Group   Company

2011 Actual

R’000

  2010 Actual

R’000

    2011 Actual

R’000

  2011 Budget

R’000

  2010 Actual

R’000                    

Expenses (291,465)   (192,911))   (258,358)   (132,274)   (163,104)

Personnel expenses (33,949)   (33,629))   (33,949)   (37,313)   (33,629)Investment property

expenses(48,109)   (36,854))   (48,109)   (40,494)   (36,854)

Movement on impairments and bad debt provisions

(96,309)   (52,738)    (149,074)   (19,822)   (42,895)

Bad debt written off (54,347)   (20,951)    -   -   (20,951)Other operating expenses (58,751)   (48,739))   (27,226)   (34,645)   (28,775)

                    

Bottom line

  Group   Company  

2011 Actual

R’000

   2010 Actual

R’000

   2011 Actual

R’000

    2010 Actual

R’000

 

                     

(Loss)/profit before tax (129,090)   8,642     (126,824)   (11,477)Taxation* 45,580 2,119 53,462 3,243

(Loss)/profit after tax (83,510) 10,761 (73,362) (8,234)* Mainly deferred tax reversal

Abridged Balance Sheet

  Group   Company  

2011 Actual

R’000

 2010 Actual

R’000

   2011 Actual

R’000

  2010 Actual

R’000

 

                  

Non Current Assets 803,447 792,874 816,357 805,564Current Assets 514,774 577,726 376,445 423,062Total Assets

1,318,2211,370,600 1,192,802

1,228,626

Equity and shareholder’s loans 1,216,531

1,258,622 1,166,7201,200,08

1Non-controlling

interests 375 - -

Non-current liabilities 15,929 31,567 - -Current liabilities 85,758 80,336 26,082 28,545

1,318,2211,370,600 1,192,802

1,228,626

Outlook for 2011/12

• Merger of Khula, samaf and IDC’s small business activities with anticipation of significant

Government and IDC Funding and support, rationalisation of costs and resources,

improved access by SME’s, best practice operations and processes.

• Establish SME Supply Chain Fund

• Khula Direct implementation

• Credit Indemnity Reform

• Strengthen risk and credit management processes

• Limited financial resources and restrictive wholesale mandate limit Khula’s impact

and sustained growth

• Mandate dictates highly developmental activities (start-ups, smaller sized loans,

rural)

• Current pricing model does not price for the credit risk and high development cost

• Balance sheet to include a portfolio of strategic investments with a high level of

profitability to subsidise highly developmental initiatives

Concluding remarks

THANK YOU

14 October 2011