ANNUAL REPORT FOR THE YEAR ENDED 31 MARCH 2014

PRESENTATION TO THE PORTOLIO COMMITTEE ON

TELECOMMUNICATIONS AND POSTAL SERVICES

21 OCTOBER 2014

CONTENTS:CONTENTS:

1.1. BUSINESS REVIEWBUSINESS REVIEW

2. OPERATIONAL REVIEW

3. SUSTAINABILITY REPORT

4. ANNUAL FINANCIAL STATEMENTS

5. CONCLUSION

BUSINESS REVIEW:Highlights of the Financial Year

● Performance o For the 2013/14 financial year, SENTECH achieved 90.9% of its annual Key Performance Indicators

(outlined on the Corporate Plan) as shown below :

o The target not achieved is for the Digital Terrestrial Television (DTT) population coverage of 84%, the performance level was 82.1%. The Board and management anticipate to complete the project by 31 December 2014. The company is ready for analogue switch off (ASO) in June 2015, in accordance with International Communications Union (ITU) Agreement.

● Audit opiniono SENTECH received a clean audit report from the external auditors for the second financial year in a row

with our external auditors having declared the following: • Unmodified opinion on financial statements;• No material findings on predetermined objectives; and• No material findings on compliance with laws and regulations.

● Financialo The company is liquid and operating as a going concern and has a healthy balance sheet. This will be

expanded in the Annual Financial Statements section.

3

No of Targets

Achieved % Achieved Not Achieved

% Not Achieved

Key Performance Indicators 11 10 90.91% 1 9.09%

SENTECH SOC LIMITED | Annual Report 2013/14

4

OPERATIONAL REVIEW:Performance Overview

Strategic GoalsStrategic

ObjectivesKey Performance

IndicatorsAnnual Performance Targets

     Target Actual

Achieved or not Achieved

Comments

SG 1: Ensure that ICT infrastructure is accessible, robust, reliable, affordable and secure to meet the needs of the country and its people.

Ensure universal access of the digital broadcasting signal distribution network.

Population covered via the Digital Terrestrial Network.

84% 82.13% Not Achieved

• Late delivery of UHF antennas to the Oudtshoorn, Uniondale, Uniondale Town, Willowmore, Ulundi, Riversdale, Piet Retief, Napier, Upington, Upington Town, Beaufort West, Graaf Reinet, Kuruman Hills, De Aar, Prieska, Pomfret, Springbok, Pofadder, Garies, Victoria West and Van Rhynsdorp sites.

• Site acquisition challenges at Sterkspruit and Clifton.

• Site access challenges at the Colesburg installation.

Population covered through Direct-to-Home Satellite gap-filler platform.

100% 100% Achieved None

Formal submission of the Broadcasting Signal Distribution Master plan to the SIP15 Steering Committee.

Submission To SIP15

Committee by end of Q3.

Submission To SIP15

Committee by end of Q3.

Achieved None

Establish an open access Direct-To-Home Satellite platform to promote growth of the local content development industry..

Commercial open access DTH-S platform.

Launch DTH-S platform

Launch DTH-S platform

Achieved None

Number of new DTH-S and MCD open access platform users.

5 8 Achieved The number of new DTH-S customers and MCD Open Access Platform users exceeded the target by 60%.

Ensure universal access connectivity to public institutions.

Number of VSAT terminals installed (cumulative).

50 137 Achieved

The number of VSAT terminals installed exceeded the target by 274%, due to an unprecedented growth in the market during the period under review

OPERATIONAL REVIEW: Performance Overview

5

Strategic Goals Strategic Objectives

Key Performance Indicators

Annual Performance Targets 

     Target Actual

Achieved or not Achieved

Comments

SG 2: Ensure high levels of customer and stakeholder satisfaction by meeting their needs at all times.

Ensure that network availability meets SLA requirements across all platforms.

Weighted average availability based on product revenue.

99.80% 99.86 % Achieved

There was an improvement in the efficiency of network availability, especially with regard to analogue television and FM radio, resulting in a better-weighted average availability, based on product revenue.

Improve customer and stakeholder satisfaction.

Customer and stakeholder service index.

62% 87% Achieved

The improvement in customer satisfaction of over 20% of the target was realised by putting in a concerted effort to address all customer concerns that had been raised during the Baseline Survey.

SG 3: Drive organisational performance in order to improve organisational effectiveness.

Improve employee engagement and satisfaction.

Employee engagement and satisfaction levels.

60% 62% Achieved The Employee Satisfaction Survey exceeded the target due to an improvement in the company’s operational management

Improve employee performance.

Percentage of managers performing at different levels.

Establish baseline performance measures.

Performance contracts signed by all executive

directors, executives and

heads.

Achieved None

SG 4: Ensure that the company is financially sustainable.

Maintain sustainable Return on Net Assets (RONA).

RONA from continuing operations.

10.00% 15.4% Achieved

The RONA from continued operations exceeded the target due to an improvement in profit before interest and taxation of the budgeted amounts.

SUSTAINABILITY REPORT Summary

6

Corporate Governance ●The Company further supports and endorses the guiding principles of the Code of Corporate Practices and Conduct as articulated in the King III Report, to the extent that they are not in conflict with the Company’s primary legislative documents, as stated above. The Company is continuing to design and implement the necessary governance systems to ensure compliance.

Human Resources ●SENTECH started a crucial journey of becoming a high-performance organisation, focused on better customer services, more effective and efficient operations and a new level of service delivery. In support of this journey, an integrated performance and development management system was successfully implemented at executive and management level.

Corporate Social Investment ●SENTECH endeavours to focus its resources in the ICT sector with special emphasis on connecting institutions of learning. This relates to providing VSAT connectivity to primary and secondary schools in rural and/or underserviced areas. Within this strategy, and in instances where the school does not have computer facilities, the CSI provision is further extended to computer hardware and software. The period of sponsored internet connectivity is five years, upon which the Department of Education and/or the municipality in the area will take over the account. This is agreed upon prior to installing the Computer Labs. SENTECH also continued with its investment in Mindset Learn.

Risk Management ●Enterprise Risk management (ERM) is the responsibility of the Board. The Board delegated the task of monitoring the risk management process to the Audit and Risk Committee via the Committee’s Terms of Reference. The Executive Committee is responsible for ensuring that all significant risks facing the company are managed in accordance with the Risk Management Policy and Framework approved by the Board. During the year under review, the Risk Policy Framework was revised and adopted, a Fraud Prevention Plan and Assurance Process Plan were prepared and adopted, and risks linked to KPI’s were identified and assessed.

SENTECH SOC LIMITED | Annual Report 2013/14

SUSTAINABILITY REPORT Summary (cont)

7

Internal Audit ●The Audit and Risk Committee (ARC) ensured that SENTECH has an effective risk-based and independent Internal Audit Function (IAF), governed by an Internal Audit Charter, which was approved by ARC. The IAF adheres to the Standards and Code of Ethics set out by the Institute of Internal Auditors.

Compliance ●SENTECH has a full-time Compliance Officer who reports directly to the Executive Internal Audit. During the period under review, the Compliance Unit conducted the monitoring of health and safety requirements; developed a PAIA Manual which was approved by Exco and the ARC; developed a Compliance Plan for 2014; and prepared a high-level awareness document in relation to the PAJA, PAIA and POPI.

Innovation●At the beginning of the 2013/14 financial year SENTECH resolved to establish the Innovation HUB – to specifically focus on the development of new platforms and business solutions that would enable the company to take advantage of these new opportunities. ●Over the past year, the Innovation HUB has focused on the new product roadmap that forms part of the DTT Business Plan. Key to this new product roadmap was the development of platform services for digital TV that incorporated the upgrade and renovation of the SENTECH Direct-To-Home Satellite Service. In this regard SENTECH created a platform brand, FREEVISION, to host the services of different customers

SENTECH SOC LIMITED | Annual Report 2013/14

8

FINANCIAL OVERVIEW:Summary

●Group revenue from operations (excluding Dual Illumination) increased by 8.4% to R975 million (2013 R899 million).

●Total Income for the Group increased to R1 062 million (2013: R927 million)

●Group operating profit from operations increased by 4% to R201 million.

●Cash generated from operations decreased to R47 million from R226 million.

●The Broadband funding including interest net of taxation of R622 million was returned to Treasury during the period

●R110 million was spent on additions to Property, Plant and Equipment in 2014 using SENTECH’s own funds.

●The Group has presented 2 comparative years as a result of the following restatements that occurred:

o The taxation related to previous wear and tear in 2013 was incorrectly not deducted, based on the advice of our tax advisors it was concluded that the amounts were in fact deductible. This has had the impact of reducing the tax liability of R18 million. There was also an increase in the deferred tax liability of R5 million due to a change in treatment of items in the tax calculation that impact deferred taxation.

o In the past, spares have been re-classified from Inventory to Property, Plant and Equipment and were depreciated over what was considered the appropriate useful life of the assets. After reviewing IAS 16 it was concluded that this was incorrect and the Spares were actually inventory. This has resulted in an increase in inventory and a decrease in Property, Plant and Equipment.

9

FINANCIAL OVERVIEW:Statement of Profit or Loss & Other Comprehensive Income

  2014 2013  

% Change

    Restated   

  R'000 R'000           Revenue             975 287             899 383    8%Cost of Sales           (670 566 )          (496 590 )   35%

Gross profit            304 721             402 793    -24%

         Other Income               41 410                        -      100%

Operating and other expenses           (144 746 )          (209 157 )   -31%

Operating Profit             201 385            193 636    4%         

Finance Income               46 202               27 485    68%Finance Costs             (23 103)           (193 030)    -88%

Profit before taxation             224 484              28 091   699%

         

Tax expense             (11 511 )            (50 165)   -77%

Profit (Loss) for the year             212 973             (22 074 )   -1065%         

Other comprehensive income (net of tax)      

Actuarial gains and losses on defined benefit plans  33               (9 413)    100%

Revaluation of property, plant and equipment                 28 208    -100%         

Total comprehensive income /(loss)             213 006                 (3 279)   64 99%

● Group revenue from operations (excluding Dual Illumination) increased by 6.6 % to R886 million (2013: R831 million).

● Group operating profit from operations increased by 4 % to R201 million.

● Other Income of R41 million resulted from the settlement of the Post Retirement Medical Aid Benefit.

● Finance cost decreased materially due to reversal of interest of R173m net of taxation in the prior year which was earned on Broadband and Eassy grant funding not used, previously recognised in own income.

● Taxation expense decreased due to the deduction of amounts paid to National Treasury for Broadband and Eassy.

10

FINANCIAL OVERVIEW:Statement of Financial Position

  2014 2013 2012

% Change

    Restated  Restated 

  R'000 R'000 R'000

         Total non-current assets             602 409            545 629                 506 988  10%

Total current assets         1 239 329        1 688 836              1 703 503  -27%

         

Total Assets  1 841 738       2 234 465              2 210 491  -18%

       

Total equity        1 166 200            953 194                 956 473  22%

       Total non-current liabilities             138 540            222 433                 196 557  -38%Total current liabilities             536 998        1 058 838              1 057 461  -49%       Total equity and liabilities         1 841 738        2 234 465              2 210 491  -18%

● Non- Current Assets consists of Property, Plant and Equipment which is presented net of Government Grants. The increase in the balance was due to additions.

● Included in current assets are :o Cash and cash equivalents of R1 077 million. This is made

up of restricted cash relating to government grants of R366 million. The reason for the decrease in the balance was due to R622 repaid to National Treasury with respect to the Broadband and Eassy projects .

o Trade and other receivables balance decreased by 34% due to improved collections .

o Current tax receivable increased significantly due to the deduction of amounts paid to National Treasury for Broadband and Eassy. 2013 current tax was restated by R18 million due to allowances for depreciation of grant funded assets that had not been taken into account in the current tax calculation.

● Equity increased as a result of Retained Income increase due to an increase in the net profit for the year.

● Non current liabilities decreased due to the partial settlement of the Post Retirement Medical Aid Benefit and the Closure of the Pension Benefit Plan. This also resulted in the significant increase in the deferred tax liability.

● Current liabilities decreased significantly due to :o Full settlement of the DBSA Loan.o Trade and other payables decreased as a result of a drive

by the group to pay its creditors within 30 days in order to apply best practice in line with the Treasury Regulations for departments .

o Grants payable decreased due to the repayment made to National Treasury .

11

FINANCIAL OVERVIEW:Statement of Cash Flow

  2014 2013

% Change

    Restated 

  R'000 R'000

       

Cash inflow in operating activities               47 609            225 662  -79%

       

Cash flows from investing activities           -290 493          -457 012  -36%

       

Cash flows from financing activities           -239 946            185 673  -229%

       

Net (decrease) increase in cash and cash equivalents           -482 830            -45 677  957%

       

Cash and cash equivalent at the beginning of the year         1 560 260        1 605 937  -3%

       

Total comprehensive income /(loss)         1 077 430        1 560 260  -31%

● Cash flows from operating activities decreased due to :o A decrease in the Trade payables balance as a

result of these being paid within 30 days

● Cash flows from investing activities decreased due to : o Less additions being purchased in the current year

● Cash flows from financing activities decreased due to:

● The repayment of DBSA loan in full and payment of the ICASA settlement liability.

● Repayment of the Broadband and Eassy funds to National Treasury

● Payments made to employees who agreed to the settlement of their post retirement medical aid benefit obligation .

● Sentech plans to spend R645m Capital Projects over the next 3 years using its own funds.

Conclusion

Conclusion

● The Strategic Plan for the 2014 to 2017 MTEF period will continue with the core strategic interventions by the Company: Enabling access to universal, open, inter-operable and affordable network platforms for broadcasting and content distribution.

● The Board of Directors challenged the Executive Management and all employees to exceed their performance in the following areas:

oClean audit and administration;oinnovations that will continuously bridge the digital divide; andofinancial sustainability of the company.

12SENTECH SOC LIMITED | Annual Report 2013/14

SENTECH SOC LimitedSENTECH SOC Limited