1. INTEGRATED ANNUAL REPORT FOR THE 2016/17 FINANCIAL YEAR
PRESENTATION TO THE PORTFOLIO COMMITTEE ON TELECOMMUNICATIONS AND POSTAL SERVICES
5 OCTOBER 2017

2. Presentation Contents
Overview of SENTECH
Strategic Review
Highlights and Challenges
Network and Product Performance
Financial Performance Analysis
Governance
Risks Management
Strategic Priorities for the MTEF Period
Conclusion and Way Forward

3. Presentation Contents
Presenters
Presentation Contents
Mr. Magatho Mello
Chairperson of the Board
Mr. Mlamli Booi
Chief Executive Officer
Mr. Siphamandla Mthethwa
Chief Financial Officer
Ms. Jacqueline Huntley
Audit and Risk Committee Member

4. Overview of SENTECH and Strategic Review

5. SENTECH’S VISION, MISSION AND VALUES

6. Overview of SENTECH
SENTECH is mandated is to provide communications infrastructure to the broadcasting and telecommunications industries. The company is responsible for the development and operation of vital infrastructure which provides broadcasting, wireless broadband and shared capacity services to a wide range of customers.
SENTECH currently owns and operates 938 FM radio transmitters, 620 Analogue TV transmitters, 280 Digital TV transmitters and various satellite platforms.
SENTECH provides signal / content transmission / distribution services to most of the country’s broadcasters which include the Public Broadcaster, Commercial and Community Broadcasters.
SENTECH also provides telecommunications connectivity to government departments and state owned companies.
SENTECH provides a satellite based Direct-to-Home (DTH) platform and a facilities leasing service to various customers.
SENTECH adheres to five core values that serve as a compass for its actions and decision-making processes. Serving as a benchmark for excellency, these values are designed to position SENTECH SOC Limited as a company focused on delivering to its clients a service that focuses on the following:
Social Responsibility
Integrity
Quality Customer Service
Innovation
Accountability

7. Organisational Strategy
The strategy considers the need for revenue growth in the context of technology disruptions, the future of broadcasting, changing consumer behaviour and socio-economic transformation imperatives.
It is centred on the Seven Strategic Pillars, namely, growth, innovation, customer focus, culture change, efficiency, transformation and reputation.

8. Business Model
The Board has reviewed SENTECH’s Business Model to ensure that the Company is prepared for the converged digital communications ecosystem.
The current business model puts more emphasis on across-the-board research, development and innovation; the products and services are focused in three categories, namely, Content and Multimedia Services, Infrastructure Management Services and Connectivity Services

9. Performance Against Objectives (including highlights and challenges)

10. Highlights All 9 KPIs (100%) set out for the year were achieved;
Achieved a clean audit for 5 consecutive years;
Customer Satisfaction Index improved to 76%;
Network Availability improved to 99,88%;
Disaster Recovery Site in Nasrec, Johannesburg built and commissioned ;
13,72% of the profits spent on socio economic and supplier development activities;
93% of training interventions implemented; and
Stable financial position with acceptable levels of liquidity and solvency ratios.

11. Challenges
Sluggish economic growth and weak ZAR/US$ exchange rate which, amongst other things, caused the marginal increase in revenue for the year and lower profitability;
Shortfall in the funding of dual illumination which impacted profitability for the year;
Level 4 B-BBEE Rating which is due mainly to the introduction of new ICT B-BBEE sector codes in November 2016;
Community broadcasters and some commercial broadcasters continue to face challenges of sustainability and as a result the company has raised a doubtful debts provision of R28 million for the year; and
A single major customer of the company started to experience cash flow challenges towards the end of the financial year and this has continued in the post reporting period. A payment arrangement is in place and is being closely monitored by Exco and the Board.

12. Achieved/Not achieved
Performance Against Strategic Objectives
Strategic Objective
KPI
Annual Target
Actual Performance
Achieved/Not achieved
Ensure universal access of the digital broadcasting signal distribution network
Disaster recovery (DR) and business continuity (BC) center established
Build and commission disaster recovery capability sites planned for the financial year.
All disaster recovery capability sites planned for the 2016/17 financial year
built and commissioned
Achieved
Ensure network availability meets SLA requirements across all platforms
Weighted average
availability based on product revenues
availability based on product revenues of
99.80%
99.88%
Improve customer satisfaction
Customer service index
Baseline +5%
A baseline of +5% or 76% was achieved
Achieve a high performance culture and effective talent management
Performance ratings achieved
Average employee performance score of 3.2 achieved
Average employee performance score of 3.83 achieved
% Training Plan implemented
80% of the 2016/17 approved
training plan interventions implemented
93.3% of the approved
training plan implemented

13. Performance Against Strategic Objectives (continued..)
KPI
Annual Target
Actual Performance
Achieved/Not achieved
Revenue
diversification into international markets
Develop and implement
Pan-African
Strategy
Business Case
Completed
Achieved
Implement ESD and SED
initiatives
% actual NPAT spent for the 2016/17 financial year
6% of actual NPAT spent for the 2016/17 financial year
13.72% of actual NPAT spent for the 2016/17 financial year
Implement effective internal control systems and compliance with applicable legislation
Clean audit achieved
Clean Audit Achieved
Maintain a healthy EBIT
Earnings before interest and tax
R5.22 million
R33.95 million

14. Product and Network Performance

15. Product Mix/Revenue Contribution
2017
2016
C&MS
IMS CS
Other % 87 5 7 1 86 9
Figure 15: Revenue Contribution per Product
The Content and Multimedia Services (“C&MS”) currently account for 87% of SENTECH’s revenue base, while Infrastructure Management Services (“IMS”) accounts for 5% of revenue, with the smallest contributor being Connectivity Services (“CS”) at 1%.
Overall revenue increased by 5% from the previous year mainly because of growth in network expansions on the signal distribution side; however this is expected to flatten in the following financial year as growth will be constrained by the availability of frequencies for FM and the migration from analogue to digital terrestrial television.

16. Network Performance for the year…
100
99.9
99.8
99.7
99.6
99.5
99.4
99.3
99.2
Terrestrial
FM Radio
Medium
Short Wave
Satellite
99.87
99.84
99.89
99.93
99.97
Targeted Network Performance
Actual Network Performance

17. Financial Statement Analysis – including audit findings

18. Financial Performance drivers
Broadcasting signal distribution
Television and Radio
Facilities leasing
Leasing capacity on all national sites
Broadband Connectivity

19. Financial Summary Description Year ended 31 March 2017 R’000
Turnover
Gross profit
Gross profit margin %
19%
28%
30%
Normalized EBIT (excluding shortfall in dual illumination funding)
Dual illumination funding shortfall
(69 506)
(30 441) -
EBIT
33 955
EBIT margin % 3%
17%
15%
Net profit
Cash generated from operations
Cash balances
Net asset value
Solvency ratio
9:1
7:1
4:1
Liquidity ratio
6:1
5:1
3:1

20. Financial Summary – (continued..)
Financial Highlights R’000
Revenue
Net Profit
Cash
Balances
Net Asset
Value
2017
2016
2015

21. Profitability Analysis
Profitability in the 2016/17 financial year was impacted by the following:
Revenue – Overall revenue increased by 5% from the previous year mainly because of growth in network expansions on the signal distribution side
Expenditure – The weak ZAR/US$ exchange rate increased the satellite rental costs and other imported input costs in the business. In addition some and overdue critical preventative maintenance was done during the year.
Dual Illumination – There was a shortfall of R69 million in the funding for the year
Doubtful debtors provision – A provision of R28 million was raised for the debt of community broadcasters and some commercial broadcasters.
Depreciation on revalued assets – The company’s assets were revalued in the 2015/16 financial and a result additional depreciation R20 million was recorded in the 2016/17 financial year.

22. Cash flow analysis
The cash balances have remained above R800 million over the last 3 financial years. Cash generated from operations declined in 2016/17 due to mainly the following:
Weak ZAR/US$ exchange rate
Lower revenues
Preventative maintenance expenditure
Non payment by community broadcasters and some commercial customers and
Funding of dual illumination
Despite the above , the company has managed to fund all of the capital expenditure from cash generated from the business over the years.

23. Financial position analysis
The company remains in a strong financial position. The net asset value of the company (total assets less total liabilities) increased by over R100 million to R1,7 billion due to the profits made during the year.
A significant portion of the company’s assets is made up of buildings, broadcasting infrastructure, technology equipment and cash.
The company had no external debt in the balance sheet at the end of the financial year.

24. Financial Outlook Into the Future
The company is on a solid foundation and is able to manage challenges posed by the prevailing economic climate.
Innovative ways of sustaining business growth, such as new content delivery platforms, are under development in our R&D environment.
The company will continue to streamline processes, strengthen business development, execute capital projects aimed at growing revenue, contain costs and diversify revenue.
Volatile currency and slow economic growth will continue to have an impact on the performance of the company going forward.
Challenges facing community broadcasters and one of the major customers are anticipated to continue at least for another year and they will closely be monitored by the Board and management.
 In the medium to long term , the company will pursue opportunities in the African continent, identify possible acquisitions and grow the managed infrastructure business.
A long term funding plan will be reviewed in the light of the funding requirements for the growth of the business.
Much improved performance is expected in the 2017/18 financial year.

25. Financial Outlook – MTEF Plan
Details
31 March 2018
R’000
31 March 2019
31 March 2020
Revenue
Cost of Sales
( )
( )
( )
Gross Profit
Operating Expenses (total)
( )
( )
( )
Adjustment for dual illumination
EBIT (Continuing Operations)
Dual illumination shortfall -
( )
( )
EBIT (including dual illumination)
(14 000)
(24 663)
Cash generated from operations
36 816
73 892
83 476
Cash balances
Capital expenditure

26. Management Responses and Intervention
Audit findings and planned interventions
Key Finding Areas
Root Causes
Management Responses and Intervention
General Information Technology controls weaknesses
User access administration controls on SAP: non-compliance with established user account management procedures, segregation of duty conflicts, generic user profiles and excessive number of administrator accounts on SAP.
Weaknesses in design and implementation: backups; and physical and environmental controls in the server room.
SAP reports inconsistent with the master data on the system.
Vacancy at senior management leading to:
General controls weaknesses.
Inadequate review of policies and procedures.
Filling of the vacancy at senior management was underway. The IT Head has been appointed in the first quarter of the 2016/17 f/y. 
Review policies and procedure manuals to ensure compliance.
Incorporate non-compliance into the departmental scorecard and monitor progress.
Financial internal controls weaknesses
Lack of decision making by senior management on key transaction: billing and failing credit checks.
Lack of regular reconciliations: prepayments, accounts payable, clearing accounts and payroll balances.
Lack of controls to address cut-off: finalization of billing reports.
Lack of documented processes and decisions.
Poor basic accounting skills.
Accountability.
Review process flow and regular reporting on non-compliance / deviations.
Training programs on key accounting principles and regular review of implementation of controls.
Controls are part of performance measure (KPI).
Review and update process for identifying transactions – monthly reporting.
Non-compliance and consequences management
Supply Chain Management: Demand Management Plan insufficiently designed, validity of B-BBEE before points awarded, period of adverts and procurement of stock items.
Human Resources: standby hours limit and pre-approval of overtime.
Poor planning. Inadequate record keeping.
Outdated documented processes.
Accountability. Policies and processes not adequately consulted.
Align the plan with the three years’ Corporate Plan.
Review procurement processes to clarify position.
Incentivize employees to keep records through performance management.
Review policies and processes.
Monthly exception reporting for non-compliance.
Revise approval templates to improve documentation.

27. Governance and Review by Audit and Risk Committee (including stakeholder relationship management)

28. Board Structures Board Chairperson: Mr. Magatho Mello
Social and Ethics Committee:
Chairperson: Ms. Jackie Huntley
Audit and Risk Committee:
Chairperson: Mr. Seth Radebe
Technology, Policy and
Regulatory Committee:
Chairperson: Mr. Lumko Mtimde
Human Resources:
Nominations and
Remuneration Committee:
Chairpersons: Ms Xoliswa Daku and
Ms. Lungi Ndlovu
SENTECH embraces governance principles and practices that are underpinned by an independent and diverse Board striving to ensure the creation of value in a manner that is sustainable for its stakeholders. The Board has ultimate accountability and responsibility for the performance and affairs of SENTECH and ensures that SENTECH adheres to high standards of ethical behavior. Governance at SENTECH entails a culture committed to sound processes and procedures, which goes beyond legal compliance and ensures sustainability long after a law and its iterations have been implemented.
In terms of the SENTECH Act, the Board shall consist of three executive directors and at least four non-executive directors, who are all appointed by the Minister. Board Committees facilitate the discharge of responsibilities and provide in-depth focus, oversight and guidance on specific areas, and report to the board through their respective chairpersons. The Company Secretary assists the Committee chairpersons with drafting the reports which they present to the Board. To this end, the Board has established four Board Committees, set out above.

29. Audit and Risk Committee (“ARC”) Report
External Audit:
The ARC is responsible for recommendation of appointment and oversight over the external auditors of the Company. During the year, the ARC, amongst other things:
Approved the 2015/16 draft AFS;
Recommended the 2015/16 Integrated Report to the Board;
Recommended re-appointment of the external auditor to the Board for approval by the Shareholder Representative at the AGM;
Considered the External Audit Strategy for the year ending 31 March 2017, with specific reference to the proposed audit scope, methodology and fee; and
Reviewed a report from the external auditor concerning the effectiveness of the Company’s internal control environment and ICT Governance.
Internal Audit
The ARC receives reports from Internal Audit on adequacy and effectiveness of internal controls and assesses the effectiveness of the IAF.
During the year, amongst other things ARC:
Approved the 2016/17 Internal Audit Plan and Rolling Three-Year Plan;
Considered the effectiveness of the internal audit function;
Considered Internal Audit Quarterly Reports relating to the effectiveness of the Company’s internal control environment, systems and processes together with the adequacy and appropriateness of the Management’s related corrective action plans; and
Reviewed and approved the Internal Audit Charter.
Risk Management
The ARC owns the risk management policy of the Company, and oversees that both risks and opportunities are appropriately identified, monitored, managed and appropriately provisioned within the Company’s defined risk appetite. During the year ARC recommended the following for approval by the Board:
Risk Management Reporting Framework;
Risk Management Plan;
Combined Assurance Plan; and
Risk appetite and tolerance levels.

30. Stakeholder expectation
Stakeholder Relationship Management
Stakeholder expectation
Issues
Actions on the issues
Shareholder - DTPS
ICT development and contribution to economic growth
Achievement of strategic goals
Timeous and quality reporting
Government Focus Week
International delegation
Rationalization of SOCs within the DTPS
Missed quarterly targets on the Annual Performance Plan
Supported the Minister and Deputy Minister in advancing the ICT development agenda
Bilateral agreements
SENTECH submitted its input on the SOC rationalization
SENTECH has achieved its strategic objectives for the year
Participated in all the Minister and Deputy Minister public participation programs
Government - DoC
Broadcast industry development and contribution to economic growth
DTT network roll-out
The impact of the dual illumination funding shortfall on SENTECH’s financial resources
Escalated the budget shortfall to DTPS and funding was allocated by DTPS
Support of DTT awareness campaigns with other BDM stakeholders
Process of stabilizing the network for DTT commercialization
Employees (staff compliment of 550)
Conducive, empowering
and fair working environment
Establish an Employee Equity and Skills Development Forum
Improve employee engagement score (2015: 6.59)
An Employment Equity and Skills Development Committee has been established
Employee engagement score improved from 6.59 in 2015 to 6.91 in 2016
Customers
Excellent customer services
and value for money
Response times to customer queries within agreed SLA
Improve turnaround times on operational processes

31. Stakeholder Relationship Management (continued…)
Stakeholder profile
Stakeholder expectation
Issues
Actions on the issues
Suppliers
Collaboration and payment on time
Sustainability of their business enterprises
Lack of ICT SMME development and growth
The organization has identified SMMEs within the supplier database for early payment commitment. These SMMEs do not wait for the 30 days payment cycle, but are paid within 10 working days
The organization strives to ensure 95% of our suppliers are paid within 30 days.
The remaining 5% still experience delays due to non-compliance issues
A Supplier Demand Plan was developed, highlighting areas that require development
Various government agencies
Compliance, partnership and collaboration
Quarterly and annual performance reports are tabled in parliament successfully with limited adverse comments
Review of the National Radio Frequency Plan radio frequency bands allocated only to analogue sound broadcasting
Cordial relations are maintained at all material times
SENTECH engaged ICASA to extend the allocation of both DTT and DSB services
Public and the Media
Informed and consulted communities and leaders
Creation of shared value
Brand visibility
Land issues on sites
A brand audit and perception was commissioned to establish brand visibility and awareness baseline
Focused engagements with communities near operations to resolve overuse of land for sites
Union (CWU)
Consultation and involvement in decision-making that affects workers
Review of policies and migration of employees in the bargaining unit to hay grading system
Ongoing consultation and engagement between management and labour on issues that have an impact on employees

32. Risk Management Review – Key risks
Unsuitable policy and regulatory framework that threaten business sustainability
Sustainability of suppliers or service providers
Complexity of DTT migration
This risk involves the migration process as well as the ASO and dual illumination.
Ageing Infrastructure
This is due to technology obsolescence and the delayed Analogue Switch Off.
Cyber attacks
The risk of cyber criminals hacking into SENTECH systems.
Inadequate physical security
SENTECH sites are mostly in remote locations and this exposes these sites to theft and vandalization.
Unavailability of reliable energy to run efficient operations
Foreign exchange
SENTECH is exposed to foreign exchange rates fluctuations.
Lack of a dynamic workforce to take SENTECH into the future

33. Strategic Priorities for the MTEF period

34. Sustainability Sustainability:
Business sustainability is generally understood to mean managing economic, environmental and social demands and concerns, the aim being to ensure responsible, ethical and ongoing success.
In relation to SENTECH, sustainability refers to the ability of the business to continue providing services to its customers for the long term, whilst contributing to a healthy environment and being socially responsible.
SENTECH will continue with the implementation of the ‘Six Capitals’ as defined in the Company’s Sustainability Plan. These Six Capitals are financial, manufactured, natural, human, social and relationship, and intellectual capitals.
Emphasis will be placed on business expansion and new product innovation to ensure financial sustainability. Transformation, as a social capital, will also receive greater attention to advance social and economic transformation of society.

35. Human Capital Human Capital :
The primary focus of the strategy is to position SENTECH as an employer of choice by creating a healthy organisational climate that allows for the attraction and retention of employees who have the required capabilities and competencies to support a high-performance organisation. The following strategic deliverables are aligned with SENTECH’s strategic objectives and key challenges:
Transformation practices;
Employee value proposition;
Strategic workforce planning;
Stakeholder engagement and improvement;
Organisational culture and change management;
Employee health, wellbeing and safety;
Human resources service delivery model;
Leadership excellence;
People analytics and management information system.
Talent management;
Performance management;
Skills development;

36. South African-Based Pan-African Satellite
SENTECH is expected to play a leading role in the development of the South African-based Pan-African satellite. The satellite is expected to cover the Southern African Development Community (SADC) and support broadcast requirements, and broadband initiatives and targets, as well as other initiatives such as e-education, e-health, and e-government in respect of SADC countries.
The project will also stimulate economic growth, job creation and citizen development in the region.
with the support of government through the DTPS, SENTECH is planning to develop a Business Plan, Project Plan and Funding Proposal in the first year of the MTEF for sanction by government so that implementation of the project can proceed.
The Project Plan will determine time allowed for design, construction and launch of the satellite once the project is sanctioned.  

37. DTT Commercialisation
SENTECH is participating in the national effort of commercialising the DTT network across the country. The initiatives include creation of awareness and enhancing customer experience through optimising the DTT platform.
In the first year of the MTEF SENTECH will focus on supporting DTT uptake and creating value-added applications for DTT.
National consumer-viewing households will provide user feedback on the DTT network quality.
In line with the policy framework and international trends, SENTECH will be implementing digital-to-digital migration to free spectrum and allow use for other purposes, particularly broadband connectivity.
SENTECH will be extending its Research and Development Laboratory to include a receiver conformance regime to support DTT migration in South Africa and across Africa.

38. Conclusion and Way Forward
Overall positive performance for the year , given the difficult trading conditions.
Achieved a clean audit with 100% performance against predetermined KPIs.
The MTEF Period will be challenging, which means that there will more focus on sustainability of the business. The activities to improve the sustainability of the business include:
Implementation of the Pan African Strategy;
Consideration of acquisitions;
Growing the Facilities Leasing and Connectivity businesses; and
Continuation of the cost containment initiatives.
Pan African Satellite project will be a major focus area as this is a strategic project not just for SENTECH but for the country.
Corporate governance remains at high standard and this will continue.
Developing our people and improving stakeholder relationships remains a priority.

39. QUESTIONS AND DISCUSSION…