Due to Remgro being an investment holding company, traditional measurements of performance, such as sales or gross profit, are not meaningful criteria for evaluating the Group’s performance. However, management uses “headline earnings“, “intrinsic net asset value“ and “cash at the centre“ to evaluate the performance of the Group on a continuous basis and hence these concepts are used throughout the Integrated Annual Report to provide shareholders with a better understanding of our results.
For the year to 30 June 2017, headline earnings increased by 40.0% from R5 874 million to R8 221 million, while headline earnings per share (HEPS) increased by 32.7% from 1 119.6 cents to 1 485.5 cents. The difference in the increase between headline earnings and HEPS is attributed to the impact of the rights issue during the year under review.For the year to 30 June 2017, headline earnings increased by 40.0% from R5 874 million to R8 221 million, while headline earnings per share (HEPS) increased by 32.7% from 1 119.6 cents to 1 485.5 cents. The difference in the increase between headline earnings and HEPS is attributed to the impact of the rights issue during the year under review.
Included in headline earnings for the comparative year are once-off transaction costs incurred with the Mediclinic International Limited (Mediclinic) rights issue and Al Noor Hospitals Group plc (Al Noor) transaction amounting to R788 million (“once-off costs”), as well as a negative fair value adjustment of R730 million, relating to the increase in value of the bondholders’ exchange option of the bonds (“option remeasurement”). The year under review includes a positive fair value adjustment of R687 million. Excluding these items, headline earnings increased by 1.9% from R7 392 million to R7 534 million, while HEPS decreased by 3.4% from 1 409.0 cents to 1 361.3 cents. The increase in headline earnings, excluding once-off costs and option remeasurement, is mainly due to higher contributions from the banking and insurance platforms, KTH and higher interest income, partly offset by lower earnings from RCL Foods and higher finance costs.
COMMENTARY ON REPORTING PLATFORMS’ PERFORMANCE
Mediclinic’s contribution to Remgro’s headline earnings amounted to R1 875 million (2016: R1 566 million), representing an increase of 19.7%. It should be noted that Mediclinic’s results for the comparative period include once-off transaction costs incurred with the Al Noor transaction amounting to R891 million (Remgro’s portion being R386 million). Excluding these once-off items Mediclinic’s contribution to Remgro’s headline earnings would have decreased by 3.9% from R1 952 million to R1 875 million. This decrease is mainly due to the strengthening of the rand against the British pound. In British pound terms Mediclinic’s contribution, excluding once-off transaction costs, increased by 8.2% mainly due to Remgro’s increased interest in Mediclinic (42.1% to 44.6%), the inclusion of the results of Al Noor and Spire Healthcare Group plc (Spire) for the full 12 months and a strong performance in Switzerland, as well as good organic growth in Southern Africa. The increase is partly offset by the underperforming Middle East business, which was impacted by a number of operational and regulatory factors, doctor vacancies and delayed facility openings.
The headline earnings contribution from the banking division amounted to R3 163 million (2016: R2 989 million), representing an increase of 5.8%. FirstRand and RMBH reported headline earnings growth of 6.1% and 5.7% respectively. On a normalised basis, which excludes certain non-operational and accounting anomalies, FirstRand and RMBH reported earnings growth of 7.1% and 6.6% respectively. These increases are mainly due to growth in both net interest income, underpinned by good growth in deposits and a positive endowment on the back of higher average interest rates, and non-interest revenue due to strong growth in fee and commission income at FNB and from realisations in RMB’s private equity portfolio at marginally higher levels. This growth in earnings was partly offset by an increase in credit impairment charges.
CONSUMER PRODUCTS The contribution from consumer products to Remgro’s headline earnings amounted to R1 354 million (2016: R1 605 million), representing a decrease of 15.6%. RCL Foods’ contribution to Remgro’s headline earnings decreased by 34.3% to R424 million (2016: R645 million). During the comparative period RCL Foods’ results were positively impacted by the release of a R163 million provision raised for uncertain tax disputes as part of the Foodcorp acquisition, as well as a R119 million gain on the exercise of the Zam Chick and Zamhatch put options. On a normalised basis, RCL Foods reported headline earnings growth of 7.7%. The Sugar business benefited from price increases which helped offset reduced volumes, while the Chicken business was impacted by a massive oversupply in the local market caused by local production and dumping of imported chicken. Unilever’s contribution to Remgro’s headline earnings decreased by 2.6% to R449 million (2016: R461 million). This decrease is mainly the result of lower tax allowances following the completion of manufacturing investments, as well as a weakening trade environment. Distell’s contribution to headline earnings, which includes the investment in Capevin Holdings, amounted to R481 million (2016: R499 million). Distell’s results were negatively impacted by a stronger rand, particularly against the British pound, as well as intense competition and pressure on consumers. Distell reported headline earnings growth, adjusted for foreign exchange movements, at 7.4%.
|Headline earnings (R million)||8 221||5 874||40.0|
|– per share (cents)||1 485.5||1 119.6||32.7|
|Headline earnings, excluding once-off costs and option remeasurement (R million)||7 534||7 392||1.9|
|– per share (cents)||1 361.3||1 409.0||(3.4)|
|Earnings (R million)||8 431||5 364||57.2|
|– per share (cents)||1 523.4||1 022.4||49.0|
|Dividends per share (cents)|
|Intrinsic net asset value per share (Rand)||251.48||306.44||(17.9)|
contribution to headline earnings by reporting platform
|R million||Year ended
|Healthcare||1 875||19.7||1 566|
|Banking||3 163||5.8||2 989|
|Consumer products||1 354||(15.6)||1 605|
|Media and sport||(58)||(61.1)||(36)|
|– Finance income||349||179.2||125|
|– Finance costs||(903)||(3.6)||(872)|
|– Option remeasurement||687||194.1||(730)|
|Other net corporate costs||(143)||43.0||(251)|
|Headline earnings||8 221||40.0||5 874|
|Headline earnings, excluding once-off costs and option remeasurement||7 534||1.9||7 392|
Refer to the composition of headline earnings here for further information.
RMI Holdings’ contribution to headline earnings increased by 17.2% to R1 041 million (2016: R888 million). On a normalised basis, RMI Holdings reported an increase of 16.4% in earnings mainly due to OUTsurance and Discovery, which achieved earnings growth of 25.7% and 8.2% respectively. The strong result by OUTsurance was driven by favourable claims experienced across the group, as well as a significant improvement in the cost-to-income ratio, particularly at Youi due to scale benefits and cost efficiencies. With effect from 1 March 2017 RMI Holdings acquired a 29.9% stake in Hastings Group Holdings plc (Hastings), a fast-growing agile digital general insurance provider operating principally in the UK motor market. The contribution from Hastings were partially offset by higher funding costs relating to the acquisition.
Total’s contribution to Remgro’s headline earnings amounted to R224 million (2016: R291 million). The decrease is mainly due to a lower refining margin. Remgro’s share of the results of KTH amounted to a profit of R34 million (2016: loss of R229 million). In the comparative period, KTH’s results were negatively impacted by unfavourable fair value adjustments relating to its investments in Exxaro Resources Limited and MMI Holdings Limited preference shares. Air Products’ and Wispeco’s contribution to headline earnings amounted to R298 million and R169 million respectively (2016: R275 million and R144 million), while PGSI contributed R25 million to Remgro’s headline earnings (2016: R36 million).
Grindrod’s contribution to Remgro’s headline earnings amounted to a loss of R48 million (2016: a loss of R45 million). The increased loss is mainly due to the underperformance of the rail assembly businesses resulting from a lack in demand for locomotives, continued uncertainty in the mining sector and low levels of activity in Southern Africa. The increased loss is partly offset by an improvement in dry-bulk shipping rates and commodity markets, as well as the Agricultural businesses. For the year under review the CIV group contributed R110 million to headline earnings (2016: R64 million). This increase is mainly due to solid growth in annuity revenue. Remgro’s share of SEACOM’s loss amounted to R33 million (2016: loss of R33 million).
DIVIDEND COVER (HEPS: HEADLINE EARNINGS PER SHARE)
MEDIA AND SPORT
Media and sport primarily consist of the interests in eMedia Investments and various sport interests, including interests in rugby franchises, as well as the Stellenbosch Academy of Sport. eMedia Investments’ contribution to Remgro’s headline earnings increased to R49 million (2016: R28 million), mainly due to higher advertising revenue as a result of an improvement in market share. The increase is partly offset by higher business development costs, as well as continued investment into the multichannel business.
The contribution from other investments to headline earnings amounted to R70 million (2016: R67 million), of which Business Partners’ contribution was R54 million (2016: R48 million).
CENTRAL TREASURY AND OTHER NET CORPORATE COSTS
Finance income amounted to R349 million (2016: R125 million). This increase is mainly due to higher average cash balances as a result of the Remgro rights issue. Finance costs mainly consist of funding costs amounting to R893 million (2016: R466 million) and once-off transaction costs in the comparative period amounting to R402 million, which relate to the Mediclinic rights issue and Al Noor transaction. The positive fair value adjustment of R687 million relates to the decrease in the value of the exchange option of the exchangeable bonds (2016: negative fair value adjustment of R730 million). Other net corporate costs amounted to R143 million (2016: R251 million). The comparative period includes transaction and funding costs amounting to R115 million relating to Remgro’s acquisition of Spire. These costs were recouped from Mediclinic as part of the Spire disposal consideration, outside headline earnings.
Earnings increased by 57.2% to R8 431 million (2016: R5 364 million). This increase is mainly the result of the positive fair value adjustment relating to the decrease in value of the exchange option of the exchangeable bonds amounting to R687 million (2016: negative fair value adjustment of R730 million) and the once-off transaction costs in the comparative period amounting to R788 million, which relate to the Mediclinic rights issue and Al Noor transaction. The comparative period also includes an impairment of the investment in Grindrod (R1 861 million), Remgro’s portion of the impairments in Grindrod’s Rail and Shipping divisions (R577 million) and Remgro’s portion of an impairment in RCL Foods’ Milling business (R439 million), offset by a profit of R2 262 million realised on the dilution of Remgro’s interest in Mediclinic as part of the Al Noor transaction.
CASH AT THE CENTRE AND FOREIGN EXCHANGE RATES
On 30 June 2017 Remgro’s cash at the centre amounted to R12 223 million (2016: R3 778 million), of which 35% was invested offshore (2016: 55%). The cash is held in different currencies of which approximately 65% was held in SA rand, 32% in USA dollar and 3% in British pound.
During the year $188 million and £50 million was transferred from local cash to the offshore cash at a SA rand/USA dollar exchange rate of R13.83 and a SA rand/GBP exchange rate of R17.25 respectively. Foreign exchange losses amounting to R414 million (2016: R213 million) were accounted for during the year under review, mainly as a result of the strengthening of the SA rand against the USA dollar from R14.70 = $1.00 at 30 June 2016, to R13.11 = $1.00 at 30 June 2017. For accounting purposes these exchange movements are accounted for directly in equity.
Remgro’s offshore cash is earmarked for potential new investments and the expansion of existing offshore investments (USA dollar), as well as to service foreign debt (British pound).
During October 2016 Remgro completed a rights issue whereby 48 110 637 new ordinary shares and 3 550 635 new B ordinary shares were issued at a subscription price of R192.50 per share for a total consideration of R9 944.8 million. The offer to the ordinary shareholders was made in the ratio of 10 rights issue shares for every 100 ordinary shares held on the record date of the rights issue, representing an aggregate amount of R9 261.3 million. In order to maintain the current level of voting rights of Rupert Beleggings Proprietary Limited (Rupert Beleggings) in Remgro, and to contribute to the new equity capital being raised, Remgro offered Rupert Beleggings the right to subscribe for 3 550 635 B ordinary shares, representing an aggregate amount of R683.5 million. In terms of IAS 33 paragraph 26, an adjustment to the weighted average number of shares in issue for the comparative period is required as the shares were issued at a discount to the Remgro share price on the day before the announcement (being R243.29 per share). Consequently, the comparable weighted number of shares in issue was adjusted by 9 994 195 shares to account for the deemed dilutive effect of the rights issue.
On 13 January 2016 Remgro (through its wholly owned subsidiary, Remgro Healthcare Holdings Proprietary Limited (Remgro Healthcare)) issued fixed rate cumulative redeemable preference shares amounting to R3.5 billion to fund its participation in a Mediclinic International Limited rights issue as part of the Spire acquisition. These preference shares have a tenure of four years and the dividend rate is fixed at 7.7%, payable semi-annually.
The Al Noor transaction was funded with local bridge
financing of £200.0 million (or R4.3 billion), as well as foreign
bridge financing of £400.0 million. On 16 March 2016 Remgro
(through its wholly owned subsidiary, Remgro Healthcare) replaced the local bridge facility with newly issued fixed rate
cumulative redeemable preference shares amounting to
R4.4 billion. The preference shares have a tenure of five years
and a fixed dividend rate of 8.3%, payable semi-annually. On
22 March 2016 Remgro (through its wholly owned subsidiary,
Remgro Jersey GBP Limited) replaced £350.0 million of the
foreign bridge facility by issuing exchangeable bonds with a
tenure of five years and a fixed coupon rate of 2.625%, payable
semi-annually. The exchangeable bonds are exchangeable into
approximately 30.9 million Mediclinic shares and/or cash, and
the exchange price for the bonds is £11.3086 per Mediclinic
plc share, representing a 30% premium above the weighted
average price on the London Stock Exchange (LSE) between
launch and pricing of the bond offering. Upon exchange or
redemption of the bonds, Remgro will have the discretionary
right to deliver an amount in cash or shares or a combination
of cash and shares. The bonds were included for trading
on the open market (Freiverkehr) segment of the Frankfurt
Stock Exchange on 23 March 2016. During November 2016
Remgro repaid the remainder of the foreign bridge facility of £50.0 million.
|30 June 2017|
|R million||30 June
|USA dollar||294.6||13.1062||3 862||1 509|
|SA rand||7 968||1 737|
|12 223||3 778|
|Closing exchange rates|| 30 June
| 30 June
|Average exchange rates||Year ended
ZAR VS FOREIGN CURRENCIES REMGRO HOLDS
The final dividend per share was determined at 301 cents (2016: 275 cents). Total ordinary dividends per share in respect of the year to 30 June 2017 therefore amounted to 495 cents (2016: 460 cents).
The dividend is covered 3.0 times by headline earnings against 2.4 times the previous year.
INTRINSIC NET ASSET VALUE
Remgro’s intrinsic net asset value per share at 30 June 2017 was R251.48 compared to R306.44 on 30 June 2016. Refer to the Chief Executive Officer’s Report here for a detailed discussion regarding Remgro’s intrinsic net asset value and its relative performance with certain selected JSE indices.
The annual financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The accounting policies have been consistently applied to both years presented, with the exception of the adoption of the amendments to IAS 16: Property, Plant and Equipment and IAS 41: Agriculture. These amendments have to be applied retrospectively and, accordingly, the comparative results were restated as more fully set out in note 15 to the summary annual financial statements.
The Company has implemented a comprehensive Risk Management Policy that is based on the principles of the international COSO (Committee of Sponsoring Organisations of the Treadway Commission) Enterprise Risk Management – Integrated Framework and complies with the recommendations of King III. A comprehensive risk management structure furthermore ensures the effective and efficient management of risk within the Group.
Chief Financial Officer
COMPOSITION OF HEADLINE EARNINGS
|R million||Year ended
|Mediclinic||1 875||19.7||1 566|
|RMBH||2 232||5.7||2 112|
|RMI Holdings||1 041||17.2||888|
|Other infrastructure interests||7||(65.0)||20|
|Media and sport|
|Other media and sport interests||(107)||(67.2)||(64)|
|Finance costs(2)||(216)||86.5||(1 602)|
|Other net corporate costs||(143)||43.0||(251)|
|Headline earnings||8 221||40.0||5 874|
|Weighted number of shares (million)||553.4||5.5||524.6|
|Headline earnings per share (cents)||1 485.5||32.7||1 119.6|
|(1)||Includes the investment in Capevin Holdings Limited.|
|(2)||Finance costs for the year under review include a positive option remeasurement of R687 million. The prior year includes a negative option remeasurement of R730 million and once-off costs of R402 million.|