Remgro Limited – 2009 Audited consolidated results

Comments

1. ACCOUNTING POLICIES

The annual financial statements are prepared on the historical cost basis, unless otherwise indicated, in accordance with International Financial Reporting Standards (IFRS), including IAS 34: Interim Financial Reporting, and in accordance with the requirements of the Companies Act (No. 61 of 1973), as amended, and the Listings Requirements of the JSE Limited.

These financial statements incorporate accounting policies that have been consistently applied to both years presented, with the exception of the implementation of IFRS 8: Operating segments and the amendments to IFRS 7: Financial Instruments disclosure and IAS 1 (revised): Presentation of financial statements. The adoption of the new accounting standard and amendments to IFRS only affected disclosure and had no impact on the results of either the current or prior years.

2. CHANGE IN ACCOUNTING ESTIMATE

During the year under review Tsb Sugar Holdings (Pty) Limited (Tsb Sugar) changed its valuation methodology relating to biological agricultural assets. In terms of IAS 41: Agriculture, these assets should be measured, on initial recognition and at the end of each reporting period, at its fair value less costs to sell. The change in the valuation methodology resulted from improved management information being available and is consequently treated as a change in accounting estimate with only prospective application.

The financial effect on the carrying value of biological agricultural assets on 31 March 2010 and on profit attributable to equity holders for the year then ended is as follows:

Increase in the value of biological agricultural assets:   R53 million
Increase in profit attributable to equity holders:              R34 million

3. COMPARISON WITH PRIOR YEAR

With effect from 3 November 2008 the investment in BAT was distributed to Remgro shareholders as an interim dividend in specie. For the year ended
31 March 2009 the investment in BAT was accordingly still equity accounted for the seven months to 31 October 2008, which distorts year-on-year comparisons.

However, year-on-year comparisons of headline earnings and headline earnings per share from continuing operations can be made.

4. RESULTS

Headline earnings
For the year to 31 March 2010 headline earnings decreased by 28.0% from R4 660 million to R3 355 million, while headline earnings per share decreased by 30.1% from 987.7 cents to 690.1 cents.

In order to facilitate year-on-year comparison, headline earnings and headline earnings per share are also presented for continuing operations, which excludes the equity accounted income of BAT, as well as all non-recurring costs relating to the unbundling, as set out in the following table.

 

    Year ended 31 March
 

2010 

 2009 
 

R’m 

 R’m 
Headline earnings as reported

3 355 

 4 660 
Equity accounted income of BAT

– 

 (2 211)
STC on the BAT unbundling

– 

 686 
Other non-recurring costs relating to the unbundling

– 

 33 
Headline earnings from continuing operations

3 355 

 3 168 
Headline earnings per share as reported (cents)

690.1 

 987.7 
Headline earnings per share from continuing operations (cents)

690.1 

 671.5 

Headline earnings from continuing operations increased by 5.9%, from R3 168 million to R3 355 million, while headline earnings per share from continuing operations increased by only 2.8% from 671.5 cents to 690.1 cents due to the dilutive effect of issuing ordinary shares for the acquisition of VenFin.

Contribution to headline earnings
 

Year ended 31 March
      Excluding BAT  Including BAT 
 

2010 

 %  2009  2009 
 

R’m 

 change  R’m  R’m 
Tobacco interests

– 

   –  2 295 
Financial services

1 355 

 (14.0) 1 576  1 576 
Industrial interests

1 982 

 50.4  1 318  1 318 
Media interests

17 

   –  – 
Mining interests

96 

 (41.5) 164  164 
Technology interests

13 

   –  – 
Other investments

(64)

 20.0  (80) (80)
Central treasury

57 

 (79.5) 278  194 
Other net corporate costs

(101)

 (14.8) (88) (807)
 

3 355 

 5.9  3 168  4 660 

Refer to Annexures A and B for segmental information. The headline earnings “Excluding BAT” presented above represent headline earnings from continuing operations.

The acquisition of VenFin necessitated the introduction of two new reporting groups, “Media interests” and “Technology interests”. A third new reporting group, “Other investments” was also created. In order to facilitate year-on-year comparison, the information presented for the comparative year has been adjusted accordingly.

The following commentary, comparing the results to those of the previous year, is based on headline earnings from continuing operations only.

The combined contribution of FirstRand and RMBH to Remgro’s headline earnings from financial services amounted to R1 355 million (2009: R1 576 million). The decrease of 14.0% can be attributed mainly to an increase in bad debts in the retail lending business of the banking division as well as to equity trading losses.

The contribution of the industrial interests to headline earnings increased by 50.4% to R1 982 million (2009: R1 318 million). Kagiso Trust Investment’s (KTI) contribution to headline earnings amounted to R128 million (2009: R139 million loss). KTI’s results were impacted by favourable fair value adjustments amounting to R20 million (2009: R368 million unfavourable) relating to its shareholding in Metropolitan Holdings Limited. Total South Africa’s contribution to headline earnings amounted to R42 million (2009: R25 million loss). The improved performance of Total South Africa is mainly due to a more stable international oil price than in 2008, resulting in lower stock revaluation losses. Rainbow reported improved results with its contribution to Remgro’s headline earnings amounting to R259 million (2009: R235 million). Medi-Clinic’s contribution to headline earnings amounted to R460 million (2009: R288 million). This substantial increase is due to improved operating results, as well as non-recurring items amounting to R176 million (Remgro’s share being R81 million). Distell and Unilever’s contribution to headline earnings amounted to R274 million and R279 million respectively (2009: R304 million and R231 million). Tsb Sugar’s contribution to headline earnings amounted to R227 million (2009: R188 million). This increase is mainly due to a change in the valuation methodology of its biological agricultural assets, resulting in an increase in profit of R34 million.

Media interests consist primarily of the interest in Sabido that was previously held by VenFin. Sabido’s contribution to Remgro’s headline earnings for the three months to March 2010 amounted to R11 million.

Mining interest’s contribution to headline earnings decreased by 41.5% to R96 million (2009: R164 million). Dividends received from Implats amounted to R85 million (2009: R346 million), while Remgro’s share of the results of Trans Hex amounted to R11 million (2009: R182 million loss). It should be noted that with effect from 30 November 2009 the investment in Trans Hex was reclassified as an investment “held for sale” and consequently Trans Hex was only equity accounted for the eight months to 30 November 2009.

Technology interests primarily represent the interest in the CIV group of companies that was acquired with VenFin. For the year under review the CIV group was only equity accounted for the three months to March 2010 and contributed R7 million to Remgro’s headline earnings.

The contribution of other investments to headline earnings improved by R16 million to a loss of R64 million (2009: R80 million loss). Business Partners’ contribution to headline earnings amounted to R12 million (2009: R28 million), while losses amounting to R79 million were equity accounted from the investment in Xiocom (2009: R108 million loss). Xiocom was sold in March 2010.

Lower interest rates as well as lower average cash balances resulted in a decrease in the contribution from the central treasury division of R221 million. It should be noted that foreign currency profits amounting to R50 million were realised on the repatriation of R&R dividends in the comparative year. The increase in other net corporate costs to R101 million (2009: R88 million) is mainly due to the inclusion of VenFin’s corporate costs.

Earnings
Total earnings decreased by 93.2% to R3 060 million (2009: R45 330 million), mainly as a result of the capital gain amounting to R40 805 million realised on the unbundling of the investment in BAT in the comparative year.

During the year under review Remgro made an impairment provision amounting to R168 million in respect of three investments, i.e. PGSI, KIEF and Premier Team Holdings, as their carrying values exceeded their estimated recoverable amounts. In the comparative year an impairment provision amounting to R438 million was made in respect of the investments in Dorbyl, Trans Hex and PGSI.

5. INTRINSIC VALUE

Remgro’s intrinsic value per share at 31 March 2010 was R121.64 compared to R99.15 on 31 March 2009. Refer to Annexure B for full details. The intrinsic value per share on Friday, 18 June 2010 was R120.21.

 

6. INVESTMENT ACTIVITIES

The most important investment activities during the year under review were as follows:

Acquisition of VenFin Limited (VenFin)
On 23 November 2009 the VenFin acquisition was finalised resulting in Remgro issuing 41 626 619 shares at a price of R89.25 per share to VenFin shareholders.

For the year ended 31 March 2010 only VenFin’s associates and joint ventures with March and September year-ends have been equity accounted for the three months from 1 January 2010 to 31 March 2010. The most significant of these investments are Sabido Investments (Pty) Limited (Sabido) and the CIV group of companies that includes the investment in Dark Fibre Africa (Pty) Limited. From 1 April 2010 all VenFin’s investee companies will be equity accounted annually for a full twelve-month period.

In terms of IFRS 3: Business Combinations the purchase price of R3 715 million was allocated to investments in associated companies amounting to R2 986 million and other investments and loans of R485 million, while the balance was allocated to other net assets acquired. Intangible assets amounting to R698 million were identified within Sabido, SEACOM and Tracker as part of the accounting for the acquisition of VenFin. The amortisation of these assets will result in an additional annual charge of R35 million against headline earnings.

For the year under review, the results of VenFin included in Remgro’s reported results were immaterial and consisted of headline earnings from investee companies of approximately R53 million and after-tax corporate costs of approximately R16 million. Based on the assumption that the acquisition was effective on 1 April 2009, it is calculated that VenFin’s headline earnings for the full year would have amounted to approximately R117 million.

Capevin Holdings Limited (Capevin Holdings) and Capevin Investments Limited (Capevin Investments)
During the year under review Remgro acquired 4 034 692 shares in Capevin Investments (9.6% shareholding) and 38 551 857 shares in Capevin Holdings (8.6% shareholding) for a total consideration of R389.3 million. These acquisitions effectively increased Remgro’s indirect interest in Distell by 4.1% to 33.3% (31 March 2009: 29.2%).

The investment in Capevin Investments was originally classified as a financial instrument “available-for-sale” and dividend income amounting to R7.3 million was accounted for in the income statement during the year under review. Going forward both of these investments will be equity accounted for the twelve months to December each year.

PG Group of Companies (PGSI)
PGSI is the foreign holding company of the Plate Glass group. During June 2009, in participation of a rights offer, Remgro invested a further R171.1 million in PGSI, being represented by an equity investment amounting to R41.5 million and an investment in convertible redeemable preference shares amounting to R129.6 million. The term of the preference shares is five years and it has an effective dividend yield of 7.6%.

During March 2010, PGSI made another rights offer in terms of which Remgro invested an initial R13.6 million in PGSI. The rights offer will be implemented in two tranches and Remgro is to invest a further R13.6 million during June 2010. The shareholders of PGSI simultaneously agreed to provide a standby facility amounting to R150 million to PGSI. Remgro’s portion of the facility amounts to R44 million and the facility will expire on 27 December 2011. On 31 March 2010 Remgro’s interest in PGSI, on a fully diluted basis, was 25.2% (31 March 2009: 25.0%).

Tsb Sugar Holdings (Pty) Limited (Tsb Sugar)
With effect from 3 August 2009 Tsb Sugar acquired the Pongola sugar mill from Illovo Sugar Limited for R180.0 million. For the eight months since acquisition the Pongola sugar mill contributed R248 million to turnover, while an operating loss of R46 million, before interest and tax, was reported.

Xiocom Wireless, Inc. (Xiocom)
During the 2008 financial year Remgro acquired a 37.5% interest in Xiocom. During the year under review Remgro invested a further $7.1 million in Xiocom, increasing the total investment to $35.8 million. The company underperformed during this time.

During the second half of the financial year it was decided to exit the investment in Xiocom and in March 2010 it was sold for a nominal amount. In addition to equity accounting for a headline loss of R79.2 million in the current financial year, an after-tax capital loss of R13.5 million was also realised on this transaction.

Kagiso Trust Investments (Pty) Limited (KTI) and the Kagiso Infrastructure Empowerment Fund (KIEF)
During the 2007 financial year, Remgro entered into agreements with KTI and KIEF, in terms of which it committed funds amounting to R350 million to KIEF. The fund has a target size of R650 million and aims to invest in infrastructure projects, including roads, airports, power and telecommunication installations, railway systems, ports, water and social infrastructure. During the year under review Remgro invested a further R19.1 million in KIEF. By 31 March 2010, Remgro had invested R94.2 million of the R350 million committed.

Events after year-end:

FirstRand Limited (FirstRand) and RMB Holdings Limited (RMBH)
On 31 March 2010 FirstRand announced that it has reached an agreement with Metropolitan Holdings Limited (Metropolitan) to dispose of all of FirstRand’s ordinary shares in its wholly owned subsidiary, Momentum Group Limited, in consideration for Metropolitan ordinary shares. It is anticipated that FirstRand will hold approximately 59.5% of the issued share capital of the merged entity. FirstRand has further advised that, following the proposed merger, it intends to unbundle its entire shareholding in the merged entity to its ordinary shareholders. The transaction is subject to the fulfilment of a number of conditions precedent prior to 31 October 2010.

At the same time RMBH announced that it is exploring a number of restructuring steps to realign its investment portfolio and to enhance shareholder value. These steps include the possible separation of RMBH’s insurance and banking interests that could result in a separate listing of these interests. Further announcements regarding the above will be made by FirstRand and RMBH once detailed information becomes available.

Trans Hex Group Limited (Trans Hex)
On 21 June 2010 the Remgro Board approved the unbundling of the investment in Trans Hex to its shareholders. Remgro shareholders are referred to the separate Terms Announcement released on SENS on 21 June 2010 that provides more detail regarding the proposed unbundling. A circular containing full detail of the intended unbundling will be posted to shareholders during July 2010.

Since year-end the following investments were made:

Business Partners – Further equity investment of R77.7 million (Remgro’s interest on a fully diluted basis: 28.7%).

KTI and KIEF – Further amount of R74.7 million invested, thereby increasing the amount already invested to R168.9 million of the R350 million committed.

Dark Fibre Africa (Pty) Limited – Equity investment of R9.7 million, as well as the granting of a loan facility of R85.1 million in terms of which R53.1 million has already been advanced.

Capevin Holdings – Further equity investment amounting to R19.1 million, thereby increasing Remgro’s indirect interest in Distell to 33.4% (31 March 2010: 33.3%).

7. TREASURY SHARES

At 31 March 2009, 3 500 000 Remgro ordinary shares (0.8%) were held as treasury shares by a wholly owned subsidiary company of Remgro. As previously reported, these shares were acquired for the purpose of hedging the new share appreciation rights scheme that was implemented subsequent to the unbundling of the investment in BAT during November 2008.

During the year under review no Remgro ordinary shares were repurchased, while 75 956 Remgro ordinary shares were utilised to settle Remgro’s obligation towards scheme participants who exercised share appreciation rights granted to them.

At 31 March 2010, 3 424 044 Remgro ordinary shares (0.7%) were held as treasury shares.

8. CASH RESOURCES AT THE CENTRE

The Company’s cash resources at 31 March 2010 were as follows:
 

Local 

Offshore 

Total 

 2009 
 

R’m 

R’m 

R’m 

 R’m 
Per consolidated statement of financial position

1 372 

2 455 

3 827 

 5 050 
Investment in money market funds

- 

1 812 

1 812 

 1 578 
Less: Cash of operating subsidiaries

(937)

(40)

(977)

 (661)

Cash at the centre

435 

4 227 

4 662 

 5 967 

On 31 March 2010, approximately 43% (R1 812 million) of the available offshore cash at the centre was invested in money market funds which are not classified as cash and cash equivalents on the statement of financial position.

 

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