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No longer so extraordinary

The extraordinary item has come a long way.

Previously maligned and disparagingly referred to as to a pesky one-off item, the extraordinary item is now part and parcel of the financial statements of many companies listed on the JSE.

An extraordinary item is a one-off event accounted for in a company’s income statement.

It refers to a corporate event – that yields either an extraordinary profit or loss – that’s unlikely to recur again, at least in the foreseeable future.

The definition of an extraordinary item can take in corporate events, such as disposals of subsidiaries and operating assets, the sale of properties, restructuring charges, a windfall (from a successful court settlement or legal challenge) and even a tax refund.

Extra good, extra bad

We also need to recognise extraordinary losses are also possible.

Successful legal claims against a company could see a chunky one-off payment.

And so could a fine from a regulatory authority (such as the Competition Commission).

Retrenchment charges that may come about as a result of a corporate downsizing could also realise a one-off loss.

Put another way: an extraordinary item is basically any profit or loss generated by events that aren’t considered a company’s core operating business.

Having said that, a private equity company (such as Paladin Capital, for example) or traditional investment company (like Sabvest) would probably consider it part of their core business to cash out of investments when appropriate.

But those “equity investment counters” would still have to register such events as extraordinary items.

Sometimes extraordinary items are most welcome and often an unexpected windfall can result in a special dividend.

Mostly, though, extraordinary items come from restructurings, which would normally involve re-focussing the business back to its profitable core(s).

In instances such as that the one-off windfall has to be measured against the possible effects on the company.

There could be dramatic changes to revenue lines, changes in trading margins and perhaps even a significant change to net asset values (for example, if the asset in question was sold for a whole lot more than book value).

Sales and auctions

Of course, we’d suspect tough economic conditions would perhaps spur the incidence of extraordinary items.

Naturally, companies facing financial pressure could look to rigorous restructuring programmes to right-size for lower demand for products or services.

That could well entail selling off subsidiaries, hiving off property portfolios, disposing of non-core operations and even auctioning equipment.

This year our Extraordinary Items table shows 43 of the top 200 rankings earned more than half their reported bottom line from an extraordinary item.

In the previous year, 26 of the ranked companies earned more than 50% of their bottom line from extraordinary profits.

Back in 2007 the number of companies with more than half their profits stemming from extraordinary activities was 27.

Those statistics would lend credence to the earlier contention that tougher times might lead to increased incidences of sizeable extraordinary items.

If that indeed is the case then next year’s top 200 table for Extraordinary Items might well see even more companies with more than 50% of their bottom line comprising one-off profits.

At least the Extraordinary Item table can’t be accused of harbouring the same old suspects, as in previous years.

The one-off nature of extraordinary items means the top rungs of the table are usually completely different to the tables from the preceding years.


Property, investments

This year’s table shows a number of obvious candidates for large extraordinary items – including property companies (some of which have seen significant structural change) and a handful of investment companies (which would have re-valued their investment portfolios).

There are also a smattering of winding down situations, the most prominent being former industrial heavyweight Dorbyl (currently selling off its remaining industrial properties).

Calgro

However, there were some less obvious rankings that might bear closer scrutiny – especially those companies that are “operational entities”.
Housing developer Calgro M3 (ranked eighth) showed quite an astounding percentage for extraordinary items.

Results for the year to end-February 2009 did show a R17m entry under “other income” – which is a big entry in terms of overall earnings.

While there appears to be no detail in its annual statements of what exactly “other income” is composed of it does seem this entry is the difference between Calgro’s headline earnings of 5c/share and earnings of 16c/share.

No doubt Calgro will appear prominently in our 2010 Extraordinary Items ranking.

The company last year sold off its 30% shares in the Fleurhof housing project to the SA Workforce Housing Fund for R30m.

Crane specialists SA French also ranked highly in the extraordinary item table.

It showed a significant “other income” entry of R10m – which, unfortunately, isn’t detailed in its annual statements.

The same goes for independent power supplier IPSA, which presumably earned extraordinary profits after the sale of turbines (in a bid to raise working capital).

 - Finweek

To view the Extraordinary Items Table, click here
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