Shares in technology distribution group Alviva Holdings – whose assets include IT distributors Pinnacle and Axiz – tumbled more than 25% in intraday trading in Johannesburg on Friday after it shocked investors with a poor trading update.

Headline earnings for the six months ended 31 December will plunge by between 39% and 46%, or to between R115-million and R130-million. Headline earnings per share are expected to fall by between 33% and 41%, with core earnings per share to fall by between 21% and 31%.

Core EPS is measured using headline earnings adjusted for the amortisation charge of intangible assets recognised on business combinations and expenses incurred in the acquisition of these entities.

“The company has produced disappointing results for the period, mainly as a result of the performance of the distribution segment,” Alviva said in a trade update published via the JSE’s stock exchange news service.

“This segment has been affected by the tough economic environment, operating challenges with its new ERP system, minor losses on forex positions compared to profits in the prior period, and changes in the go-to-market strategy adopted by a large vendor, all of these in approximately equal measure,” it said.

“The balance of the decrease in profitability has been brought about through the increase in the amortisation charges on intangible assets, further impairment charges on the loan to an associate, and the introduction of IFRS 16” accounting standards.

IFRS 16

The group adopted IFRS 16 with effect from 1 July 2019 whereby right-of-use assets and associated liabilities for its operating leases of equipment and properties have been recognised. “The nature of expenses related to those leases has changed as the group now incurs depreciation charges for the right-of-use assets and interest expenses on the lease liabilities. Previously, the group recognised operating lease expenses on a straight-line basis over the term of the leases,” it explained.

“The group has applied the modified retrospective approach whereby historic comparative information has not been restated. IFRS 16 has no impact on the income statement over the full lease term but is earnings dilutive towards the beginning of the relevant lease term and earnings enhancing towards the end of the lease term. The pre-tax effect on the profit for the six months ended 31 December 2019 was a decrease of approximately R9.9-million. The group is on average at the beginning stages of most of its leases and hence the reduction in all earning metrics in the current period. Cash outflows associated with the adoption of IFRS 16 regarding the payment of the lease obligations did not and will not change going forward.”