13/2/22 PEPKOR - Chairman's Review

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CHAIRMANS REVIEW

FINANCIAL RESULTS

Pepkor�s results for the year to 30 June were by far the best in its history. Operating profitincreased 76 percent to R915 million on turnover which was 9 percent higher at R27,76 billion.Profit before exceptional items but after investment income and interest paid came to R917million, 109 percent more than in 1999. Despite the fact that the group�s tax liability increasedby 70 percent to R67 million, profit after tax was still 128 percent higher at R767 million.

The net profit of R550 million was in turn 167 percent higher than the R206 million of 1999, whileearnings per share before exceptional items came to 280,4 cents (125,1 cents). In the light ofthese results, the company declared a final dividend of 30 cents per share, which brought thetotal distribution for the year to 80 cents (50 cents). Dividend cover increased from 2,5 times to3,5 times.

Included in exceptional items are losses investments amounting to R109 million resulting mainlyfrom the write-off to current market value the group�s investment in Retail Apparel Group Ltd(RAG). This investment is not held as a long-term asset, which means that RAG is no longerregarded as an associated company and that results were not included in those of the group.

As the tax losses available to our British subsidiary, Brown & Jackson, had already been utilisedto a large extent, this company was taxed at a much higher rate. This is the main reason for theincrease of 70% in the group�s tax expenditure. In compliance with Generally AcceptedAccounting Practice (GAAP) deferred tax assets of R51 million were created in the case of PepStores and Ackermans in respect of calculated tax losses. The group�s tax liability was reducedaccordingly. However, no such asset was created from the calculated tax loss obtained becauseof Shoprite�s takeover of OK Bazaars as that would have resulted in negative goodwill, which,in terms of GAAP, may not be created in subsequent years.

BUSINESS CLIMATE

The group produced excellent results during the period under review notwithstanding thedifficult trading conditions in South and Southern Africa, while growth in the UK was alsosluggish, and higher interest rates and the introduction of sales tax thwarted retail activities inAustralia to some extent.

Unemployment, political unrest, weakening currencies and the lack of adequate economicgrowth are some of the main reasons for low consumer spending in Africa. In South Africa, theinitially favourable economic forecasts for growth of 3,5 percent in GDP in 2000 were scaleddown to 2 to 2,5 percent despite positive economic indicators such as a dramatic drop ininterest rates, higher exports and a positive balance of payments.

The concept of an African Renaissance has contributed much to the awakening pride in thecontinent, but has also mistakenly advanced the impression abroad that Africa constitutes a

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single economic entity. The unprecedented floods in Mozambique and violent occupation offarms in Zimbabwe caused international investors to avoid South Africa too. Consequently, therand came under heavy pressure, which has had a negative impact on the total economydespite the competitive advantage it holds for exports.

Not only events in Southern Africa, but also further afield, such as the ongoing unrest in theDemocratic Republic of Congo and events in Sierra Leone, have conspired to strengthen �Afro-pessimism� which emanates from the idea that corruption, nepotism, violent crime, the declineof law and order and incompetent governments are endemic to all African countries.

Such an interpretation negates not only South Africa�s successes, but also those achieved incountries like Botswana and Nigeria, or positive developments like those in Mozambique, whereit is expected that, despite the devastating floods, the country�s economy may still grow by 5percent this year, albeit from a low base.

I believe it imperative that government and the business sector do everything in their power todispel this negative perception before it gains general credence. It is already affecting foreignconfidence and consequently foreign investments which are already at a low ebb.

In my view we still have the basis for a strong message to the world: South Africa�sinternational competitiveness, according to the International Institute for Management,improved from 42nd in 1999 to 38th; Standard and Poor�s has raised the country�sinvestment grading to a higher level; labour productivity improved by 30 percent during the pastdecade; and exports are rising, partly due to the fact that agri-business in some quartersresponded well to deregulation.

We should seize these and other factors working in our favour to improve our global positionand to promote South Africa as the gateway to an extended regional trading bloc encompassingthe whole of Africa south of the Sahara. Such an approach will not only create new markets, butalso attract new investments and create more jobs.

New job opportunities are of vital importance, not only for the country�s economicdevelopment, but also for growth in the retail sector, especially those sectors in which Pepkoroperates. For, instead of growing, the number of jobs is still decreasing an alarming rate.Despite the rapid population growth, it is estimated that we have lost more than a million jobssince the start of the �nineties.

Rigid labour laws, militant trade unions and inadequate skills hamper employment and forcebusiness world-wide to rely increasingly on mechanisation and technology. I still believe thatmillions of job opportunities exist in South Africa, but not within the straight-jacket of prescribedminimum wages and employment conditions. Labour laws in particular will have to be drasticallyrevised to address unemployment successfully, which remains central to so many of our socialproblems.

REVIEW OF OPERATIONS

The millennium year has been an exceptional one for the group. After the disappointments of1999 much has gone our way in the year to June 2000, to the extent that we were able todeclare our best results ever. The tri-divisional structure proved its value at group managementlevel and helped to improve our focus. The three divisions are Food (Shoprite); Clothing:Northern Hemisphere (Brown & Jackson), and Clothing: Southern Hemisphere, in which Pep,Ackermans and our Australian subsidiary, Best & Less, have been brought into single operatingunit without the loss of their separate identities.

All our operating companies, with the exception of our Australian subsidiary, which lost someground, performed exceptionally well in the period under review and improved operatingmargins substantially:

Brown & Jackson, the listed British company in which Pepkor holds 69 percent, was again

the foremost contributor to group operating profits and was the main reason Pepkor was

able to earn 43% of operating profit outside Africa. This business is now well established

in its market sector and it has thus been decided to accelerate its expansion programme

to at least 100 new outlets per year for the next four years.

With an increase of 159 percent in operating profit to R326 million Shoprite provided

convincing proof that it has completely shed its stock loss problems of the previous year.

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The consolidation of OK Bazaars is almost complete, and this division is now growing

rapidly on abroad front, also geographically, and the benefits of this consolidation will

reflect increasingly in the company�s future profits.

Pep managed to extricate itself from the doldrums in which it has been for several years,

and has not only increased its operating profit by 180 percent, but has almost doubled its

profit margin. Clearly this business is regaining its lost reputation in its target market and

is once more honouring its name as the chain offering the best value for money.

Ackermans once again delivered a remarkable performance in doubling its operating profit

off an already high base. With its dynamic new positioning and strong customer support

this chain is fast establishing itself as leader in the middle-income market.

A more global approach to retailing has become evident in the group�s business emphasisduring the past financial year. This focus has manifested itself more emphatically in certainareas, such as Shoprite�s growth in Africa and Brown & Jackson�s expansion from the UK toPoland to achieve a foothold in Eastern Europe.

The group�s expansion into Africa has gained momentum since the mid-nineties. Africa offersenormous potential for businesses with the market positioning of Pepkor�s operating units.While expansion outside South Africa was tentative at first, the experience gained during thelast few years has prompted larger and more decisive initiatives. As a result, Pepkor is nowfirmly anchored in Africa, and the rest of the continent has made a meaningful contribution �R82 million during the past year � to group operating profits.

While Pep was the first to cross our borders in a meaningful way, Shoprite is presently growingfaster northwards. The two groups follow different strategies. Pep acquires critical mass in onecountry before moving on to the next, while Shoprite, with its far greater and moresophisticated infrastructure, is able to move faster. Consequently, Shoprite expects to openoutlets this year in four new countries � Zimbabwe, Malawi, Tanzania and Uganda.

In addition, Shoprite will open its first outlet in Egypt within the next few months, therebyextending its operations from Cape to Cairo. Towards year-end Shoprite was also engaged innegotiatons which could result in it also obtaining a foothold elsewhere in the Middle East.

But, as indicated earlier, there is no uniformity in Africa, and markets and trading expectationsvary from country to country. Broadly speaking the continent lends itself mainly to thepositioning of Pep and Shoprite. Opportunities for Ackermans, which operates in the middle-income market, are therefore more restricted. This chain�s priority is to consolidate its positionin the local market and, as a consequence, withdrew from Zambia during the period underreview.

Brown & Jackson�s expansion within the UK is aimed primarily at extending its geographicalreach to increase penetration of its target market. This business expects to have about 1 250shops in the UK by 2005, while we believe Poland has the potential for 300 shops.

DEVELOPEMENTS

During the period under review Pepkor sold two of its subsidiaries, Cashbuild and Stuttafords,to their respective managements and other interested parties. The group had been indicating tothe market for some time its intention of selling these two chains. Both were acquired as part ofthe transaction involving the acquisition of Checkers from Sankorp. In both instances therationale for selling them was that they did not fit the group�s core business of cashdiscounting in the clothing and food markets.

In Cashbuild�s case, the group sold, effective from June 2000, a holding of 46,3 percent for R33million to management and staff, suppliers and financial institutions. That left Pepkor with 12,5percent of the company, a holding which is not regarded as a long-term investment.

Effective from 2 April 2000 the group sold its total interest in Stuttafords to a consortiumconsisting of senior Stuttafords management and black empowerment group AMB Private EquityPartners, for an amount that places a value of R106 million on this up-market chain.Stuttafords� profit accrued to Pepkor for nine months of the period under review.

PROSPECTS

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An analysis of the group�s results for the past year leaves two main impressions: firstly, thatthe problems of the 1999 financial year have to a very large extent been resolved; and,secondly, that all the subsidiaries are correctly positioned for strong organic growth. Providedthat no further deterioration occur in the trading environment, further meaningful growth inoperating margins is expected, albeit not of the same magnitude as during the past year. Theexpected higher tax liabilities will, however, affect earnings.

BOARD

Mr John Braithwaite (45) has been elected to the Board in a non-executive capacity. During hisyears as a senior BoE executive Mr Braithwaite was actively involved in the structuring of manytransactions involving the group. We believe his knowledge and experience will stand us ingood stead.

ACKNOWLEDGMENTS

Results such as those produced by Pepkor in the year under review don�t come easily. Toachieve them required bold decision-making and strong leadership, coupled with total dedicationand sheer hard work, not only from management, but from staff at all levels in our business.Some of the problems faced during the past year were huge, the challenges enormous. That weovercame them so successfully is a tribute to the quality of our people and the level of theircommitment. To them all, and to my colleagues on the Board, I extend my heartfelt thanks andappreciation.

CH WIESE - Executive chairman

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