Transnet SOC Ltd is a South African state-owned transportation company that operates freight rail, ports, and pipelines. The company experienced challenges in 2018/2019 including a slowing economy, allegations of fraud and corruption, and operational issues. Revenue increased slightly to R74.1 billion while costs were contained, leading to a 24.7% increase in profit. The auditors issued a qualified opinion related to irregular expenditure reporting but the company's financial position remains strong. Going forward, Transnet aims to improve operations and ethics while contributing to South Africa's economic growth.

1. Condensed segmental analysis
Corporate information
Transnet SOC Ltd
Incorporated in the Republic of South Africa.
Registration number 1990/000900/30.
Waterfall Business Estate
9 Country Estate Drive
Midrand, 1662
Executive directors
Mr MS Mahomedy (Acting Group Chief Executive)
Mr MD Gregg-Macdonald (Acting Group Chief Financial Officer)
Mr SI Gama’s employment contract was terminated on
28 October 2018.
Mr T Morwe was appointed in November 2018 and his contract expired
on 30 April 2019.
Mr MS Mahomedy was appointed during May 2019.
Mr MD Gregg-Macdonald was appointed during May 2019.
Independent non-executive directors
Dr PS Molefe (Chairperson),
Ms UN Fikelepi, Ms RJ Ganda,
Ms DC Matshoga, Mr LL von Zeuner,
Ms ME Letlape, Adv OM Motaung,
Ms GT Ramphaka, Mr AP Ramabulana,
Dr FS Mufamadi.
Ms V McMenamin resigned on 28 February 2019.
Professor EC Kieswetter resigned on 06 May 2019.
Acting Group Company Secretary
Ms K Naicker
Auditors
SizweNtsalubaGobodo Grant Thornton Inc.
20 Morris Street East, Woodmead, Johannesburg, 2191
Short-form announcement
This short-form announcement is the responsibility of the Transnet Board of Directors.
It is only a summary of the information contained in the integrated report and annual
financial statements and does not contain full or complete details. Any investment
decision should be based on the integrated report and annual financial statements
available on the Transnet website at www.transnet.net. The integrated report and annual
financial statements are also available for inspection at the registered office of Transnet.
Overview
The technical recession experienced during the second quarter of 2018, coupled with
a decline in the agriculture, transport and manufacturing industries, as well as reduced
activity in government sectors and trade, contributed to a marginal GDP growth rate
of only 0,8% for the 2018 calendar year.
Amidst these trying economic conditions, Transnet had to address numerous allegations
of fraud and corruption, performing its own forensic investigations and collaborating
with various law-enforcement agencies to determine the extent and impact of reported
incidents. The current leadership made significant progress in addressing each
allegation, instituting the requisite remedial actions and taking steps to stabilise the
organisation. The finalisation of these cases is taking longer than anticipated but
the engagement with state agencies is ongoing to ensure the most effective closure of
these matters.
Numerous other operational challenges impeded the Company’s ability to achieve the
planned volumes and operational efficiency targets. The resultant lower-than-targeted
revenue was, however, more than offset by stringent cost-containment measures, that
resulted in a marginal decline in operating costs compared to the prior year.
Governance and compliance
In terms of the Public Finance Management Act, 1999 (PFMA) of South Africa, the
Company is required to report the quantum of irregular expenditure incurred, which is
expenditure that was incurred in contravention of procurement legislation,
notwithstanding that value was received.
In the prior year, the audit opinion was qualified due to external audit being unable to
obtain sufficient audit evidence that the disclosure of irregular expenditure was
complete and accurate.
During the year under review, management made a significant effort to improve and
establish adequate controls to maintain complete and accurate records of irregular
expenditure. The vast majority of the irregular expenditure reported in the current year
relates to expenditure in prior years arising from contracts entered into in prior years,
which is indicative of both the identification of PFMA contraventions in the past, and
the improvement in the procurement control environment that is now limiting new
incidences of non-compliance.
The Transnet Board, together with the Department of Public Enterprises, appointed the
Auditor-General of South Africa to provide additional oversight in respect of PFMA
compliance during the audit process of the year under review.
The amount of irregular expenditure reported in the current year is significant due to
the progress made in identifying incidents of non-compliance in the past, specifically
the inclusion of R41,5 billion expenditure on the locomotive contracts, entered into
prior to 2015, that was the subject of several investigations at the time of finalising the
prior year report.
www.transnet.net
* Compound annual growth rate.
Revenue increased by 1,6% to R74,1 billion for the year,
supported by a 9,1% increase in petroleum volumes.
Operating expenses were contained to R40,3 billion, which
represents a R6,8 billion saving against planned costs.
EBITDA increased by 3,8% to R33,8 billion, with the EBITDA
margin Increasing from 44,6% to 45,6%.
Profit for the year increased by 24,7% to R6,0 billion.
Cash generated from operations increased by 0,7% to
R35,2 billion.
Gearing of 44,5% and cash interest cover at 2,9 times
were both comfortably within loan covenant requirements.
Capital investment of R17,9 billion for the year, brought
expenditure over the past seven years to R183,5 billion.
2,5% of labour costs was spent on training, focusing on
artisans, engineers and engineering technicians.
B-BBEE spend amounted to R29,93 billion or 92,62% of
total measured procurement spend per DTI codes.
DIFR performance of 0,71 against a tolerance of 0,75, which
is exceptional by international standards, and is the eighth
consecutive year that a ratio below 0,75 has been achieved
with the global benchmark being 1,0.
Audited condensed consolidated financial results
for the year ended 31 March 2019
Freight
Rail
43582
Engineering National Ports
Authority
Port
Terminals
50 000
40 000
30 000
20 000
10 000
0(Rmillion)
Pipelines
43709
10524
11250
12450
11699
13086
12393
5262
4488
2019
2018
Segment revenue
Freight
Rail
19506
Engineering National Ports
Authority
Port
Terminals
25 000
20 000
15 000
10 000
5 000
0
(5 000)
(Rmillion)
Pipelines
20473
(737)
(139)
8317
7196
4541
4172
3996
3192
2019
2018
Segment EBITDA
Highlights
Freight Rail
Pipelines
National Ports
Authority
Port
Terminals
Engineering
Outbound services / South African businesses
moving products to international markets.
Inbound services /
Bringing products to South African markets.
Export iron ore volumes railed.
Container volumes at ports.
Pipelines petroleum volumes.
Export coal volumes railed.
58,4mt
General freight volumes railed.84,7mt 4 534 341
TEUs
17 825 Mℓ
72,0mt Automotive volumes at ports.
743 350
units
0
80 000
70 000
60 000
40 000
10 000
61 152 62 167 65 478 72 887 74 070
2015 2016 2017 2018 2019
50 000
30 000
20 000
Revenue 4,9%*
Rmillion
0
40 000
10 000
35 564 35 917 37 921 40 372 40 320
2015 2016 2017 2018 2019
50 000
30 000
20 000
Operating expenses 3,2%*
Rmillion
0
35 000
30 000
20 000
5 000
25 588 26 250 27 557 32 515 33 750
2015 2016 2017 2018 2019
25 000
15 000
10 000
EBITDA 7,2%*
Rmillion
0
7 000
6 000
4 000
1 000
5 302 393 2 765 4 851 6 047
2015 2016 2017 2018 2019
5 000
3 000
2 000
Profit for the year 3,3%*
Rmillion
Condensed statement of financial position
Audited
31 March 31 March
(in R million) 2019 2018
Non-current assets 339 422 352 333
Current assets 16 078 17 490
Total assets 355 500 369 823
Capital and reserves 148 631 156 874
Non-current liabilities 173 782 158 036
Current liabilities 33 087 54 913
Total equity and liabilities 355 500 369 823
Condensed statement of cash flows
Audited
31 March 31 March
(in R million) 2019 2018
Cash flows from operating activities 21 930 22 958
Cash flows utilised in investing activities (20 124) (24 891)
Cash flows utilised in financing activities (2 030) (109)
Net decrease in cash and cash equivalents (224) (2 042)
Cash and cash equivalents at the beginning
of the year 4 380 6 422
Total cash and cash equivalents at the end
of the year 4 156 4 380
Condensed income statement
Audited
(in R million)
31 March
2019
31 March
2018
Revenue 74 070 72 887
Net operating expenses excluding
depreciation and amortisation (40 320) (40 372)
Profit from operations before depreciation,
derecognition, amortisation and items listed
below (EBITDA) 33 750 32 515
Depreciation, derecognition and amortisation (14 274) (13 686)
Profit from operations before items
listed below: 19 476 18 829
Impairment of financial assets (444) (681)
Impairment of non-financial assets (2 244) (761)
Post-retirement benefit obligation expense (287) (268)
Fair value adjustments 3 271 410
Income from equity-accounted investees 19 9
Profit from operations before net
finance costs 19 791 17 538
Finance costs (11 597) (10 211)
Finance income 387 302
Profit before tax 8 581 7 629
Tax (2 534) (2 778)
Profit for the year 6 047 4 851
Despite the abovementioned corrective action, the external auditors have expressed the view that
Transnet’s implementation of certain of the Preferential Procurement Regulations, 2017 relating
to tender pre-qualification criteria was inconsistent with the legislation. However, management
was of the opinion that the affected expenditure was not irregular, as the use of the tender
pre-qualification criteria was aimed at assisting the Company to achieve the competitive supplier
development targets set by the shareholder. The Company ceased using the tender pre-
qualification criteria in June 2018.
This matter has been considered in detail and, with input provided by various technical and legal
experts, it appears that there are divergent views on whether the affected expenditure should be
reported as irregular expenditure, as defined in the PFMA. This matter is still under investigation.
Ultimately, however, the Company was not in a position to satisfy external audit that the reporting
of this category of irregular expenditure is complete and accurate and, accordingly, the external
auditors have issued a qualified opinion, that is specific to the completeness and accuracy of the
reported irregular expenditure, as required by the PFMA.
The qualified opinion is not related to compliance with International Financial Reporting Standards
nor the Companies Act of South Africa, 2008 and accordingly, has no bearing on the financial
strength and sustainability of Transnet as depicted in the annual financial statements. Transnet
holds the view that the qualified opinion will not result in any negative action related to the debt
book, and is satisfied with the adoption of the going concern assumption in the preparation of the
annual financial statements.
Prospects
In emerging from a year marked by several distractions, defined in large part by the Board and
management’s efforts to remediate the wide-spread effects of corruption on the business, the
way forward is clear. While experiencing operational challenges, particularly in the port
environment, Transnet is confident that the continued efforts of the current leadership to
enhance internal controls, improve operational efficiency and customer service, and to shape
the ethical cultural bedrock required to set the Company on its new growth trajectory, will deliver
the quality and reliable service needed to build a globally-competitive national freight system.
Despite the challenges experienced in the year’s difficult business and operational climate, it is
heartening to note instances of record-breaking performance across the Company, evidence of
the continued commitment of the many dedicated Transnet employees across South Africa.
The Company is expected to continue to generate strong cash flows, to maintain affordable levels
of debt without any Government support, and to continue to report year-on-year improvement in
financial performance. More importantly, Transnet will continue to strive to contribute to the
overall efficiency and growth of the South African logistics environment and, in turn, have a
positive impact on the economic growth of the country.