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

Notes

 

1

Basis of preparation

 

These preliminary summarised 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 2018, and further comply with the SAICA Financial Reporting Guides, as issued by the Accounting Practices Committee and the Financial Reporting pronouncements as issued by the Financial Reporting Standards Council. These summarised consolidated financial statements contain the minimum information as required by IAS 34 – Interim Financial Reporting, and comply with the Listings Requirements of the JSE Limited and the requirements of the Companies Act, No 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 2018, were consistent with those applied in the prior year’s audited consolidated annual financial statements. These accounting policies comply with IFRS.

     

R million

Audited
2018
Audited
2017

2

Operating profit

Operating profit includes:
– Cost of sales (excluding depreciation and amortisation) 6 999 6 309
– Other expenses (expenses excluding depreciation and amortisation) 1 976 1 859
– Other income 82 30
– Fair value gain on contingent purchase consideration 100*
– Depreciation and amortisation 157** 138**
– Included in other expenses above are:
– Realised loss on foreign exchange and derivative instruments (99) (20)
– Unrealised gain on foreign exchange and derivative instruments 21 1
– Auditors’ remuneration 25 24

3

Net interest income and dividends

Interest income and dividends 60 113
Interest expense (40) (43)
Interest on unwinding of put option liability (9) (5)
Total 11 65
* Includes routine movements of R23 million and a non routine movement of R77 million arising from the SkyWire fair value remeasurement.
**

Depreciation and amortisation allocated to cost of sales in gross margin calculations is R 51 million (2017: R57 million). Depreciation and amortisation allocated to other expenses is R106 million (2017: R81 million).

 

R million

Audited
2018
Audited
2017

4

Empowerment transactions

IFRS 2 share-based payment cost of BBBEE transactions** 32 20
Professional costs related to BBBEE transactions 10
Taxation thereon
Net empowerment transactions after taxation 42 20

5

Number of shares and earnings used to calculate earnings1 per share

Weighted average number of shares in issue, net of treasury and empowerment shares, used to determine basic earnings, headline earnings and normalised headline earnings per share (millions of shares) 161 164
Adjusted by the dilutive effect of unexercised share options granted (millions of shares) 3 2
Weighted average number of shares used to determine diluted basic, headline and normalised headline earnings per share (millions of shares) 164 166

6

Headline earnings

6.1 Profit attributable to equity holders of Reunert 1 158 1 112
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 R5 million and non-controlling interest (NCI) portion of Rnil) (2017: tax and NCI of Rnil) (23) (1)

Headline earnings

1 135 1 111
** Included in the prior year charge is a donation to an empowerment structure for R1 million.
1 The earnings used to determine earnings per share and diluted earnings per share are the profit for the year attributable to equity holders of Reunert of R1 158 million (2017: R1 112 million). (Refer to the statement of profit or loss.)
     

R million

Audited
2018
Audited
2017
6.2 Normalised headline earnings1
Headline earnings 1 135 1 111
Normalised headline earnings are determined by eliminating the effect of the following items from headline earnings:
Empowerment transactions 42 20
Once-off IFRS 2 share-based payment cost of BBBEE transactions (tax and NCI of Rnil) (2017: tax and NCI of Rnil) 32 19
Professional fees for BBBEE transactions (tax and
NCI of Rnil) (2017: tax and NCI of Rnil)
10
Once-off donation to empowerment structure (2017: tax and
NCI of Rnil)
1
Acquisition transactions (68) 9
Recurring professional fees for acquisitions
(tax and NCI of Rnil) (2017: tax and NCI of Rnil)
9 9
Once-off contingent consideration fair value remeasurement
(tax and NCI of Rnil) (2017: tax and NCI of Rnil)2
(77)

Normalised headline earnings

1 109 1 140
1 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 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 2018, the revised SAICA guide on pro forma financial information and the Listings Requirements of the JSE Limited. There are no post-balance sheet events that necessitate 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. 2 In respect of SkyWire (refer to note 10). At year end the contingent purchase consideration was adjusted to R16 million, resulting in a fair value remeasurement gain of R77 million. This is disclosed in EBITDA in the statement of profit or loss.
2 In respect of SkyWire (refer to note 10). At year end the contingent purchase consideration was adjusted to R16 million, resulting in a fair value remeasurement gain of R77 million. This is disclosed in EBITDA in the statement of profit or loss.

7

Goodwill

Carrying value at the beginning of the year 921 737
Acquisition of businesses1 (Note 10) 146 171
Adjustment to goodwill on finalisation of acquisition made
in prior financial year
33
Disposal of a controlling interest in a subsidiary (12)
Disposal of businesses (9)
Exchange differences on consolidation of foreign subsidiaries (14) 1
Carrying value at the end of the year 1 053 921

8

Long-term borrowings

Total long-term borrowings (including finance leases) 100 84
Less: short-term portion (including finance leases) (18) (11)
82 73
1 At 30 September 2018, the purchase price allocation of the acquisitions made in 2018 have not been finalised and therefore the amounts reported are provisional and subject to change.
     

R million

Audited
2018
Audited
2017

9

Put option liability

As part of the Terra Firma and Ryonic acquisitions, the group granted put options in favour of the non-controlling shareholders for 25% of the issued share capital. During the current year the Ryonic put obligation was re-negotiated and settled.
A reconciliation of the closing balance is as below:
Balance at the beginning of the year 121
Raised at acquisition at fair value 116
Fair value remeasurements (9)
Payment to option holder (Ryonic) (1)
Unwinding of discount 9 5

Balance at the end of the year

120 121

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 the 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. These forecasts are based on management’s best estimate of the revenue and NPAT likely to be achieved in 2020.
> The earnings multiples are as stipulated in the sales and purchase agreement.
> The discount rate applied was 8%, being the average cost of borrowing.

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 R2 million respectively.

   

R million

Audited
2018

10

Acquisition of businesses

During the current period the group made the following acquisitions:
> SkyWire Proprietary Limited: With effect from 1 March 2018, the group acquired 100% of the business and related assets of SkyWire, a provider of broad band connectivity, in an asset transaction. The R146 million in goodwill arising from the acquisition is attributable to the expected high growth in this business and the ability to harvest significant synergies through the ICT segment’s distribution network. As the ICT segment in the Reunert group is seeking to diversify its product offerings, and its existing services depend on reliable high-speed data connections, SkyWire data-access products provide a natural extension of the segment’s service offering. Synergies will also be obtained from the vertical integration with the group’s other businesses in the ICT Segment. A contingent purchase consideration amounting to R93 million was raised on acquisition1. This is disclosed in note 13.
205
> Dopptech Proprietary Limited: With effect from 1 March 2018, the group acquired 100% of the share capital of Dopptech Proprietary Limited. An intangible asset of R51 million was valued on acquisition attributable mainly to the customer relationships in key geographic regions not accessible to the group as well as patents currently in use. The company has a well-developed R&D capability in electro-mechanical engineering that will assist with product development within the Applied Electronics segment. A contingent purchase consideration amounting to R17 million was also raised on acquisition. This is disclosed in note 13.
20
> Other transactions:
 
  During the current year the group increased its holding in Terra Firma Solutions Proprietary Limited from 51% to 54,38%.
1
  The group purchased the remaining 25,1% of Ryonic Robotics Proprietary Limited from the existing non-controlling shareholder.
4
Direct cash cost 230
Net borrowings acquired on acquisition 3
Net cash flows on acquisition of businesses 2 233
Contingent purchase considerations 110

Total purchase consideration

343
1 This contingent purchase consideration was finalised and remeasured to R16 million at the financial year end (refer to note 6).
2 Reflected in the statement of cash flows in the following lines:
 
– gross cash flows on acquisition of business R228 million
– incorporated as part of net transactions with non-controlling interests R4 million
– exercise of Ryonic put option R1 million
 

R million

Audited
2018
Gross assets acquired and liabilities taken over:
Property, plant and equipment and intangible assets 235
Inventory 2
Receivables 2
Payables (1)
Deferred taxation (46)
Goodwill 146
Non-controlling interests 1
Transactions with non-controlling interests 3
Put option liability 1

Net assets acquired

343
Revenue since acquisition 71
Profit after taxation since acquisition 1 1
Revenue for the 12 months ended 30 September 2018 as though the acquisition dates had been 1 October 2017 119
Profit after taxation for the 12 months ended 30 September 2018 as though the acquisition dates had been 1 October 2017 2 2
The value of uncollectible accounts receivable at acquisition was negligible.

2017

Refer to 2017 published results.
1 Includes the after tax effect of R13 million of additional depreciation and amortisation since acquisition. The additional depreciation and amortisation relate to the revalued plant and equipment and intangible assets on acquisition.
2 Includes the after tax effect of R22 million of depreciation and amortisation as noted in 1 above had the acquisition been 1 October 2017.

11

Unconsolidated subsidiary

The financial results of Cafca Limited (Cafca), a 70%-owned subsidiary of the company, incorporated in Zimbabwe, have not been consolidated into the group results as the group does not exercise management control because it does not have the ability to affect its variable returns through its powers over Cafca.

This is supported by:
> Reunert having 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 an ongoing liquidity constraint which impairs Reunert’s ability to repatriate the economic benefits from Cafca (e.g. dividends).
The amounts involved are not material to the group’s results.

At 30 September 2018, Cafca’s share capital and reserves amounted to US$16 million (2017: US$15 million) after the declaration in 2018 of a dividend of US$3.5 million. Reunert has applied for the repatriation of its portion of the dividend, but permission has not yet been received. If permission is not received, the cash proceeds will be re-advanced to the company as a shareholder loan.

 

12

Related party transactions

R million
Counterparty

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 2018

         
CBI-electric Telecom Cables Proprietary Limited A joint venture 2 5
Oxirostax Proprietary Limited (Nashua Winelands) An associate 16 2
Bargenel Investments Proprietary Limited Owns 18,5m Reunert shares 276
Lexshell 661 Investment Proprietary Limited A joint venture 5

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

 

     

R million

Audited
2018
Audited
2017

13

Contingent purchase considerations

As part of the acquisitions of SkyWire and Dopptech (note 10), the group recognised contingent purchase considerations on these acquisitions as follows:
Balance at the beginning of the year
Transfer from provisions 1 27
Raised at acquisition at fair value (SkyWire and Dopptech) 110
Fair value remeasurements (100)

Balance at the end of the year2

37
1 In 2018, the Omnigo purchase consideration was transferred to the contingent consideration category under trade and other payables. The acquisition of SkyWire and Dopptech in 2018 resulted in additional contingent consideration for the current year. Refer to note 10. Due to the materiality of the amounts on acquisition of these businesses, all contingent considerations have been separately disclosed.
2 The balance of the contingent purchase consideration have been included in ‘Accounts payable, provisions and taxation’ on the balance sheet.
These were classified as level 3 instruments in the fair value hierarchy based on the following unobservable inputs: For Omnigo, the fair value of the contingent purchase consideration is determined using a cash flow valuation technique and is based on earnings multiples stipulated in the purchase agreement.

The contingent purchase consideration for Omnigo was determined as 40% of the expected excess of profit before interest and tax (PBIT) exceeding a 25% return on expected average capital employed during the year.

The amount is assessed on an annual basis using forecasted average capital employed and PBIT. The discount rate used is 9,1% (Jibar plus 2%).

For SkyWire, the contingent consideration is based on a defined business plan according to which the company has to achieve certain predefined strategic tasks and objectives within 12 months of the acquisition date. The discount rate used is 9,1% (Jibar plus 2%).

For Dopptech, the contingent consideration is fixed and stipulated within the purchase agreement.

 

14

Litigation

There is no material litigation being undertaken against or by 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.

15

Events after reporting date

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

16

Audit opinion

These summarised consolidated financial statements were derived from the consolidated financial statements and are consistent in all material respects with the group’s consolidated financial statements. The directors take full responsibility for the preparation of the summarised consolidated financial statements. The auditors, Deloitte & Touche, have issued unmodified audit opinions on the consolidated financial statements and on these summarised consolidated financial statements for the year ended 30 September 2018 and the audit opinions and consolidated financial statements are available for inspection at Reunert’s registered office. The audit was conducted in accordance with the International Standards on Auditing. The auditor’s report does not necessarily report on all information contained in this announcement. Shareholders 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 together with the accompanying financial information from Reunert’s registered office. Any reference to future performance included in this announcement has not been reviewed or reported on by the auditors.