Unaudited Interim Financial Report and Cash Dividend Declaration for the 6 months ended 31 March 2016

Notes

1

Basis of preparation

 

These preliminary condensed consolidated financial statements have been prepared in compliance with the framework concepts and the recognition and measurement requirements of International Financial Reporting Standards (IFRS) in effect for the group at 30 September 2017, and further comply with the SAICA Financial Reporting Guides, as issued by the Accounting Practices Committees and the Financial Reporting pronouncements as issued by the Financial Reporting Standards Council. These condensed consolidated financial statements contain the minimum information as required by IAS 34 – Interim Financial Reporting, and complies with the Listings Requirements of the JSE Limited and the requirements of the Companies Act, 71 of 2008, of South Africa. This report was compiled under the supervision of NA Thomson CA(SA) (chief financial officer).


The group’s accounting policies applied for the year ended 30 September 2017 were consistent with those applied in the prior year’s audited consolidated annual financial statements. These accounting policies comply with IFRS.

     
R million
  Reviewed
2017
Audited
2016

2

Operating profit

Operating profit includes:
– Cost of sales 6 366 5 402
– Other expenses excluding depreciation and amortisation 1 759 1 710
– Other income 30 45
– Realised (loss)/gain on foreign exchange and derivative instruments (20) 26
– Unrealised gain/(loss) on foreign exchange and derivative instruments 1 (16)
– Auditors’ remuneration   24 21

3

Net interest income and dividends

Interest income and dividends 113 164
Interest expense   (48) (27)
Total   65 137

4

Empowerment transactions

IFRS 2 share based payment cost of
BBBEE transaction*
20 113
Taxation thereon  
Net empowerment transactions after taxation   20 113
* Included in the current year charge is a donation to create an empowerment structure for R1 million.
     
R million/millions of shares
Reviewed
2017
Audited
2016

5

Number of shares and earnings used to calculate earnings per share

Weighted average number of shares in issue used to determine basic earnings, headline earnings and normalised headline earnings per share (millions of shares) 164 165
Adjusted by the dilutive effect of unexercised share options granted (millions of shares)   2 2
Weighted average number of shares used to determine diluted basic, headline and normalised headline earnings per share (millions of shares) 166 167
Profit attributable to equity holders
of Reunert
1 112 954

6

Headline earnings

6.1 Profit attributable to equity holders of Reunert 1 112 954
Headline earnings are determined by eliminating the effect of the following items from
attributable earnings:
Net gain on disposal of assets (after a tax charge of Rnil and non-controlling interest (NCI) portion of Rnil) (2016: tax charge of R2 million,
NCI of Rnil)
(1) (20)
Impairment of intangible asset (tax and NCI of Rnil) (2016: tax credit of R3 million and
NCI of R2 million)
  8

Headline earnings

  1 111 942
 
     
R million
Reviewed
2017
Audited
2016
6.2 Normalised headline earnings*
Headline earnings 1 111 942
Normalised headline earnings are determined by eliminating the effect of the following items from headline earnings:
Empowerment transactions 20 113
Once off IFRS 2 share-based payment cost of BBBEE transactions (tax and NCI of Rnil) (2016: tax and NCI of Rnil) 19 113
Once off donation to create empowerment structure (tax and
NCI of Rnil)
1
Recurring merger and acquisition costs (tax and NCI of Rnil)
(2016: tax and NCI of Rnil)
9 39

Normalised headline earnings

1 140 1 094

* The pro forma financial information above has been prepared for illustrative purposes only to provide information on how the normalised earnings adjustments might have impacted on the financial results of the group. Because of its nature, the pro forma financial information may not be a fair reflection of the group’s results of operation, financial position, changes in equity or cash flows.

The summarised pro forma financial effects have been prepared in a manner consistent in all respects with IFRS, the accounting policies adopted by Reunert Limited as at 30 September 2017, the revised SAICA guide on pro forma financial information, and the Listings Requirements of the JSE Limited.

There are no post-balance sheet events which require adjustment to the pro forma financial information. The directors are responsible for compiling the pro forma financial information on the basis of the applicable criteria specified in the JSE Listings Requirements.

The pro forma financial information should be read in conjunction with the unmodified Deloitte & Touche independent reporting accountants’ reasonable assurance report thereon, which is available for inspection at the company’s registered office.

7

Goodwill

Carrying value at the beginning of the year 737 653
Acquisition of businesses1 171 90
Adjustment to goodwill on finalisation of acquisition made in
prior year
33
Disposal of a controlling interest in a subsidiary (12)
Disposal of businesses (9)
Exchange differences on consolidation of foreign subsidiaries 1 (6)
Carrying value at the end of the year 921 737
1At 30 September 2017, the purchase price allocation of the acquisitions made in 2017 have not been finalised and therefore the amounts reported are provisional and subject to change.
     

R million

Reviewed
2017
Audited
2016

8

Put option liability

As part of the Terra Firma and Ryonic acquisitions, the group has granted put options in favour of the non-controlling shareholders for 25% of the issued share capital, in both cases.
A reconciliation of the closing balance is as below:
Balance at the beginning of the year
Raised at acquisition at fair value 116
Fair value remeasurements
Unwinding of interest expense 5
Balance at the end of the year
121
The obligations were classified as level 3 instruments in the fair value hierarchy.

For Terra Firma, the fair value of the put option liability has been determined using a discounted cash flow valuation technique and is based on multiples stipulated in the sales and purchase agreement. Significant unobservable inputs include:

The 2020 forecast revenue and net profit after tax (NPAT) have been used. This forecast is based on management’s best estimate of the revenue and NPAT likely to be achieved in 2020.
The multiples stipulated in the sales and purchase agreement.
The discount rate of 8%, being the average cost of borrowing.

The put option for Ryonic is immaterial.

If the key unobservable inputs to the valuation model being estimated were 1% higher/lower while all the other variables were held constant, the carrying amount of the put option liabilities would decrease/increase by R3 million respectively.

   

9

Long-term borrowings

Total long-term borrowings (including finance leases)2 84 272
Less: short-term portion (including finance leases) (11) (229)
73 43
2In 2016, these borrowings included R200 million in respect of the Quince rental book, which was repaid in May 2017.
   

R million

Reviewed 2017

10

Acquisition of businesses
During the current year, the group obtained control over the following entities through the acquisition of a majority interest in the equity shares:
Nanoteq Proprietary Limited: With effect from 1 October 2016, the group acquired 100% of the share capital of Nanoteq Proprietary Limited. The acquisition and related goodwill of R69 million is attributable to the synergies from the vertical integration with the group’s other businesses in the Applied Electronics segment.
95
Terra Firma Solutions Proprietary Limited: With effect from 1 March 2017, the group accounted for its acquisition of 51% of the share capital of Terra Firma Solutions Proprietary Limited. The acquisition and related goodwill of R88 million is attributable to the expected high growth in this business and the ability for the group to diversify into new products and geographical areas. The following options exist: a call option in favour of Reunert Limited for a further 9% (exercisable in September 2018); and a put at the option of the non-controlling interests for 25% (exercisable in either September 2019 or September 2020), which if all are exercised, will increase the group’s holding of Terra Firma’s share capital to 85%. At the reporting date, it is estimated that the fair value of the call option is Rnil and the fair value of the put option is R112 million. A put obligation liability has been recognised in non-current liabilities with a corresponding entry to equity. Refer to note 8.
102
Ryonic Robotics Proprietary Limited: With effect from 1 March 2017, the group accounted for its acquisition of 74,9% of the share capital of Ryonic Robotics Proprietary Limited. The acquisition and related goodwill of R14 million is attributable to the ability of the group to leverage its interest in Ryonic into new products and geographical areas in the rapidly advancing field of robotics, automation, machine learning and autonomous machine control. A put option has been granted in favour of the non-controlling interests for some or all of the non-controlling interest’s equity in the company. The put option is exercisable at any time after the fifth anniversary of the effective date of the acquisition. At the reporting date, it is estimated that the fair value of the put option is R9 million. A put obligation liability has been recognised in non-current liabilities with a corresponding entry to equity. Refer to note 8.
21
Cost of investments 218
Net borrowings acquired on acquisition 23
Gross cash flows on acquisition of businesses 241
Non-controlling interest* 14
Total funding of acquisitions
255
* Non-controlling interests have been recognised using the proportionate share basis.
   

R million

Reviewed
2017
Gross assets acquired and liabilities taken over:
Property, plant and equipment and intangible assets 82
Non-current receivables 2
Inventory 4
Gross accounts receivable and taxation** 69
Short-term borrowings (7)
Deferred taxation (10)
Accounts payable, provisions and taxation (56)
Goodwill 171
Net assets acquired
255
Revenue since acquisition 170
Profit after taxation since acquisition 19
Revenue for the 12 months ended 30 September 2017 as though the acquisition dates had been 1 October 2016 270
Profit after taxation for the 12 months ended 30 September 2017 as though the acquisition dates had been 1 October 2016 29
** The value of uncollectible debtors receivable at acquisition was negligible.
Change made to prior year acquisition accounting
Metal Fabricators of Zambia Plc (Zamefa): The goodwill arising on the 2016 acquisition of Zamefa was increased by R33 million due to the reassessment of the trade receivables at acquisition. There was no impact on the actual purchase price.
2016
Refer to 2016 published results.

11

Unconsolidated subsidiary
The financial results of Cafca Limited (Cafca), a subsidiary incorporated in Zimbabwe, have not been consolidated into the group results as the group does not exercise management control:
Reunert has not appointed a majority of the directors to the board of directors of Cafca and therefore does not control the board; and
the difficult economic circumstances in Zimbabwe have resulted in a major liquidity crisis which renders Reunert’s access to economic benefits from Cafca (e.g. dividends) such that it does not have the ability to affect its variable returns through its powers over Cafca.

The amounts involved are not material to the group’s results.

At 30 September 2017, Cafca’s share capital and reserves amounted to US$15 million.

12

Related-party transactions
Counterparty R million
Relationship
Sales
Purchases
Lease payments
Treasury shares
All related-party transactions, trading account and loan balances are on the same terms and conditions as those with non-related parties.
September 2017
          
CBI-electric Telecom Cables Proprietary Limited A joint venture 3 35
Oxirostax Proprietary Limited (Nashua Winelands) An associate 2 22
Bargenel Investments Proprietary Limited Owns 18,5m Reunert shares 276
Lexshell 661 Investment Proprietary Limited A joint venture 1
September 2016
CBI-electric Telecom Cables Proprietary Limited A joint venture 1
Bargenel Investments Proprietary Limited Owns 18,5m Reunert shares 276
Lexshell 661 Investment Proprietary Limited A joint venture

13

Litigation
There is no material litigation being undertaken against the group. The group has made adequate provision against any cases where the group considers there are reasonable prospects for the litigation to succeed. The group has adequate resources and good grounds to defend any litigation it is aware of.

14

Events after reporting date
No events have occurred after the reporting date that require additional disclosure or adjustment to the results presented.

15

External auditors review opinion
Deloitte & Touche has issued its unmodified review report on the reviewed condensed consolidated financial statements for the year ended 30 September 2017. The review was concluded in accordance with ISRE 2410 – Review of Interim Financial Information performed by the independent auditor of the entity. A copy of their unmodified review report is available for inspection at Reunert’s registered office. The auditor’s review report does not necessarily report on all information contained in this announcement. Investors are, therefore, advised that in order to obtain a full understanding of the nature of the auditor’s engagement, they should obtain a copy of that report from Reunert’s registered office. Any reference to future performance included in this announcement has not been reviewed or reported on by the auditors.