Financial review

Statement of comprehensive income
Total Group sales growth for the period to December 2011 was 15.0% with comparable sales growth of 9.2%. Sales in our African businesses represented 7.7% of total Group sales and total African sales grew by 21.3% in Rands and 12.8% in local currencies.

The Groupís product inflation was 1.1% for the period, and this is the first time we have moved into product inflation since 2009. General Merchandise remained strongly in deflation and was 6.1%, while Food and Liquorís inflation increased slightly to 2.3% and Home Improvement inflation was steady at 0.6%.

During the six-month period, four stores were closed and 21 opened resulting in a total of 330 stores at December 2011. Net trading space increased by 5.0% to a total of 1,321,233m2.

The Groupís gross margin of 17.70% is lower than that of the prior period (18.06%). Margins were steady in Makro and Masscash but slightly lower in Massbuild due to clearance activity and in Massdiscounters due to high sales growth in the lower-margin Hi-tech and Appliances categories and as promotional sales mix increased slightly.

Due to the Foodco roll-out, the three new Makro stores and the investment in Cambridgeís supply chain and infrastructure, total expenses (excluding foreign exchange gains and losses) increased by 14.4%. Comparable expenses increased by 9.4%. Amongst other areas, the impact of the Groupís continued investment in growth can be seen in the 24.4% higher depreciation and amortisation charges and excluding these charges, the Groupís expenses as a percentage of sales improved from 12.9% to 12.8%.

Included in operating profit are net realised and unrealised foreign exchange gains of R82.4 million (December 2010: R79.5 million loss), caused by the weaker Rand. The translation of Massdiscountersí African balance sheets accounted for R25.4 million of this (2010: R57.8 million loss) and there was a net gain from other foreign monetary balances of R57.0 million (2010: R21.7 million loss).

Direct costs incurred by the Group in connection with the Walmart integration totalled R41.7 million.

Net interest paid of R48.1 million increased as a result of the Groupís capital expenditure programme. Working capital levels are optimal across the Divisions. At R1.34 billion, the Groupís average net borrowings are 15.5% higher than the prior periodís figure of R1.16 billion.

The Groupís effective tax rate of 31.2% (2010: 31.7%) includes the effect of STC of 1.9% (2010: 2.6%).

The minority interests comprise store managersí holdings in Masscash stores and minorities in acquired Masscash businesses. This periodís minority figure has reduced due to the Groupís acquisition of several store managersí minority interests in Masscash Wholesale and of the Kangela 49% minority interest.

Headline earnings increased by 21.1% and headline EPS increased by 13.7%. Adjusting for the effect of foreign exchange translation in both periods however, reduces these to 4.9% and -1.4% respectively. The lower earnings per share growth is caused by the higher number of shares in issue, as a consequence of the implementation of the Walmart transaction in June 2011.

Statement of financial position
As noted earlier, working capital levels have returned to optimal levels. Days in inventory at December 2011 were 59.0 (2010: 59.7 days) for the Group, and inventory days are higher only in Masscash.

The net book value of property, plant and equipment increased by 32.4% compared to December 2010 as we invested for growth. No businesses were acquired during the period.

Despite the higher average interest-bearing debt, the Groupís gearing ratio was steady at 31.6% (2010: 31.4%).

The annual rolling return on equity was 33.1% at December 2011.

Statement of cash flows
Operating cash of R1.64 billion was 19.9% higher than the prior period. Cash from operations of R3.58 billion was 60.4% higher, reflecting the Groupís improved working capital position. Supplier funding levels are, however, approximately R600 million higher than normal and adjusting for this results in a more representative 33.5% increase in cash from operations. Total capital expenditure of R752.2 million is 32.9% higher than the prior period, and comprises R324.3 million on replacement and R427.9 million on expansionary expenditure. This expenditure was incurred in three main areas, being from new and Foodco-refurbished stores in Massdiscounters (R249.1 million), three new Makro stores (R209.6 million), and new stores and supply chain capability in Masscash Retail (R122.9 million).

Impact of New Tax Treatment on Dividends
The proposed amendments to the South African tax treatment of dividends becomes effective on 1 April 2012 and so will affect Massmartís final dividend payable in September 2012 and thereafter. Following these amendments, Massmartís dividend policy will likely be adjusted in response to the effect of the new tax on shareholders.