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South Africa: Transnet lays a new track for Africa

By Xolisa Phillip, in Johannesburg
Posted on Friday, 4 October 2019 12:58

Railway tracks are seen near Moses Mabhida stadium in Durban. REUTERS/Rogan Ward

Transnet is staking its future prospects on the drive for greater regional integration with the rest of the continent.

  • Transnet is wholly owned by the South African government, falling under the department of public enterprises.
  • It has five divisions: Transnet Engineering, National Ports Authority, Ports Terminal, Transnet Pipelines and Transnet Freight Rail (TFR) — the largest operating division.
  • It is one of the largest state-owned logistics infrastructure companies in Africa, with satellite offices in: Lesotho, Namibia, Swaziland and Tanzania.
  • It also has joint operating centres in: Botswana, Mozambique and Zimbabwe.

The division’s revenue for 2019 decreased slightly because of lower demand in mining, which dragged down volumes. Furthermore, declines in the exports of coal volumes, minerals, cement and lime had a negative impact on TRF’s revenue.

Good, but not yet great

Transnet presented its results on Monday, September 30, for the financial year ending on 31 March 2019. In South Africa, the financial year for the government and its entities and agencies runs from 1 April to 31 March the next year.

The logistics operator presented a respectable set of results, remaining one of the few state-owned entities that do not rely on government guarantees to fund its operations.

However, Transnet has not escaped unscathed from the scourge of state capture.

The logistics operator is locked in a dispute with its external auditors, SNG Grant Thornton (previously SizweNtsalubaGobodo) about a qualified audit opinion that almost threatened to delay the publication of the company’s results.

The qualified audit opinion relates to the procurement of 1,064 locomotives and a quantum of $2.74bn that has increased Transnet’s irregular expenditure to $3.23bn.

What’s in an opinion?

A qualified audit opinion has implications for Transnet’s ability to raise future funding and might trigger covenants on existing debt.

But the logistics company wrote in its results documents that the qualified audit opinion “has no bearing on the financial strength and sustainability of Transnet”.

As a result of state capture, Transnet has lost members of its executive and management teams, including its CEO.

Some implicated staff face disciplinary action for their role in administrative malfeasance. The company has referred cases for investigation to the police and instituted legal proceedings against those implicated in maladministration as part of efforts to recoup money lost.

Mixed results

In the period under review, at group level, Transnet reported:

  • A post-tax profit of $395m ($316m in 2018).
  • Revenue of $4.87bn ($4.7bn in 2018).

The picture is not as rosy at divisional level, especially for Transnet Engineering and TRF.

Through Transnet Engineering, under the umbrella of Transnet Holdings International, the company aims to solidify its footprint in the rest of Africa as a maintenance service provider and an original equipment manufacturer (OEM).

But it faces headwinds at Transnet Engineering including:

  • A decline in cross-border orders for the division, which were “below expectations”.
  • A revenue drop of 6.4% to $692m ($738m in 2018) .
  • A 1% increase in internal revenue to $580m.
  • A 32.8% drop in external revenue to $105m ($158m in 2018).
  • As a result, the division posted a $48.6m loss for 2019.

Optimism for future prospects

As part of its OEM strategy, Transnet has developed the TransAfrica Locomotive, the first locomotive designed, engineered and manufactured on the continent, specifically for the African environment.

  • It states that its Africa wagons have been “showcased to potential customers” without saying who they are.

The state-owned enterprise has opted for a change of tack and is gradually winding down its MDS. The rest of Africa remains central to Transnet Engineering’s objectives and revenue-generation goals. The 2019 set of results show that:

  • Africa sales slumped to $10.9m, compared to $16.7m in 2018. Transnet Engineering had an Africa sales target of $130m for the year.

Bottom line: Disappointing 2019 figures, and a brush with state capture, means that an ambitious expansion plan will be keenly watched.

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