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

Notes

 

1

Basis of preparation

 

This unaudited interim financial report has been prepared in accordance with the framework concepts and the recognition and measurement requirements of International Financial Reporting Standards (IFRS) in effect for the group at 1 October 2018, and further complies 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. This interim financial report was prepared using the 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, 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 six-month period ended 31 March 2019, were consistent with those applied in the prior financial year’s audited consolidated annual financial statements, except for the impact of the first time adoption of IFRS 15: Revenue from Contracts with Customers and IFRS 9: Financial Instruments, the impact of which is set out in Note 15. These accounting policies comply with IFRS.

 

Six months ended 31 March

R million

2019 (Unaudited) 2018 (Unaudited) 30 September 2018 (Audited)

2

Revenue

Revenue from contracts with customers

Sale of goods 4 467 3 680 8 243
Services 465 726 1 488
Contract revenue 103 104 302

Other

Interest received on lease receivables 209 184 379
Rental and other revenue 44 147 80
Total 5 288 4 841 10 492

The Electrical Engineering segment earned the majority of its revenue in the sale of goods and services categories. The ICT segment earned revenue in each of the above categories. The Applied Electronics segment earned revenue in each category except for interest. Refer to the segmental analysis, for a disaggregation of the revenue contribution by each segment.


On adoption of IFRS 15 Revenue from Contracts with Customers, the revenue recognition relating to contracts and services has changed. Refer to Note 15.

Six months ended 31 March

R million

2019 (Unaudited) 2018 (Unaudited) 30 September 2018 (Audited)

3

Operating profit

Operating profit includes:
– Cost of sales (excluding depreciation and amortisation) 3 653 3 323 6 999
– Other expenses (excluding depreciation and amortisation) 963 903 1 976
– Other income 26 21 82
– Fair value gain on contingent consideration* 100
– Depreciation and amortisation** 83 69 157
Included in other expenses above are:
– Realised loss on foreign exchange and derivative instruments (11) (10) (99)
– Unrealised gain/(loss) on foreign exchange and derivative instruments 23 (11) 21
– Auditors’ remuneration 14 13 25
* For March 2019 and 2018, these amounts have been included in other income above due to their immateriality. September 2018 includes routine movements of R23 million and a non routine movement of R77 million arising from SkyWire.
** Depreciation and amortisation allocated to cost of sales in gross margin calculations is R30 million (2018: R27 million) (September 2018: R51 million). Depreciation and amortisation allocated to other expenses is R53 million (2018: R42 million) (September 2018: R106 million).
Six months ended 31 March

R million

2019 (Unaudited) 2018 (Unaudited) 30 September 2018 (Audited)

4

Net interest income and dividends

Interest income and dividends 23 31 60
Interest expense (22) (19) (40)
Interest on unwinding of put option liability (5) (4) (9)
Total (4) 8 11

5

Empowerment transactions

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

6

Number of shares and earnings used to calculate earnings per share1

Weighted average number of shares in issue, net of empowerment and treasury shares,used to determine basic earnings, headline earnings and normalised headline earnings per share (millions of shares) 161 162 161
Adjusted by the dilutive effect of unexercised share options granted (millions of shares) 3 3 3
Weighted average number of shares used to determine diluted basic, headline and normalised headline earnings per share (millions of shares) 164 165 164
1 The earnings used to determine earnings per share and diluted earnings per share is the profit for the period attributable to equity holders of Reunert, as per the statement of profit or loss, of R366 million (2018: R445 million) (September 2018: R1 158 million).
Six months ended 31 March

R million

2019 (Unaudited) 2018 (Unaudited) 30 September 2018 (Audited)

7

Headline earnings

7.1 Headline earnings
Profit attributable to equity holders of Reunert 366 445 1 158
Headline earnings are determined by eliminating the effect of the following items from attributable earnings:
Net loss on disposal of subsidiary (after a tax charge of Rnil) (2018 Rnil) (September 2018 charge of Rnil) 44
Net gain on disposal of assets (after a tax charge of R1 million and non-controlling interest (NCI) portion of Rnil) (2018: tax and NCI of Rnil) (September 2018: tax charge of R5 million and NCI of Rnil) (2) (23)
Headline earnings# 408 445 1 135
7.2 Normalised headline earnings
Normalised headline earnings are determined by eliminating the effect of the following items from headline earnings:
Empowerment Transactions 2 42
Once-off IFRS 2 share based payment cost of BBBEE transactions (tax and NCI of Rnil) (March and September 2018: tax and NCI of Rnil) 32
Professional fees for BBBEE transactions (tax and NCI of Rnil) (March and September 2018: tax and NCI of Rnil) 2 10
Acquisition transactions (68)
Recurring professional fees for acquisitions (tax and NCI of Rnil) (March and September 2018: tax and NCI of Rnil) 9
Once-off contingent consideration fair value remeasurement (tax and NCI of Rnil) (March and September 2018: tax and NCI of Rnil)* (77)*
Normalised headline earnings 408 447 1 109
# 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 operations, 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.
* In respect of the SkyWire acquisition in 2018.
Six months ended 31 March

R million

2019 (Unaudited) 2018 (Unaudited) 30 September 2018 (Audited)

8

Goodwill

Carrying value at the beginning of the period 1 053 921 921
Acquisition of businesses 183 146
Disposal of business (Note 11) (62)
Exchange differences on consolidation of foreign subsidiaries (16) (14)
Carrying value at the end of the period 991 1 088 1 053

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.
A reconciliation of the closing balance is as below:
Balance at the beginning of the period 120 121 121
Fair value remeasurements (9)
Payment to option holder (Ryonic) (1)
Unwinding of discount 5 4 9

Balance at the end of the period

125 125 120
The obligations were classified as level 3 instruments in the fair value hierarchy.

The Terra Firma obligation represents the fair value of the put option liability which has been determined using a discounted cash flow valuation technique 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 8.25%, 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.

During the prior financial year the Ryonic put obligation was re-negotiated and settled.
Six months ended 31 March

R million

2019 (Unaudited) 2018 (Unaudited) 30 September 2018 (Audited)

10

Long-term borrowings

Total long-term borrowings (including
finance leases)
67 80 100
Less: short-term portion (including finance leases) (1) (11) (18)
66 691 82
1 Included in March 2018 is a share based payment liability of R15 million. From September 2018 this liability has been separately disclosed on the balance sheet.

R million

2019 (Unaudited)

11

Disposal of business

During the current period the group made the following disposal:
> Prodoc Svenska AB: With effect from 26 March 2019 the net assets and business of Prodoc Svenska AB, were sold at the fair value less cost to sell of R37 million.
Net assets disposed:
Property, plant and equipment and intangible assets 4
Goodwill 62
Rental and finance lease receivables 26
Inventory 32
Deferred tax 2
Trade and sundry receivables 79
Trade and sundry payables (102)
Foreign currency translation reserve 10
Non controlling interests (13)
Long term borrowings (26)
Short term portion of long term borrowings (15)
Book value of net assets disposed of 59
Consideration received: 15
Cash received on sale 37
Less: cash on hand (22)
Loss on sale of business (net of taxation of Rnil) 44

2018

The group made no disposals in the prior period.

12

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 (eg dividends).
The amounts involved are not material to the group’s results. At 31 March 2019, Cafca’s share capital and reserves amounted to US$17 million (March 2018: US$17 million).

13

Related party transactions

R million
Counterparty

Relationship

Sales

Purchases

Lease payments

Treasury shares

Amount owed to related parties

All related-party transactions, trading account and loan balances are on the same terms and conditions as those with non-related parties.

March 2019

CBi-electric Telecom Cables Proprietary Limited
Cables Proprietary Limited
A joint venture 1 30 7
Oxirostax Proprietary Limited (Nashua Winelands) An associate 8 1
Bargenel Investments Proprietary Limited Owns 18,5m Reunert shares 276
Lexshell 661 Investment Proprietary Limited A joint venture 5 7

March 2018

CBi-electric Telecom
Cables Proprietary Limited
A joint venture 1
Oxirostax Proprietary Limited (Nashua Winelands) An associate 8 5
Bargenel Investments Proprietary Limited Owns 18,5m Reunert shares 276
Lexshell 661 Investment Proprietary Limited A joint venture

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 4

14

Contingent purchase considerations

As part of the acquisitions of SkyWire and Dopptech undertaken in the prior year, the group recognised contingent purchase considerations on these acquisitions as follows:
Six months ended 31 March

R million

2019 (Unaudited) 2018 (Unaudited) 30 September 2018 (Audited)
Balance at the beginning of the period 37
Transfer in from provisions1 27 27
Raised at acquisition at fair value (SkyWire and Dopptech) 111 110
Fair value remeasurements (2) (11) (100)
Balance at the end of the period2 35 127 37
1 In 2018, the Omnigo purchase consideration was transferred from provisions to the contingent consideration category under trade and other payables. The acquisition of SkyWire and Dopptech in 2018 resulted in additional contingent consideration. Due to the nature of the amounts on acquisition of these businesses, all contingent considerations are now separately disclosed.
2 The balance of the contingent purchase consideration have been included in ‘Accounts payable, provisions and taxation’ on the balance sheet.
The balance of the contingent purchase consideration relates to R17 million for Dopptech, R16 million for SkyWire and R2 million for Omnigo.

14

Contingent purchase considerations continued

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 period.
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.

15

Change in accounting policy

IFRS 15 replaces both IAS 11 and IAS 18 as well as SIC 31, IFRIC 13, IFRIC 15 and IFRIC 18 and establishes a comprehensive framework for recognition of revenue from contracts with customers. Revenue is recognised when a customer obtains control of the goods or services. Determining the timing of the transfer of control – at a point in time or over time – requires a certain level of judgement.

On application of IFRS 15, the following material changes and considerations have been made:

Revenue category

Nature of material considerations and changes in accounting policy

Contract revenue Due to the change in considerations for the recognition of revenue under IFRS 15, revenue relating to certain contracts have been recognised taking into consideration an appropriate allocation of revenue to multiple performance obligations.
Service revenue The adjustment includes consideration relating to time value of money, and changes in the measure of progress.

IFRS 9 – Financial Instruments

IFRS 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items.

This standard replaces IAS 39: Financial Instruments: Recognition and Measurement.

Classification and measurement of financial assets

IFRS 9 has reduced the number of categories required for classification and measurement however the adoption of IFRS 9 has not had a material impact on the group’s accounting policies related to the classification and measurement of financial assets, financial liabilities and derivative financial instruments.

Impairment of financial assets

IFRS 9 replaces the ’incurred loss’ model in IAS 39 with an ‘expected credit loss’ (ECL) model.
The group has 2 types of financial assets that are subject to the new ECL model:
> trade receivables; and
> rental and finance lease receivables.
The group was required to revise its impairment methodology under IFRS 9 for each of these classes of assets. The impact of the change in impairment methodology on the group’s retained earnings is disclosed below.

Trade receivables

The group applies the IFRS 9 simplified approach to measuring ECL which uses a lifetime expected loss model for all trade receivables. ECLs are calculated by applying a loss ratio to the age analysis of trade receivables at each reporting date. The loss ratio is calculated according to the ageing/payment profile of sales by applying historic write-offs to the payment profile of the sales population.

Trade receivable balances have been grouped so that the ECL calculation is performed on groups of receivables with similar risk characteristics and ability to pay. The historic loss ratio is then adjusted for forward looking information to determine the ECL for the portfolio of trade receivables at the reporting date.

Rental and finance lease receivables

The group applies the IFRS 9 general approach to measuring expected credit losses which uses a 12-month expected loss allowance. This is calculated by applying a loss ratio to the balance at each reporting date.

The loss ratio for the rental and finance lease receivables is calculated according to the ageing/payment profile by applying historic write-offs to the payment profile of the population.

The historic loss ratio is then adjusted for forward looking information to determine the ECL at the reporting date to the extent that there is a strong correlation between the forward looking information and the ECL.

Critical accounting judgements and assumptions

The ECL for financial assets is based on assumptions about risk of default and expected loss rates. The group uses judgement in making these assumptions and selecting the input to the impairment calculation, based on the group’s past history, existing market conditions, as well as forward looking estimates at the end of each reporting period.

IFRS 15 and IFRS 9 transition

The group has applied both IFRS 9: Financial Instruments and IFRS 15: Revenue from Contracts with Customers using the modified retrospective approach, by recognising the cumulative effect of initially applying IFRS 9 and IFRS 15 as an adjustment to the opening balance of equity at 1 October 2018.

Therefore the comparative information on the unaudited condensed group statement of financial position and unaudited condensed group statement of comprehensive income has not been restated for the adoption of these new standards and continues to be reported under the previously applied standards.
The following table shows the adjustments recognised for each individual line item. Line items that were not affected by the changes have not been included.

The effect of the IFRS 9 and 15 transition on the statement of financial position is as follows:

R million

IFRS 9
adjustments

IFRS 15
adjustments

Condensed consolidated statement of financial position

Non-current assets

Rental and finance lease receivables (19)
Deferred taxation 9 13

Current assets

Accounts receivable and taxation (20) (20)

Equity

Retained earnings (27) (29)
Non-controlling interests (3) (6)

Current liabilities

Accounts payable, provisions
and taxation
28
During the current period the impact of IFRS 9 on the statement of profit or loss and other comprehensive income was a R16 million increase in the profit for period (R12 million net of taxation).

16

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.

17

Events after reporting date

Subsequent to 31 March 2019, Zamefa, the group’s Zambian energy cable manufacturer,
became technically insolvent due to the rapid depreciation of the Zambian Kwacha against
the United States Dollar (the currency in which a significant portion of Zamefa’s liabilities are denominated). The group continues to support Zamefa and has subordinated such portion of its US$ 20m loan to Zamefa as is required to restore the technical solvency of Zamefa in favour of Zamefa’s other creditors.