Reunert Limited (RLO) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you for joining us this afternoon for the webcast presentation of Reunert's year-end results for the period ending 30 September 2020. Nick Thomson is sharing the presentation duties with me today. After the webcast, we will be available for a live Q&A session. The 2020 financial year has been a challenging one for Reunert, and our results have been negatively impacted by 3 distinct issues. The first of these is the COVID-19 pandemic, which resulted in a material reduction of our revenue in quarters 2 and 3 due to the hard lockdown in Perth and South Africa over this period. COVID-19 also had a negative impact on our cash consumption as we supported our employees and businesses during the hard lockdown. In addition to the lost sales and cash consumption, the predicted impact of COVID-19 on our businesses resulted in us raising provisions for impairments in terms of the forward-looking requirements of IFRS. The second key issue impacting the results was the underperformance of the cable businesses, resulting in weak Electrical Engineering segment results. The underperformance was caused by a 7-week labor disruption at African Cables in quarter 1. This emanated from the restructure that was completed in the prior financial year, the continued weak electrical infrastructure investment across our key South African markets and noncash forex losses at Zamefa due to the kwacha depreciating rapidly against the U.S. dollar. The final key issue we faced in 2020 financial year was the credit write-off at Quince, where an external fraud was perpetrated against Quince by a nonconnected independent third-party. In reaction to these challenges, the group adopted strict cost control across our businesses and strong working capital management to protect our cash-generating capability. Our free cash flow was strong, and we have achieved similar EBITDA to free cash flow conversion ratios as we have in prior years and generated 84% of free cash flow from EBITDA. Pleasingly, the group's resilience was demonstrated by a strong operational and financial performance in quarter 4, once the worst of the lockdowns were completed and we were able to recommence business activities. The fundamental strength of our businesses was evidenced in a proactive manner that the company has embraced the reality of operating under the COVID-19 health and safety protocols whilst they delivered on their customer expectations. The recovery has gone slightly better than we would have expected, and the group delivered more than 90% of the core operating profit that we achieved in the same period last year, which, in itself, was a very strong quarter. All segments were profitable and coupled with a strong cash generation. The challenging year has made the financial returns disappointing but also not directly comparable primarily due to the impact of COVID-19. So whilst revenue and core operating profit have decreased for the reasons described in the previous slide, free cash flow conversion has remained positive throughout the year, and this has enabled us to hold our dividend at the same payment ratio as the half year and pay ZAR 1.92 cents per share. With the financial metrics being challenging, we felt it important to provide shareholders and investors with greater disclosure this year on the state of our businesses in the postlockdown economic environment. For this reason, we have made the slightly unusual decision to provide the quarterly information for Reunert in quarter 4 of the financial year 2020. I'm pleased to report that it was a positive quarter all-round. In Electrical Engineering, our circuit breaker business performed strongly on the back of excellent export volumes. The cable companies had the only uninterrupted quarter of production of the year, and it was pleasing that they delivered a profit despite only having moderate production volumes. This profitability reflects the improvement in their cost bases that the actions undertaken through the previous restructuring processes have yielded. Our Applied Electronics segment had an excellent quarter as all the companies executed well. Our export companies were able to catch up on the backlog caused by the lockdown and fully met their customer commitments, while the renewable energy businesses continued to benefit from the strong market demand. The ICT segment underwent a steady recovery although, because of their broad customer base across all economic segments, they were more negatively impacted by those segments of the economy that have not yet fully opened. The Quince book performed well during quarter 4 and as economic activity increased, an improved collection rate resulted. Overall, the group delivered in excess of 90% of the core operating profit of the prior year. The cash flow was also excellent, particularly since we had to reinvest into our working capital cycle once the businesses started up again. Our current level of activity is likely to support a solid first half of the 2021 financial year, underpinned by a turnaround in the Electrical Engineering performance and solid export and renewable energy orders in the Applied Electronics segment. The ICT segment will continue to recover as the general economy picks up. And free cash flow is expected to continue at the historic EBITDA to free cash flow conversion levels. I'll now address the 3 distinct issues that were the key challenges in the 2020 year. The primary challenge was COVID-19 and the impact it had on Reunert during the hard lockdowns, which negatively impacted our quarter 2 and quarter 3. COVID-19 had a materially negative financial impact on the group through lost revenue and through the predictive future impact of COVID-19 on our businesses, which resulted in us impairing ZAR 117 million of goodwill and PPE at the cable plants and creating provisions for impairments through increased expected credit losses of ZAR 288 million as a result of the forward-looking requirements of IFRS. The group has responded extremely well to the reality of running our operations through implementing a safe and healthy employee environment. We have strengthened our resilience through strict cash and cost management and protected the group against future economic uncertainty by extending our credit lines to ZAR 2,1 billion. This planning has resulted in the group operating largely uninterrupted since the lockdown level 3. We believe our business continuity plans are robust enough to enable our companies to successfully weather a second wave of COVID-19 infections, save for any further hard lockdowns to the economy. The second key issue was the underperformance of the cable businesses, which, in addition to the COVID-19 loss of revenue, were impacted by the challenges identified under the salient features section. The financial impact of these challenges was approximately ZAR 200 million and was material enough to impact the segment's performance. Most of the challenges have, however, been addressed during the course of the year. At Zamefa, as indicated, input VAT was removed on the 1st of January 2020, which stopped the increase in the quantum of government receivables. Collections were, however, slow in the first half, which resulted in the company requiring external hard currency funding to operate, and this resulted in material noncash forex losses as the kwacha depreciated from just below ZMW 14 to around ZMW 20 to the U.S. dollar during the financial year. Collections improved during the second half as ZMW 154 million was collected, leaving only ZMW 96 million outstanding at the year-end. This reduced the hard currency borrowings and, together with the restructured equity loan, have significantly reduced the risk associated with any further kwacha weakening on Zamefa. The reduced borrowings also enables Zamefa to steadily increase production as the cash position improves. At the cable factories in South Africa, we finally had some stability in quarter 4, and the benefits of the restructuring efforts were realized as the companies ran profitably despite no material improvement in production volumes. The relationship with the main union has also improved, enabling the segment to be positioned to recover back to more normal financial performance in the 2021 financial year. Finally, the external fraud perpetrated against Quince by a nonconnected independent party was a great disappointment. The fraud resulted in a ZAR 298 million credit write-off and was fully accounted for at the half year. Since then, there has been extensive work completed to validate that there is no material risk of a repeated occurrence, and we have strengthened our governance and control environment. In this respect, a detailed independent forensic investigation was completed by Bowmans. This investigation found that no current or past Quince employee had any undisclosed conflict of interest nor were involved in any criminal or deliberate misconduct in respect of the fraud perpetrated against Quince. PwC has completed an independent review of Quince's enterprise risk and control environment. Through this review, certain functions and processes, specifically in the credit management processes, are being strengthened. Performance of the book has continued at historic levels, and a detailed assessment of ZAR 1,6 billion worth of the book had been concluded by year-end. No material incorrect information has been found, and the collections are in line with the pre-COVID collection levels, demonstrating the strength of the underlying book. We, therefore, believe that the majority of the challenges found during the 2020 financial year have been addressed, and the group trusts that the year ahead will proceed with fewer material challenges. I will now hand over to Nick who will take us through the more detailed report on our financial numbers.

Thank you, Alan, and good afternoon to all of you attending this webcast. The first thing to say, which is very important for any CFO to be able to say, and I'm sure for the shareholders and for our other stakeholders, is that in the results for the full year, there are no unexpected surprises to the downside in the second half that need to be explained. All the issues that arose due to the forward-looking requirements of COVID-19 and the credit write-off due to the fraud at Quince, which were addressed at the half year are after careful reconsideration at the year-end, remain exactly as they were previously reported. I think you can say that in medical terms, we took all our bitter medicine in the first half of the year and are recovering well in the second after the level 5 and 4 national lockdowns. If anything, we think there was a surprise to the upside, being the positive extent of the group's recovery in quarter 4 after the lockdown ended, and we were able to reopen all the businesses. The main issues that have impacted these results, which are unchanged from what we reported at the half year are: the poor economic conditions coming into the 2020 financial year as South Africa was already in a recession even prior to the COVID-19 pandemic, which, of course, COVID has made much deeper; the weak performance in the Electrical Engineering segment in quarter 1 due to the copper shortages and exchange rate volatility in Zambia; the strike at African Cable and the generally poor market conditions in this sector; the COVID-19 hard lockdown at the tail end of quarter 2 and for the full quarter 3, which impacted significantly on both revenue and operating profit; the credit write-off due to the external fraud perpetrated against Quince; the various impairments provided in terms of the forward-looking requirements of IFRS 36 and IFRS 9, mainly against goodwill and the lease book and which also impacted the group's JV, CBI Telecom Cables. Lastly, to the positive, the stronger-than-expected recovery in Q4 to 90% of the prior year's performance. These issues have all impacted the statement of profit and loss as I will endeavor to explain. The group's revenue is down 25%, firstly due to the African Cable strike and the Zambian copper shortages in Q1. This was then compounded by the low activity at the end of Q2 and for Q3 due to the hard lockdown at most of our businesses. Those that were considered essential services and were able to be open still operated well below normal levels of activity as a significant proportion of their customers were also closed under the hard lockdown. This revenue reduction pulled through to the EBITDA generation. The next key number is the credit write-off at Quince, which remains unchanged from the ZAR 298 million written off at the half year in respect to the fraud, which Alan has covered in his opening remarks. The expected credit losses of ZAR 288 million contain 2 components: a ZAR 219 million charge taken at the half year due to the requirements of IFRS 9 to assess the possibility of future credit write-offs arising in our leasing book over the entire term of the underlying agreements and which had to take into consideration the potential impact of COVID-19 on future economic conditions and specifically on our customer base. This requirement continues to be assessed, utilizing external data points drawn from Moody's, and the charge remains as was calculated at the half year. On the balance sheet, the residual expected credit loss allowance at the end of the year is ZAR 210 million. This is made up of an opening balance put forward from 2019 of ZAR 41 million; the increase for the year of ZAR 219 million arising from the ECL model, which has been charged to the statement of profit and loss; and various actual credit write-offs since March against the ECL totaling ZAR 50 million, of which the largest is ZAR 40 million relating to [indiscernible] due to being in business rescue following the hard lockdown. The residual ECL of ZAR 210 million amounts to 7.5% of the lease book which is in line with other financial institutions with similar books and at a level the Board has formally assessed as being appropriate through the Audit Committee process. This issue was also a key audit matter opined on by the auditors. The balance of the expected credit loss of ZAR 69 million in the statement of profit and loss represents the increase for what used to be called provision for doubtful debt, which has been raised against our trade and other receivables book of ZAR 1,9 billion. The next key number is depreciation. Depreciation increased by 46% for the year, but this increase is entirely due to the group's adoption of IFRS 16 in the current year, which resulted in a depreciation charge of ZAR 72 million on the right-of-use assets. IFRS 16 also impacted the interest cost for the year, resulting in ZAR 22 million of interest on the lease liability being charged to interest paid. Moving down to impairments. The application of IFRS 36 and its requirements to discount our cash-generating business units' expected future cash flows resulted in an impairment charge for goodwill of ZAR 75 million, mostly related to African Cable, and a minor ZAR 4 million of property, plant and equipment. Again, these amounts which were reassessed at year-end, remained unchanged from the half year. The group also recognized a ZAR 20 million loss on the disposal of PanSolutions, a subsidiary that was no longer core to the group. The attributable loss from equity accounted investments was considerably larger than in the prior year. This was mainly due to the trading loss suffered at CBI Telecom Cables due to the adverse market conditions and the impairment of their property, plant and equipment as outlined at the half year. In the current year, we also reversed CBI Telecom's deferred tax assets previously raised on the cumulative tax loss due to the uncertainty of their ability to utilize this tax loss after several years of trading losses. What is significant is the Q4 performance as Alan has highlighted in his overall review. 46% of the year's EBITDA before the impairment of financial assets was generated in this quarter, hopefully reflecting that the group is now returning to a positive run rate, which bodes well for the 2021 financial year. Turning to the statement of financial position. Firstly, the strength of the group's financial position remains intact despite the adverse impact of COVID-19. Secondly, the group ends the year with a net ZAR 323 million in cash resources compared to ZAR 616 million in the prior year despite the ravages of the COVID-19 pandemic. This position enables the group to declare the final dividend of ZAR 1.92 cents per share. The major movements in the statement of financial position that I haven't already explained through the comments on the statement of profit and loss include: the right-of-use asset of ZAR 186 million, resulting from the capitalization of operating leases due to the requirements of IFRS 16, which the group adopted in the current year; the hedging of the 2020 share scheme by entering into a forward contract to purchase 2.3 million shares to take advantage of the low interest rate environment and what is hopefully a relatively low share price. This has resulted in the recognition of a total hedge liability of ZAR 75 million. Moving to the cash flow. As can be seen from the cash flow bridge, the group generated ZAR 1.1 billion in operational cash flow. The majority of the noncash items added back in this number from the starting point of EBITDA relates to the impairment of financial assets, being the ECL and the credit write-off. This resulted in free cash flow generation of ZAR 946 million, being 83.4% of EBITDA before impairments of financial assets. This compares very favorably with the cash conversion of the prior year of 84.8%. The group's investing activities of ZAR 163 million relate mainly to the cash invested into the group's leasing book. Its financing activities are primarily for the payment to increase the group's shareholding in Terra Firma by 27%, bringing its shareholding to just over 89% at a cost of ZAR 132 million. As well as the new requirement to reflect the settlement of the IFRS 16 lease obligations under finance activities, the settlement of these leases amounted to ZAR 57 million under finance activities and ZAR 22 million under the interest expense in the current year. This last slide relates to capital expenditure, which has been very carefully managed in the current financial year due to the cash uncertainties that COVID-19 pandemic resulted in. We have, however, ensured that our throughput capacity has not been impacted in any way as we managed our cash flows. In conclusion, the positive cash generation for the year, the group's ongoing focus on cost and cash management, the strength of the group's balance sheet and its available credit lines of ZAR 2.1 billion, combined with a positive recovery in quarter 4, all taken together, position the group for a positive 2021 within the context of the future trajectory of the South African economy. With that, I will hand you back to Alan to share the group's strategy and segmental performance with you. Thank you.

Despite the extremely challenging year, good progress was made in the key strategic initiatives we are driving within Reunert. As indicated at the half year, we have reviewed our funding of Quince. The lower interest rate cycle, which we believe is going to exist for several years, will result in reduced returns for the Quince rental book as well as Reunert's investment therein. As a result, Quince is refinancing a portion of the book, with no recourse beyond the Quince assets, and returning this capital through Reunert. This capital will be redeployed into investments that improve shareholder returns, amongst others, our investment into our build-own-operate assets in the renewable energy businesses and the expansion of our fourth cluster in the ICT segment. We have indicated that we intend to reduce our exposure to our cable operations in Zimbabwe and Zambia. To this end, we have received a binding offer for 18,8% of Cafca, our Zimbabwean cable manufacturer, which we expect to conclude shortly. Our renewable energy businesses continue to grow positively. From the last reporting period, there's been an improvement in the regulatory environment that supports the liberalization of the generation of renewable energy. The government's commitment to this has manifested in changes to the Electricity Regulations Act, which improves the ability of municipalities to generate their own electricity and exempt certain generators from acquiring licenses from NERSA. There has also been a positive movement in the wheeling of electricity, which, when fully implemented, will see further acceleration in renewable energy. All these changes improve the market fundamentals for distributed generation, which is the key market segment of Terra Firma Solutions and Blue Nova and where they hold their good market positions. Given this environment, we have increased our equity state in Terra Firma Solutions to just under 90%, and we have increased our R&D spend at both Blue Nova and CBI to ensure we have the capability to deliver grid tied storage and to switch and control distributed generation. These capabilities now enable us to deliver a holistic renewable energy solution, and we have in-house capability for solar PV distributed generation, for high-volume intelligent storage and for smart switching and metering. In addition, we are continuing to build our investments into our own renewable energy assets. These are solar plants where we own the assets and supply electricity to consumers as opposed to merely building the solar plants. The market for these assets continues to grow as both corporate and industrial customers increasingly recognize the value in the solution and wish to diversify their energy supply away from Eskom and the municipalities. Our ICT segment strategy also made good progress this year, perhaps most importantly, the launch of our fourth cluster in the segment became a reality this year. This fourth cluster augments our 3 traditional clusters of communication, total work space provision and finance and focuses on modern ICT services that are focused on higher-margin and faster-growing opportunities. The cluster is called solutions and systems integration and focuses on end-to-end ICT solutions, providing cloud and data services, digital consulting, security and managed services. Our first asset in this cluster is called +OneX, which will deliver cloud systems integration targeted at both the enterprise and mid-market segments with new age digital solutions. We look forward to this cluster providing accelerated growth for this segment and have identified that cluster is a key area of capital allocation as we enable this aspiration. Our Total Workspace Provider strategy focuses on diversifying away from legacy print solutions, and Nashua delivered another strong double-digit growth of these complementary services for the fourth consecutive year. They pivoted well and reacted to the new COVID-19 business demands by offering a suite of solutions to the market to enable remote working. In our Communications cluster, our focus on last-mile broadband connectivity yielded good growth. Both ECN and SkyWire provide last-mile broadband connectivity solutions, with SkyWire focusing on their own point-to-point wireless solutions, while ECN provides last-mile broadband connectivity through all forms of technology, both our own and those of other service providers. SkyWire has expanded their national network and entered 24 new geographies this year as well as launching their cloud security systems, which is an increasingly important component of the connectivity solution as the cybersecurity threat escalates. I have covered a significant portion of the key segment business matters in the presentation so far. The segmental reviews, where historically, we would have covered these matters, are therefore abbreviated this year. Within the Electrical Engineering segment, the circuit breaker business continued to perform well despite weak electrical engineering investment in South Africa. They expanded their exports, and their companies both in the U.S.A. and Australia performed excellently during the financial year 2020. We expect this to continue, and the launch of their new Astute range of products that enable remote switching should augment their traditional markets in South Africa. With the improved performance of the cable markets, we anticipate an improved Electrical Engineering segment performance this year. The ICT segment has seen a steady recovery since the lockdowns were lifted. But certain segments of the economy have not yet opened up, and this impedes their return to full recovery. In both the Total Workspace Provider and Communications clusters, we had recovered to around about 75% of the pre-COVID-19 levels by year-end, and this will continue to improve as the economy opens. The Communications cluster grew year-on-year despite COVID-19 as the last-mile broadband connectivity and ECN's diversified revenues continued to grow strongly. Importantly, although Quince did offer modest debt relief to a small number of customers, the majority of these have subsequently recommenced with normal monthly payments. As discussed, we will now only fund Nashua franchises, and the collections and the performance of the book have been good since the half year. The year ahead for the segment will be negatively impacted as the low interest environment impacts the loan book returns, but the Communications cluster is expected to continue its growth trajectory. The Applied Electronics segment had a strong year due to a good export performance. Secure communications had a record year, exceeding the previous record achieved last year. While Fuchs had the expected slower year due to the absence of a large fuse order, we were pleased that their product and geographic diversification efforts yielded the required impact, and they delivered a profitable year. Our renewable energy businesses were materially impacted by COVID-19 as they were unable to recover from the lost sales. However, the market remains strong, and Blue Nova's performance remains in line with the investment case. We have received good export orders for both Nanoteq and Omnigo and have good multiyear R&D funding across the segment. This, together with the renewable energy market performance, should enable good results in the year ahead. As we look forward to FY '21, we are boosted by the fact that the group has recovered well from the business interruption caused by COVID-19. We recognize that there remains future economic uncertainty, but the group has robust business models that we expect to benefit from the expected economic recovery and the government's infrastructure investment. In addition, the group has increased its participation in markets that offer good structural growth opportunities. These include our renewable energy businesses, our exports and in our Communications and the fourth cluster in the ICT segment. Our financial position remains strong, and cash flow generation is expected to continue to support dividend growth and operational and strategic execution. Thank you, ladies and gentlemen, and we will now open to questions.

Good afternoon, ladies and gentlemen, and welcome to the Q&A session after the Reunert webcast. I'm Alan Dickson, the Chief Executive, and with me this afternoon is Nick Thomson, and we'll be available to answer any questions that come through. We have one question through so far, it's from [ Anthony ] at Abax Investments. The question is whether there was any insurance cover in place against the Quince fraud and what the [indiscernible] of any insurance or any other mandatory recovery will be? I'm going to ask Nick to address that question, please.

Thanks, Alan. Good afternoon, everybody. We have a wide range of insurances in place, one of which is Fidelity Insurance. Alan and I fortunately increased the cover a couple of years ago from about ZAR 150 million to ZAR 250 million. But Fidelity Insurance requires that there is a fault on behalf of internal people to be involved in the fraud so that you can trigger the terms of the policy itself. And unfortunately, in this circumstance, despite -- well, in terms of being able to recover under this particular policy, there is no evidence of any malfeasance or collusion on behalf of any of our employees. So the policy per se will not cover because it doesn't relate to a Fidelity event. From a perspective of covering the investigation costs, that is covered, and we have lodged a ZAR 5 million claim, which is the maximum in terms of the policy in terms of doing investigation. From the perspective of any other form of recovery, we have instituted a criminal document, a docket, which we have done basically just after we discovered the fraud. We have reported the details of the fraud to the appropriate authorities, and they will be proceeding through time with a criminal process. And then what we are doing is we have instituted a civil process. But unfortunately, that process will take probably a couple of years to come to an end, and it's really far too early at this stage to understand what sort of recovery, if any, that we will get from pursuing the civil process.

Thanks, Nick. We then have a second question from -- second set of questions from Muneer Ahmed from Prescient. There's 3 questions there. I'll go through all 3 so that -- Nick will be fielding one of them, so I'll give him a chance to [indiscernible] The first question, "Is the quoted ZAR 73 million labor disruption cost at African Cables, is that a cash cost or an estimated income cost?" The second question is considering the speed of the recovery across the group, do we have a view as to whether we were too prudent when assessing the bad debt provisions at the half year to be around the receivable of the lease book, and Nick will be fielding that one. The third is, "How much of the Quince book are you looking to fund externally?" So I'll deal with the first one. The ZAR 73 million labor disruption costs at Cables is an estimated income loss and so that would have been the revenue that we would have had through that period. It's not a direct cash cost that flew -- that fell out of the group [indiscernible] that period. It was an estimated loss in earnings that we had through that period as a result of that disruption that we took in quarter 1 of the financial year. Nick, do you want to address the bad debt provisions at half year, please?

Yes. The ZAR 288 million has got 2 components into it. One is against the lease book, which is now around ZAR 2.8 billion, and that was provided at ZAR 219 million or that was a charge that we took at the half year. That charge was based on the best available information, and we used public information for that. We couldn't rely on our look back in terms of the book because obviously, COVID was a whole new environment, and there was no history that we could rely on. So what we looked at was what was the probability of default, and we used the Moody's predictor of that. And at the half year, that was a little over 10%. And that has come down, but not so much to get which -- when taken together with the write-offs that we've had, has resulted in us being able to reassess the provision. So the ZAR 219 million we put through at half year remains in place for the full year in terms of the residual provision that we've got left because of the bad debts that we've actually written off against that provision, which is mostly for [indiscernible] we've got about ZAR 220 million left. That's about 7% of the book. And our feeling is that, that is very consistent with what's in the marketplace for this type of book. And it's exactly in line with what the adjusted models require us to provide. The Audit Committee went through the mechanism in detail as did the external auditors, and all confirmed that the provision was in line with what we should have provided. Hopefully, as we go through time, we will find that the provision mechanism, based on some of these external parameters rather than pure internal parameters, will prove to be too prudent. But at this stage, it's too early to make that assessment given that we're only sort of 6 months into the economic crisis that's been caused by COVID. With regards to the balance of the provision, there was a ZAR 69 million increase in the doubtful debt provision against trade and other receivables, and that's just against a total book across the group of around ZAR 2 billion. So I think that's, again, very much in line with what you will see that most other companies are putting through in terms of their expected impact because of COVID on their data for trade receivables.

Thanks, Nick. And then the third one was how much of -- Muneer's question was how much of the Quince book are we looking to fund externally. We -- obviously, we don't want to -- we want to match the funding primarily to the opportunities that we need and the allocation of capital into the new opportunities that we've got. So it will be done in a staggered manner, and it will be aligned to the opportunities that we have. As we've indicated, there is a good market uptake at the moment for our investments into our build-own-operate assets. So that is a known area that we will be deploying capital into. And we have a number of acquisitions that we're looking to make within the fourth cluster as well, which are also -- we have an idea of what those -- that capital allocation will be. But obviously, those will only play out once -- if we are successful in the processes that we will be -- we'll be working on. So we don't have an exact number at the moment, but the intention would be that it will be a fairly significant portion of the Quince book. It won't be ZAR 100 million. It will be a decent number in that regard. But at this stage, it's a little bit too early to say what the full extent will be. But by the time we get to the half year, we'll be able to share with you exactly what we've done and the extent to which we have funded externally. The next question is from [ Jovan. ] The question is can we provide an indication of opportunities for Terra Firma, and would it be possible to disclose an order book and/or potential tenders that you're working on. In both of those cases, those would be fairly sensitive pieces of commercial information that we won't normally disclose in a public forum. What I can indicate to you, though, is that Terra Firma at the moment is at full operation at maximum capacity. And they're at maximum capacity for the entire first quarter of this financial year and pretty much at full capacity for -- all the way up to the first half. [ So we've fallen that is that, ] like I say, at full capacity. In terms of the potential tenders, I can't give you tender names. Again, I don't think that's appropriate. But what we can indicate is our key market is 10 megawatts and below. So we are involved in multiple tenders across multiple parts of the market of 10 megawatts and below. We are not involved in the residential market. So we're only looking at commercial, light industrial and industrial. And those typically fall between about 250 kilowatts and about 5 megawatts. So that's our preferred and targeted market that we're after, but we will take opportunities up as large as 10 megawatts. The next question is from [indiscernible] at [ Coronation. ] The question is don't the external party still represent or remain a conduit for your other end of parties? I'm assuming this is relating to the Quince fraud. So I'm going to answer as if that is the case and I can categorically state that the external party is not and does not represent us any further. As you -- and we've indicated in -- I think in the -- either in the webcast now or in the [indiscernible] which it is, but we are owning our financing Nashua franchises. So those are the only entities that we finance at the moment. The next question comes from Muneer again at Prescient. He's asking, "What level of investment have you made into the fourth cluster?" When it is starting off a low base versus our competitors in terms of capabilities, so why did we not go down the acquisitive route. The investment into the fourth cluster so far is relatively moderate. And you are correct, we're starting off a low base. But we've chosen not to go the acquisitive route at this stage for 2 key reasons. We did try the acquisitive route, and we found either those targets that we could -- that we were engaging with either had legacy issues that needed to be dealt with as well, and that was quite similar to what our remainder of our assets were within -- where we dealt with the legacy challenges and we want to -- specifically, a new age suite of assets. So even in the acquisitive space, we were finding that we were picking up assets that had legacy challenges that we didn't want to have to solve and try and convert. So therefore, to create the initial platform upon -- into which further acquisitions can come, we chose to do that organically, and we believe we've got a very good base into which we can then inject these additional acquisitions as we go along, and that's exactly what we intend to do. So we're not going to build a fourth cluster entirely organically. The base that we have at the moment is organic. But as we move forward, the new assets will then be acquired into that and allow us to scale that with -- in a faster way, not only do it organically. [ Fraser ] at [ Peregrine ] has asked how exposed are we to the stronger rand on our export orders, and how much of these export orders have forward currency cover. Nick, do you want to field that, please?

Certainly. So I'm going to start with the second part of the question and then come back to the first part of the question. So how much of these export orders have forward currency cover? So from -- the export orders have 2 components to them: the components that we very often import, which allow us to complete the export order; and then the actual export order itself. So there's an input cost and an output benefit. The input cost, we will typically cover by means of retaining sufficient dollars or euros, depending on the nature of the underlying contracts, in our CFC accounts to be able to meet the imports. So there's a natural hedge between what we have in our bank account and in foreign currency and what we're going to settle the imports in. The -- the balance of the exports, we have hedged a considerable portion of, let's call it, the export orders in the first 6 months of this current financial year before the end of the last financial year. And the reason that we've hedged that quantum and not the full year is that very often, the full year's orders are not yet in place. So our export companies have a lot of export orders, which they're currently working on. And to the extent that we have those orders and they're being executed, we will then take out hedging. The majority of those hedging would have been taken out just before the absolute cash of the rand. And we would be around the 16 50 in terms of forward cover in terms of rates on average in terms of what we've hedged at. And then it's -- of the next year's physical revenue, it probably will not be much more than 40% of the revenue that's been actually hedged. And therefore, in terms of how exposed we are to a stronger rand, it's clearly on the unhedged portion, which will be about 60% of the order book.

Thanks, Nick. We then have a question from [indiscernible] from Abax Investments. The question is can you please provide some guidance on the large contracts at Fuchs on whether these are going to repeat and the timing thereof. So Fuchs had a -- the large contracts that [indiscernible] refers to are typically multiyear contracts. So they are large single contracts, and they would extend typically somewhere between 18 months and 2 years in terms of their scale of production. We did not have one of those in the 2020 financial year. And that's why, as we've indicated throughout that Fuchs was going to have a slightly slower year than it had in 2019. As we sit here today, Fuchs does not have one of those orders. We are still negotiating them, but we don't have them in our hands at the moment. So we are not -- we do not have a single contract that extends through multiple years. However, what Fuchs has done very well over the last number of years is that they have developed a number of new products, and they have entered new geographic areas in which they've been able to sell both the new products and other products that they have in their repertoire. So what we do have at Fuchs at the moment is a fairly large number of smaller orders that, together, are [ fully effective. ] So at Fuchs at the moment, more or less, we are full for the first half of the year and a portion of the second half of the year. And we're working hard, and these smaller orders are coming through more steadily. So we are anticipating that Fuchs will have a better year than they had in 2020, but probably not quite as big a year as they had back in 2019. So they're in sort of a midway between these 2 large orders. But they are progressing well, and things are looking okay at Fuchs at the moment. Then we have a question from [indiscernible] again from [ Coronation. ] And the question is, is the strategic intent to fully exit Zambia, and could this potentially be at the bottom of the cycle. Perhaps let me start secondly with Zambia. I think Zambia is in a difficult space. They've obviously been downgraded over the last couple of weeks. So our view is that Zambia might be a difficult space to operate in for a number of years. So in that intent, that is why we are looking to diminish some of our equity holding in Zambia. At this stage, we're open to a number of options. And what we're working on is looking at options there and to determine how exactly and how best to reduce our exposure within Zambia. But there are no formal sales processes in place at the moment, and there are no specific -- there's -- not sufficient progress has been made in order to be able to give a -- an answer to it. So at this stage, we're not intending to exit Zambia completely. That's not what we're going to do at the moment. There is one final question, which is from [indiscernible] at Rand Merchant Bank. Nick, I'm going to ask you to answer it. It's not an easy question. The question is, is the overall book insured, and what is the percentage of the book that's insured. So again, I'm assuming this is referring to the Quince book.

Thanks, Alan. Obviously, the group has got 2 books: the trade data receivables, which is around ZAR 2 billion; and then the Quince book, which is ZAR 2.8 billion. Against the Quince book, there is no insurance. We do go through our own credit checks, and we provide the finance to fund the underlying lease rental, and the security for that is the recourse to the franchise as well as the underlying assets. So that portion, that's what security comprises of. With regards to the trade creditors -- well -- I'm sorry, trade debtors or trade receivables, very little of that is actually insured. Most of it is, again, because we've been dealing with significant customers for a long period of time or alternatively, if it's exports, we generally have a letter of credit, which we have in place before we do the export.

Ladies and gents, that's all of the questions that have come through on the Q&A. So thank you all for your attention and taking time to listen to our results today. And if anybody has any other questions, please forward them on to our Investor Relations manager, Karen Smith, and she will bring them through, and we will respond to them accordingly. Thank you very much, everybody, and goodbye.