Wrap Text
Abridged annual financial statements for the year ended 31 March 2016
RECM AND CALIBRE LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 2009/012403/06)
Preference share code: RACP
ISIN: ZAE000145041
(“RAC” or “the Company”)
ABRIDGED ANNUAL FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2016
SHAREHOLDERS’ LETTER
To our fellow shareholders
RECM and Calibre (“RAC”) is a long-term investment vehicle that
was set up in a specific way, to achieve the best possible
outcome for its shareholders – both ordinary and preferred – over
time.
Control of the Company vests with the three of us, Piet Viljoen,
Theunis de Bruyn and Jan van Niekerk, as we own all the ordinary
shares in the company. Our investment landscape is broad, our
capital is patient and we do not plan to pay dividends any time
soon. This will remain true for as long as we can find
investments that satisfy our criteria (more of which follows
later). Our main objective is to grow the Net Asset Value (“NAV”)
per share of RAC at a high rate over a long period of time.
We understand that some of our fellow shareholders might have
time horizons or liquidity preferences that differ from ours. We
have therefore listed the Participating Preference shares of RAC
on the JSE to facilitate the opportunity for shareholders to make
their own investment decisions. These shares have exactly the
same economics as the ordinary shares. We undertake to provide
you with appropriate information so that you can make informed
decisions around the value of your shares. The price at which you
transact is up to you.
During the past financial year, our NAV, for both the Ordinary
and the Participating Preference shares, grew by 6,1% on a per
share basis. By comparison, the total return generated by the JSE
All Share Index, with dividends included, was 3,2%. Since listing
in June 2010, our NAV per share has grown by 96,6%, while the
ALSI total return index has grown by 129% over that same period.
As such, we continue to find ourselves a bit behind our primary
goal of outperforming the average listed company since inception.
Importantly, over the past two years – ever since RAC became
fully invested – we have outperformed the index substantially.
Going forward we think we have the building blocks in place to
continue doing so.
The following table shows our progression against our benchmark
(the JSE All Share Index, including dividends):
RAC JSE All
Index Share Index
10 June 2010 100,00 100,00
30 September 2010 100,88 109,73
31 March 2011 102,63 121,46
30 September 2011 104,46 113,68
30 March 2012 111,20 130,60
28 September 2012 112,60 141,45
28 March 2013 118,30 159,95
30 September 2013 118,50 179,60
31 March 2014 123,20 197,65
30 September 2014 125,90 207,33
31 March 2015 186,40 222,43
30 September 2015 198,60 217,26
31 March 2016 196,60 229,47
The NAV per share growth of 6,1% over the last year implies an
increase of R56,1mn. The composition of this increase looking
through to our underlying investments in RIH is as follows:
2016 2015
R R
Interest and dividends 17 522 958 30 720 051
Realised profits on sale
of assets 2 149 792 17 149 208
Adjustments to fair value
of assets 58 973 515 296 264 098
Less: Operating expenses 15 907 690 10 140 930
Less: Financing expenses 3 185 319 –
Less: Tax paid and provided for 3 425 385 22 967 057
Net increase in NAV 56 127 871 311 025 370
Our shareholders letter has been prepared on a look through basis
to the underlying investments, and therefore ignores the internal
holding structure in RIH.
When evaluating our NAV per share growth, and comparing it with
the broad market for listed stocks, we think it might be useful
for investors to keep the following points in mind:
We have not changed our valuation method. All listed assets are
held at market prices, while unlisted assets are either held at
their OTC price – where one exists – or at our calculated fair
value. For assets where there is no visible market price, we
perform a valuation exercise, which culminates in a range of fair
values, as required by IFRS. Due to the inherent uncertainty of
valuing large stakes in unlisted, untraded assets, this range is
necessarily quite wide. For some of our unlisted investments,
this range includes the original cost price. Where we have
purchased the investment in the last 12 months and believe the
cost price still to approximate fair value, we continue to carry
the investment at cost.
Where we have held the investment for longer than 12 months, we
tend to value the investment towards the lower end of fair value
range. As such, we aim to be consistently conservative in our
valuations.
Valuations in the stock market today are arguably less
conservative, and have continued to remain at elevated levels
over the past year. This is despite huge political and regulatory
uncertainty, the burden of compliance with increasing bureaucracy
and rising interest rates. We continue to believe that valuations
in public markets remain well above levels that can be considered
conservative, leaving investors in public markets with a
significantly reduced margin of safety. This is one of the key
reasons why we prefer investing in privately-held businesses with
no or limited trading of their shares.
We deduct Capital Gains Tax in calculating the NAV of RAC. When
an investment is successful that means it is worth – hopefully a
lot – more than we paid for it. But it also means that, when we
dispose of the investment, we owe capital gains tax to the
government. Any valuation exercise worth more than the paper it
is written on should include this real liability. Our deferred
tax liabilities increased during the last year by a
disproportionate amount as the inclusion rate on capital gains
tax was increased by the Minister of Finance from 66,7% to 80%.
While we have provided for the CGT payable if we were to sell our
investments, while we still hold on to them, we have full use of
the funds. This is an important – and growing – advantage for
long term investors such as RAC.
RAC pays 1,14% (including VAT) of the gross portfolio value for
investment management services. This fee is included under
Operating expenses in the table above. There are many views in
the market place as to the exact value of this contractual
payment, but we suggest you include your own calculation when
assessing our intrinsic NAV. Other costs grew significantly last
year, mainly due to one-off fees linked to obtaining debt
financing.
In the past, we have explained why we like private (i.e. unlisted
and untraded) businesses more than listed ones. Today, over 75%
of our balance sheet is invested in such businesses, up from 59%
last year. Our investments have also become more concentrated, as
evidenced by the fact that three of our investments make up 72%
of our gross portfolio – Goldrush, Transhex/West Coast Resources
and Fledge. John Maynard Keynes expressed it well:
“As time goes on, I get more and more convinced that the right
method in investment is to put fairly large sums into enterprises
which one thinks one knows something about and in the management
in which one thoroughly believes. It is a mistake to think that
one limits one's risk by spreading too much between enterprises
about which one knows little and has no reason for special
confidence. One's knowledge and experience are definitely
limited, and there are seldom more than two or three enterprises
at any given time in which I personally feel myself entitled to
put full confidence.”
Here are the companies and management in which we have placed our
confidence:
Direc–
tors’ % of
% fair net
Owner- Cost value(1) asset
Investment Notes ship Rm Rm value
Gaming 210,5 446,8 45,5
Goldrush 2 34,5 210,5 446,8 45,5
Mining and Engineering 229,5 281,1 28,5
West Coast Resources
and Dinoka 3 27,2 38,9 112,4 11,4
Transhex 3 25,0 94,2 94,6 9,6
JB Private Equity
Investors Partnership 3 90,0 69,6 60,9 6,2
ELB Group 3 2,2 26,8 13,2 1,3
Retail 102,0 224,6 22,8
Fledge Holdings 3
Outdoor Investment
Holdings 3 28,3
Food and Beverage 85,1 86,2 8,8
Sovereign Food 4 11,3 48,0 57,5 5,8
KWV 4 5,1 32,3 19,3 2,0
KLK Landbou 4 5,6 4,8 9,4 1,0
Other investments 57,9 93,2 9,5
Conduit Capital 5 7,0 20,9 44,6 4,5
Excellerate Holdings 5 5,5 14,7 26,3 2,7
College SA 5 79,3 22,3 22,3 2,3
Non-core investments 6 30,1 22,3 2,3
Cash 3,3
Liabilities (mainly CGT) (124,3)
Preference shares issued
to ABSA (50,0)
Net asset value 983,1
NAV per share (“R”) 19,66
NOTES:
1. IFRS requires RAC, as an investment entity, to place a fair
value on all its assets. Where possible, we used market
prices, either listed or over the counter. Where these were
not available, we used our own estimate of fair value. In
select circumstances, we have provided debt to some of our
investee companies. In these rare instances, our valuations
include both equity and debt.
2. Goldrush continues to grow strongly. Over the past year,
revenue grew by over 20% and net profits more than doubled.
On top of a continued roll out of its LPM and Bingo
operations, the sports betting business is gaining rather
good traction – both land-based and online.
During the year, the Company’s balance sheet was boosted by a
once-off settlement amount received from Sun International
arising from the move of their casino license from Morula to
Menlyn Main, Pretoria.
Mergan Naidoo, the CEO of Goldrush, does an amazing job of
inspiring growth while keeping a tight rein over costs. We
regard this to be as important as new business gains.
Our valuation of Goldrush is based on an earnings multiple
for the existing operating business, plus the market value of
the non-operational licenses and an adjustment for the
balance sheet structure. It also includes a value for a call
option on further shares in the business. This call option
gives us the right to increase our shareholding to around 50%
over time. Our cost base has increased over the past year due
to some success-based contingent payments of which there are
a small amount outstanding.
After their year-end, Goldrush entered into agreements to
acquire two businesses. The first of these, The Boss Gaming
Group, is the market leader in the Eastern Cape in Bingo and
LPM operations. The second, Crazy Slots, owns a 1 000 machine
route operator’s license in Gauteng and has managed to attain
one of the highest average gross gaming revenues per LPM in
the province. Both acquisitions are still subject to
regulatory approval, but once finalised, Goldrush will be the
largest alternative gaming group in the country.
After our financial year-end, we entered into an agreement
with the founding family of Goldrush through which we will
exercise our call option on the entire outstanding
shareholding available to us. This means that RAC, through
our subsidiary RAC Investment Holdings, will now own just
over 52% of Goldrush. The R221mn payment to the sellers will
be settled by R100mn from available cash resources, as well
as 2 200 000 RAC preference shares at a price of R23,18 each.
A R71mn portion of the cash payment is deferred until no
later than September 2017.
We welcome the Hipkin family as a fellow shareholder in RAC.
We have done business together for almost three years now and
know firsthand that they possess the attributes that great
businesses need in their owners – commercial understanding, a
work ethic and patience.
3. Transhex has suffered from lower diamond prices over the past
12 months, somewhat mitigated by a weaker Rand. Despite the
poor environment, cash flows have been satisfactory. The
Angolan business has good prospects. The South African
business is nearing the end of its life, and recoveries are
lumpy. The management team continues to have a strong cost
focus, something which should always be the cornerstone of
any business in the extractive industry. Over the past few
years, Transhex has built its cash reserves – from a net debt
situation of R200mn in 2009 to net cash of R350mn by
March 2016. At the same time, it has expanded its operations,
paid dividends of more than R50mn and acquired an investment
in West Coast Resources. The following table shows Transhex’s
progress over the past 6 years:
R mn 2009 2010 2011 2012
Current assets 415,2 466,6 420,2 466,5
Current liabilities 382,8 401,7 396,5 290,3
Long-term liabilities 415,6 279,7 216,7 191,1
Net-net current asset value (383,2) (214,8) (193) (14,9)
Net asset value per share
(‘cents’) 176 308 292 442
R mn 2013 2014 2015 2016
Current assets 540,6 560,4 553 502
Current liabilities 302,7 253,1 236,7 243,3
Long-term liabilities 153,7 148,5 117,1 112,5
Net-net current asset value 84,2 158,8 199,2 146,2
Net asset value per share
(‘cents’) 505 521 630 506
NAV per share has compounded at an impressive 16% p.a. This
has happened during a period where most mining companies have
run into financial trouble. It is a tribute to management
under the leadership of Llewellyn Delport. Llewellyn has
added (and continues to add) tremendous value to the
shareholders of Transhex. Over time, we have no doubt the
share price will reflect this effort in spades.
West Coast Resources (WCR) re-started mining operations
during 2015, after having been acquired by Transhex. Results
from the tailings dumps were disappointing. Mining operations
started in earnest towards the end of last year, and are
looking much more promising. Initial results look like
Transhex has acquired an asset that will generate significant
cash over time. Last year we said “We believe the mine has
strong prospects”. Results from preliminary mine activities
have confirmed this view. RAC owns 27,2% of WCR and Transhex
owns 40%, while the latter has a management contract to
manage the mine. Due to poor results from the tailings
operation as well as startup costs, we have reduced the
valuation of WCR.
RAC owns 2,2% in ELB Group, a well-managed engineering
business. Business conditions have been very tough over the
past year, resulting in a sharp decline in its share price.
We believe the ELB Group is well financed and not only able
to survive the current turmoil, but to take advantage of it.
We have increased our holding during the course of the year.
RAC has made an investment in JB Private Equity Investors
Partnership, which has as its only asset a 36,5% stake in
Sentula Mining, a mining company listed on the JSE. Sentula,
like many other mining companies, is suffering a hangover
from the “Commodity Supercycle”. To alleviate matters, the
partnership underwrote a rights offer during the course of
the year. We use the market price of Sentula to value our
investment in the partnership.
RAC owns 28,3% of Outdoor Investment Holdings (“Safari and
Outdoor”). This business consists of Safari and Outdoor, the
premier retailer of hunting and outdoor equipment in South
Africa, Inyathi Sporting Supplies, as well as Formalito, a
significant wholesaler of hunting equipment, which was
acquired during the course of the year. Revenues were up by
more than 10% for the year, and operating profits by a
similar amount.
Marco van Niekerk, who joined the business as CEO during the
year, has plans to grow the business both organically as well
as through acquisition. We look forward to seeing the fruits
of his efforts.
RAC increased its shareholding marginally during the year,
through a combination of share buybacks and an acquisition
from existing shareholders.
Outdoor Investment Holdings has been valued at the same
earnings multiple at which the business was purchased. The
increase in value indicates the growth in underlying
profitability.
RAC owns an effective indirect 2,5% shareholding in Dischem.
This is held through a leveraged structure, Fledge Holdings.
Dischem is privately owned and is a leading South African
pharmaceutical retailer. The business continues to experience
solid growth, through an expanding footprint and market share
gains. The change in value for the year reflects the increase
in the underlying profitability of Dischem, plus the benefit
of judicial leverage in the structure. During the past year,
Fledge also received dividends from Dischem. No change was
applied to the valuation multiples. Recently, the majority
owner of Dischem announced their possible intention to list
the shares of the company on the JSE in due course. We regard
this development in a positive light, as a move from a
private to public company will create an uplift in its
valuation.
4. RAC owns 11,3% of Sovereign Foods, a listed poultry producer
in the Eastern Cape area. Sovereign has been in the news
lately, as a competitor has actively tried to negatively
influence the markets perception of Sovereign, with the aim
of either buying it out, or at least hindering its
operations. Our estimate of the business’ value has been
supported by their superior earnings performance over the
past 5 years. Their recent acquisition of additional capacity
from Quantum Foods will enable them to increase production at
low cost. Current market conditions are quite tough, but we
believe Sovereign is well positioned to weather the storm. We
value Sovereign at its market price.
RAC owns 5,1% of KWV, an unlisted wine and spirits producer.
Over the past year, we have added to our holding. Our all-in-
cost is just over R9 per share. After year-end, Niveus (the
controlling shareholder of KWV) sold the operating assets of
KWV for R16,91 per share. In addition, KWV shareholders
(including RAC) still retain certain assets, which could be
worth an additional R3 to R4 per KWV share. As this
transaction occurred after year end, the revaluation has not
been taken into account in calculating our NAV. At year end,
we were carrying our investment in KWV at R5,50 per share,
the last traded price.
We have a 5,6% investment in KLK Landbou, an unlisted farming
co-op headquartered in Upington. Their main lines of business
include meat processing, fuel sales and motor dealerships.
They also recently acquired a raisin processing operation. It
is a well-run business, and profits have grown by over 20%
per annum over the past 4 years. We have valued this
investment at its over-the-counter trading price which
translates to a PE ratio of 3.
5. Our other long-term investments are a diverse group.
RAC owns 7% of Conduit Capital, a listed specialist insurance
business. During the year Conduit concluded a rights issue to
raise capital with the aim of growing its insurance business.
This was in line with the vision, which was announced along
with the management changes in the previous year. Our
shareholding has remained unchanged, and we value Conduit at
its listed price.
We own 5,5% of Excellerate Holdings, an unlisted industrial
services company. Profits from continuing operations grew by
21% for the 6 months to December, as the business continues
to focus on property services, while shedding non-core
assets. We have not changed our valuation metrics for the
company.
During the year, we took control of College SA, a new
investment for us. College SA is a distance learning
business, which had carved out an interesting niche in the
market for education. Subsequent to the purchase, we
installed new management (who have co-invested with us) with
a brief to up the quality of the offering and expand the
reach of the business. We look forward to their results in
the years to come. We have valued this investment at cost, as
it is a recent purchase.
6. Our non-core investments have increased over the year, mainly
through adding the residual investment in The American Homes
to this list. We should have exited this investment
completely by the fourth quarter of this year. In this
category we also own 262 000 Putprop shares. The company
wanted to buy out minorities and delist over the past year.
We (and other shareholders) felt the price they were offering
was too low, and the attempt failed. At a discount to NAV of
over 50%, we think we are getting paid to wait for a better
exit price. We have had limited success in reducing the other
holdings.
7. During the year, RAC invested a net amount of R132mn. A
portion of this was funded through our debt facility with
ABSA bank.
RAC and RIH adjusted Statement of Cash Flows
2016 2015
R R
Aggregate cash and cash
equivalents at beginning
of the year 71 320 959 98 733 652
Plus interest and dividends
received 17 522 958 34 149 015
Less: Cash operating expenses (19 093 009) (9 637 731)
Less: Cash tax paid (9 681 439) (7 650 927)
Less: Cash applied to
investments (132 037 593) (44 273 050)
Plus: Financing cash flows 75 211 617 –
Aggregate cash and cash
equivalents at end
of the year 3 243 493 71 320 959
Our biggest investment during the year was into the JB
Investment Partnership, whose only asset is a listed company,
Sentula mining. With respect to industries that are out of
favour with the market, like mining, we think the following
quote from one of our favourite investors, is appropriate:
“The most common cause of low prices is pessimism – sometimes
pervasive, sometimes specific to a company or industry. We
want to do business in such an environment, not because we
like pessimism, but because we like the prices it produces.
It’s optimism that is the enemy of the rational buyer.”
– Warren Buffett, 1990 Chairman’s letter to shareholders of
Berkshire Hathaway
The current pessimistic environment for mining shares results in
investors pricing in the worst of all outcomes, and ignoring any
possible good ones. For instance, Sentula Mining is currently
trading 95% below its peak valuation in 2008. To put that into
numbers – in 2008 the market valued Sentula at R6.2bn. Today the
market thinks the same company is worth just R186mn, after having
raised fresh capital of R105mn recently. As is often the case, we
think the truth is somewhere in the middle. It is only because of
the current environment that we were able to acquire an
influential stake in this business, at a price which gives us a
good chance of substantial investment returns going forward.
Our investment in KWV further illustrates this line of thinking.
When we invested, the market was very negative around the
prospects for the business. Certain “Lead Steer” investors had
just exited, proclaiming that the business was a value trap.
After that, while the new owners were restructuring, earnings
were poor. Fundamentally, the business was sound: a fortress
balance sheet with no debt, strong well known brands which were
winning local and international prizes for quality and a
management team with skin in the game. However, market prices are
often driven by emotions, not fundamentals. When faced with a
declining share price, many investors conclude that this
declining price accurately reflects the fundamentals and jump on
the bandwagon. In so doing, a self-reinforcing vicious circle is
formed, with a lower share price cementing the negative
sentiment, leading to more selling, which serves to drive the
share price even lower, leading to more selling.
In these situations, investors such as RAC can provide liquidity
to the sellers, taking advantage of their emotions. We, like the
controlling shareholder of KWV, Niveus, can only do so because we
have permanent capital at our disposal. While we are buying these
bargains, public sentiment tends to regard us, at best, as
misguided. In the short-term, the declining share price is
“evidence” that the public – and their consultants – are right.
If our source of funds were open ended, we would not have been
able to hold on to the position, as withdrawals would have forced
us to join the selling crowd. And, even if we were not forced to
sell, the unrelenting pressure of negative public commentary can
itself induce irrational behaviour.
Accurate valuations generally only emerge when large transactions
take place at arm’s length between properly incentivized parties.
In the absence of such confirming transactions, valuation is more
art than science, and care should be taken not to get caught up
in the chatter of markets.
Simply put, our view is that we will be proven right, not because
the short-term direction of the share price movement confirms our
view or that market commentators and investment consultants agree
with us, but because we have evaluated the fundamentals
correctly. And, if we are right the share price will eventually
reflect our thinking. We just need the ability to exercise
patience. And the permanent capital nature of RAC puts us in a
position where we can indeed be as patient as we need to.
The ability to buy KWV at depressed prices and hold on to it,
despite widespread criticism, will provide our NAV with a nice
up-lift, as the investment has compounded at over 25% p.a. We
hold the view that there are more of these unpolished gems in our
portfolio of businesses.
As previously stated, our aim is to invest the capital of RAC in
order to grow our NAV per share at as high a rate as possible. We
try to be very calculated and unemotional when it comes to this.
But providing businesses with capital, and trusting their
management to grow the value of the business has important
consequences. One of the hallmarks of a successful business is
that it employs more people at ever higher productivity over
time. And in a country where unemployment has reached record
levels – despite massive political intervention with huge
negative unintended consequences – job creation is important. In
this regard, West Coast Resources has created 207 new jobs since
we provided them with capital to start mining. Bear in mind that
WCR operates in an area of the country where unemployment is
rife. Goldrush has created 778 new jobs since we provided them
with growth capital two years ago. These jobs have been created
in almost all areas of the country. Outdoor Investment Holdings
has created 56 jobs over the past two years, after receiving an
injection of growth capital from us. We have no doubt that
College SA will create many new jobs in the future as well, and
that when the cycle turns, Sentula will also turn into a job-
creating machine. Without our capital, it would most likely not
have survived, and many jobs would have been lost. This is the
friendly face of capitalism, which many so often choose to
ignore.
We believe our intrinsic fair value is growing at a rate well in
excess of our accounting NAV. We are loath to mark our assets up
to our opinion of full value, as the proof of value only comes
out in transactions.
Today, despite all the negative sentiment around South Africa, we
are optimistic about the future. We are fully invested, with a
portfolio of good businesses run by good people, acquired at good
prices. We spend almost no time thinking about the economy, as
our managers are more than smart and tenacious enough to deal
with the economic challenges and opportunities they face. All we
know is that as with all cycles, this negative one will also come
to an end.
In the meantime, we have secured debt funding to grow our asset
base, when we come across more good opportunities – which such an
environment is bound to provide. In this regard, if you are
involved in any business that meets our investment criteria and
that needs capital or a responsible owner with a long-term
orientation, please give one of us a call. We can’t promise you a
deal, but we can promise you a quick answer.
Our non-executive directors do a sterling job of providing
sounding boards and guidance when called upon. We would like to
thank them for this. And last, but definitely not least, we would
like to thank the managers of our investee companies – they do
all the heavy lifting, allowing us to get on with the fun job of
exploring investment opportunities.
SHAREHOLDERS’ MEETING WITH EXECUTIVE DIRECTORS
We will hold our annual meeting for all shareholders, immediately
after the conclusion of the Annual General Meeting of RAC
Shareholders. This Annual General Meeting is scheduled to take
place on 27 July 2016 at the Southern Sun Hotel in Newlands, Cape
Town, at 11:00. At our meeting, all three of us look forward to
discussing our investment operations, and answering as many
questions as you have. Some of our CEO’s will also be present, if
you wish to speak to them about their businesses. There is an
invitation enclosed with this annual report, and we would
appreciate it if you would let us know whether you will be
attending.
Piet Viljoen Theunis de Bruyn Jan van Niekerk
Chairman
Cape Town
10 June 2016
STATEMENT OF FINANCIAL POSITION
AT 31 MARCH 2016
2016 2015
Notes R R
ASSETS
Non-current assets 983 290 784 883 595 786
Investments 5 983 290 784 714 253 898
Loans and other receivables – 169 341 888
Current assets 1 381 153 74 418 456
Investments 5 – 67 971 006
Loans and other receivables – 3 097 497
Cash and cash equivalents 1 381 153 3 349 953
Total assets 984 671 937 958 014 242
EQUITY AND LIABILITIES
Equity 983 101 316 926 973 445
Share capital –
ordinary shareholders 50 000 000 50 000 000
Share capital –
preference shareholders 450 000 000 450 000 000
Reserves – 79 950 251
Retained income 483 101 316 347 023 194
LIABILITIES
Non-current liabilities – 29 196 620
Deferred taxation – 29 196 620
Current liabilities 1 570 621 1 844 177
Trade and other payables 1 504 352 1 704 985
Current tax payable 66 269 139 192
Total equity and liabilities 984 671 937 958 014 242
Net asset value
Net asset value attributable
to ordinary shareholders 98 310 132 92 697 345
Net asset value attributable
to preference shareholders 884 791 184 834 276 101
Net asset value per
ordinary share (cents) 1 966 1 854
Net asset value per preference
share (cents) 1 966 1 854
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2016
2016 2015
Notes R R
Revenue 6 601 449 30 720 051
Operating expenses (1 401 609) (10 140 930)
Operating profit 5 199 840 20 579 121
Other income 93 094 588 17 149 208
Fair value gains on
subsidiaries and
associates 29 505 129 287 223 959
Impairments recycled through
profit and loss – (21 225 692)
Profit before taxation 127 799 557 303 726 596
Taxation 8 278 565 (17 317 153)
Profit for the year 136 078 122 286 409 443
Other comprehensive income:
Items that may be
reclassified subsequently
to profit or loss:
Net gain on
available-for-sale
financial instruments – 26 189 347
Realised gain on sale of
available-for-sale
investments recycled
to profit or loss (93 094 588) (17 149 208)
Impairment loss reclassified – 21 225 692
Taxation related to components
of other comprehensive income 13 144 337 (5 649 904)
Other comprehensive income for
the year net of taxation (79 950 251) 24 615 927
Total comprehensive income 56 127 871 311 025 370
Earnings and headline
earnings per share
Per share information
(ordinary and preference)
Basic and diluted earnings
per share (cents) 6 272 573
Basic and diluted headline
earnings per share (cents) 6 86 579
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2016
Preference Ordinary
share share
capital capital
R R
Balance at 31 March 2014 450 000 000 50 000 000
Profit for the year – –
Other comprehensive income – –
Balance at 31 March 2015 450 000 000 50 000 000
Profit for the year – –
Other comprehensive income – –
Balance at 31 March 2016 450 000 000 50 000 000
Fair value
adjustment
assets Total
available- share-
for-sale Retained holders'
reserve income equity
R R R
Balance at
31 March 2014 55 334 324 60 613 751 615 948 075
Profit for the year – 286 409 443 286 409 443
Other comprehensive
income 24 615 927 – 24 615 927
Balance at
31 March 2015 79 950 251 347 023 194 926 973 445
Profit for the year – 136 078 122 136 078 122
Other comprehensive
income (79 950 251) – (79 950 251)
Balance at
31 March 2016 – 483 101 316 983 101 316
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 MARCH 2016
2016 2015
R R
Cash flows from operating
activities
Cash utilised in operations (728 983) (9 637 731)
Interest income 106 824 13 125 860
Dividends received 6 500 000 21 023 155
Tax paid (7 846 641) (7 650 927)
Net cash (outflow)/inflow from
operating activities (1 968 800) 16 860 357
Cash flows from investing
activities
Loans to investees – (149 419 476)
Purchase of other financial
investments – (81 758 828)
Proceeds on disposal of
financial investments – 217 566 023
Net cash outflow from
investing activities – (13 612 281)
Net movement in cash and
cash equivalents (1 968 800) 3 248 076
Cash and cash equivalents
at the beginning of the year 3 349 953 101 877
Cash and cash equivalents at
the end of year 1 381 153 3 349 953
SELECTED NOTES TO THE ABRIDGED ANNUAL FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
The summary financial statements are prepared in accordance
with the requirements of the JSE Limited Listings
Requirements for abridged reports, and the requirements of
the Companies Act applicable to summary financial statements.
The Listings Requirements require abridged reports to be
prepared in accordance with the framework concepts and the
measurement and recognition requirements of International
Financial Reporting Standards (IFRS), the SAICA Financial
Reporting Guides as issued by the Accounting Practices
Committee and Financial Pronouncements as issued by the
Financial Reporting Standards Council, and to also, as a
minimum, contain the information required by IAS 34 Interim
Financial Reporting. The accounting policies applied in the
preparation of the financial statements, from which the
summary financial statements were derived, are in terms of
International Financial Reporting Standards and are
consistent with the accounting policies applied in the
preparation of the previous annual financial statements,
other than as more fully set out below.
These abridged annual financial statements do not contain as
much detailed information and disclosures as the audited
annual financial statements and should therefore not be
considered as a substitute for reading the audited financial
statements
2. GROUP STRUCTURE
RECM and Calibre Limited (“RAC”) was established in 2009 as a
closed-end investment entity that makes long-term
investments, with the objective of generating high real
returns. Investments can be listed or unlisted, public or
private, and there are no limits as to the geographic
location.
Given that the investment infrastructure of RAC has been set
up to facilitate investments and funding in the most
efficient manner, investments are made either through a fully
owned subsidiary incorporated in South Africa, RAC Investment
Holdings (Pty) Ltd, (“RIH”) or directly.
During the period all the investments (including the related
loans and receivables) to the value of R723 549 474 held by
RAC were transferred to the wholly-owned subsidiary RIH for
an additional 190 shares in RIH. The loan to RIH in the prior
year of R114 059 440 was converted to share capital by RIH
issuing an additional 10 shares to RAC. This transfer was
primarily to facilitate future funding. This transfer had no
impact on the NAV of RAC. Given this structure, RAC has
provided the fair value disclosure in two parts in note 5.
Page 14 discloses the investment in RIH as required by IFRS
and page 15 provides additional disclosures that the
directors deem useful by looking through RIH to the
underlying investments at the directors fair values. The
transfer of the investments, (previously held as available-
for-sale), to RIH has resulted in the unrealised gains of
R93 094 558, previously recognised in other comprehensive
income, being reclassified to profit or loss. All fair value
movements on the investment in RIH will be recognised in
profit or loss going forward.
3. SIGNIFICANT ACCOUNTING POLICIES
Assessment as investment entity
Entities that meet the definition of an investment entity
within IFRS 10 are required to measure their subsidiaries at
fair value rather than consolidate them. The criteria which
define an investment entity are, as follows:
– An entity that obtains funds from one or more investors
for the purpose of providing those investors with
investment services;
– An entity that commits to its investors that its business
purpose is to invest funds solely for returns from capital
appreciation, investment income or both;
– An entity that measures and evaluates the performance of
substantially all of its investments on a fair value basis
(refer to note 3 for additional disclosures relating to
fair value)
Based on the above, the Company is considered to meet all
three conditions of the definition and, hence, qualifies
as an investment entity. Consolidated Financial Statements
are therefore not prepared.
In line with RAC carrying its investment in RIH at fair
value, RAC has also elected the exemption in IAS 28 to carry
any interests in associates and joint ventures at fair value
through profit or loss. Such election is applied consistently
due to the fact that the Company is an investment entity and
evaluates its investments on a fair value basis. The Company
reports to its investors via annual and semi-annual results
and to its management, via internal management reports, on a
fair value basis. All investments are reported at fair value
to the extent allowed by IFRS in the Company’s annual
reports.
The Board has also concluded that the Company meets the
additional characteristics of an investment entity, in that
it has exposure, directly or indirectly, to more than one
investment; the investments are predominantly in the form of
equities and similar securities; and its investors are not
related parties. The Board has concluded that the Company
meets the definition of an investment entity. These
conclusions will be reassessed on an annual basis, if any of
these criteria or characteristics change.
4. AUDIT OPINION
This abridged report is extracted from audited information,
but is not itself audited. The annual financial statements
were audited by Ernst & Young Inc., who expressed an
unmodified opinion thereon. The audited annual financial
statements and the auditor’s report thereon are available for
inspection at the company’s registered office. The directors
take full responsibility for the preparation of the abridged
report and that the financial information has been correctly
extracted from the underlying annual financial statements.
The audited financial statements, which were prepared under
the supervision of the FD, Jan van Niekerk, are available for
inspection at the Company’s registered office and will be
included in the Integrated Annual Report 2016 to be posted to
stakeholders.
2016 2015
R R
5. INVESTMENTS
Fair value hierarchy of
financial assets
Level 1
Class 1 – Listed shares – Quoted
– available-for-sale – 241 132 347
Class 2 – Unlisted shares – Quoted
– available-for-sale – 31 390 404
– 272 522 751
Level 2
Class 3 – Unit trust – cash held by
unit trust–available-for-sale – 34 956 206
Class 4 – Call accounts –
available-for-sale – 33 014 800
– 67 971 006
Level 3
Class 5 – Unlisted shares
– Unquoted – available for sale – 70 999 261
Class 5 – Unlisted shares
– Unquoted – fair value through
profit or loss – other – 253 681 269
Class 5 – Unlisted shares
– Unquoted – fair value
through profit or loss
– RIH 983 290 784 117 050 617
983 290 784 441 731 147
Total financial assets at
fair value 983 290 784 782 224 904
Non-current assets 983 290 784 714 253 898
Financial assets –
available-for-sale – 343 522 012
Financial assets – fair value
through profit or loss 983 290 784 370 731 886
Current assets
Financial assets
– available-for-sale – 67 971 006
Total investments 983 290 784 782 224 904
Management classifies cash
as current and other
investments as non-current.
Level 3 reconciliation
Opening balance 441 731 147 130 694 101
Purchases 836 735 038 6 632 549
Sales (324 680 530) –
Gains on investments
recognised in other
comprehensive income – 17 180 537
Gains on investments recognised
in profit or loss 29 505 129 287 223 960
Closing balance 983 290 784 441 731 147
Please refer to the group structure note on page 12
which explains the transfer of investments to RIH.
Level 1
Class 1 available-for-sale financial assets are valued
at the listed price per the exchange on which they trade.
Class 2 available-for-sale financial assets are valued
at the quoted price based on the latest over the counter
trades.
Level 2
Class 3 available-for-sale financial assets are valued
at the net asset value of the unit trust.
Class 4 available-for-sale financial assets are valued by
taking the following market observable data into account
and applying them to the holdings:
credit spread of the institution at which the funds are held
– any difference in the interest rate earned and what is
available in the market
Level 3
Class 5 unlisted unquoted shares are valued using a number of
valuation techniques based on the following unobservable
market data for each investment:
– Net profit of investee
– Equity and net debt of investee
– Return on capital
– Price/Earnings ratio
– Expected cash flows
– NAV of the investee if it recognises its assets and
liabilities at fair value
Management uses the above information in multiple valuation
techniques by comparing the investee information to similar
type entities in the listed market. The nature of the fair
value calculations means that fair values range greatly and
are sensitive to indirect and direct quantifiable and
unquantifiable inputs.
There have been no significant changes to the inputs to the
fair valuation calculations of the investments to which RAC
is exposed. RIH has continued to be valued based on its NAV
which is driven by the valuation of the underlying
investments.
In terms of IFRS, RAC is an Investment Entity, and therefore
no consolidated results are required to be prepared. IFRS
requires the fair value disclosure to be prepared at the Unit
of Account Level (i.e.: at the level of shares that RAC owns
and those are shown above). The Board of Directors has
decided to provide the following voluntary disclosures
looking through the 100% held subsidiary, RIH, to its
underlying investments. In addition, a summary of the NAV of
RIH as well as the underlying valuation techniques and
sensitivities have been provided.
2016 2015
R R
Fair value hierarchy of financial
assets held by RAC Investment
Holdings (Pty) Ltd
Level 1
Class 1 – Listed shares
– Quoted 218 701 832 –
Class 2 – Unlisted shares
– Quoted 28 723 525 –
247 425 357 –
Level 2
Class 3 – Unit trust – money
market unit trust 63 715 –
63 715 –
Level 3
Class 5 – Unlisted shares
– Unquoted – available-
for-sale 71 393 813 31 788 371
Class 5 – Unlisted shares
– Unquoted – fair value
through profit or loss 753 455 736 281 523 665
824 849 549 313 312 036
Total financial assets
at fair value 1 072 338 621 313 312 036
Non-current assets 1 042 743 917 313 312 036
Current assets 29 594 704 –
Total investments 1 072 338 621 313 312 036
Summary of Net Asset Value
of RIH
Total investments
from above 1 072 338 621 313 312 036
Loans and receivables 82 037 280 –
Cash and cash equivalents 1 798 625 809
Deferred tax (76 469 122) (24 134 156)
Contingent consideration (19 129 854) (58 030 305)
Loans and payables (77 284 766) (114 097 767)
Net Asset Value of RIH 983 290 784 117 050 617
5.1 Description of significant unobservable inputs and
sensitivities of RAC (level 3 investment).
Signifi-
Valua- cant
tion Fair unobser-
tech- value vable
nique R’m inputs Range Sensitivity
RAC NAV 983,3 Fair N/A A 10% increase/
Investment values decrease in the
Holdings of the fair value of
(“RIH”) underlying the underlying
investments investments
would result
in an increase/
decrease in
value of R98m.
5.2 The below table shows the sensitivities per underlying
investment as if these were held directly by RAC
(level 3 investment).
Signifi-
Valua- cant
tion Fair unobser-
tech- value vable
nique R’m inputs Range Sensitivity
Retail: Multi– 192,1 EBITDA 4 – 8 A change in
Safari ples multiple up by
and 1 would result
Outdoor; in an increase
in fair value of
approximately
R35m.
Fledge Discount 35% – A change in
(excluding for lack 45% discount rate of
non–equity of 10% would result
investments) marketabi– in a change in
lity and fair value of
liquidity approximately
to listed R66m.
entity
Goldrush Multi– 446,8 EBITDAR 5 – 7 A decrease in
Group ples the EBITDAR
multiple by 1
would result in
a decrease in
fair value of
approximately
R56m and an
increase in the
EBITDAR multiple
by 1 would
result in an
increase fair
value of
approximately
R94m.
Excellerate Last 26,3 N/A 220 cents
trade
price
Discount 1,50% A change in
for lack discount rate
of market– to 10%
ability and would result in
liquidity a change in
on latest fair value of
available approximately
NAV as a R2,3m.
check on
last traded
price
JB Private NAV 61 N/A N/A The NAV of the
Equity JB Private
Investors Equity Investors
Partnership Partnership is
directly linked
to the
underlying
investment in
Sentula Mining
Limited which is
listed on the
JSE and is not
currently
significantly
impacted by any
fair value
adjustment to
trade and other
payables and
therefore NAV of
the JB Private
Equity Investors
Partnership is
considered to be
fair value. A
10% movement in
the Sentula
share price
would have a
R6,7m impact on
the Partnership
NAV.
Mining NAV 73,5 Valua– 10% A multi-period
West tion of excess earnings
Coast mining method was used
resources rights to calculate the
(excluding mining rights in
non–equity WCR. There are
investments) unseen inputs
into this
calculation. A
change in the
value of the
mining rights by
10% would result
in a R14 million
change in the
NAV of WCR.
Education Multi– 21,2 EBITDA 4 – 6 A change in
SA College ples multiple up by
1 would result
in an increase
in fair value of
approximately
R4 million.
Other level 3 3,9
investments
Total 824,8
2015
5.3 Description of significant unobservable inputs and
sensitivities of RAC
Signifi-
Valua- cant
tion Fair unobser-
tech- value vable
nique R’m inputs Range Sensitivity
Retail: Multi– 170 EBITDA 4 – 8 A change in
Safari ples multiple up by 1
and would result
Outdoor; in an increase
in fair value of
approximately
R24 million.
Fledge Discount 35% – A change in
(excluding for lack 45% discount rate of
loans) of market– 10% would result
ability in a change in
and value of
liquidity approximately
to listed R27 million.
entity
Excellerate Last 26,5 Delisted 115 cents
–
220 cents
P/E 6 – Using a multiple
Multiple, 8,5 of 6 to 8,5
as check would result in
on last a price of 222
observable to 314 cents per
price share, before
applying a
discount for
liquidity.
RAC NAV 117 EBITDAR 5 – A change in the
Investment of 7 EBITDAR multiple
Holdings substan– of the
(“RIH”) tial underlying
underlying investment by
investments 1 would result
in RIH in an increase
or decrease in
fair value of
approximately
R38 million.
Mining:
West NAV 122 Valuation 10% A multi-period
Coast of excess earnings
resources mining method was
rights used to
calculate the
mining rights
in WCR. There
are numerous
unseen inputs
into this
calculation. A
change in the
value of the
mining rights by
10% would result
in a R14 million
change in the
NAV of RAC.
The Credit 41 Discount 20% – A change in
American and due to 30% discount rate of
Home time value the time 10% would result
of money value of in a change in
discount money (5%) fair value of
and the approximately
increased R1,5 million.
credit A 30% discount
risk of is currently
a future being applied.
dated
receipt
of redemp–
tion
proceeds
Factors that were taken into account by management in all
valuations include the current market conditions, the
invested market segment and interest rate certainty. The
market for these instruments often has significant barriers
to entry, making the comparison pool of similar entities very
shallow. Specifically, the retail pharmaceutical industry and
hunting equipment industry have few market entrants with
little reliable comparative data. The nature of the fair
value calculations means that the calculated fair values
could range greatly and are sensitive to indirect and direct
quantifiable and unquantifiable inputs. Where we have
influence over our investee companies we plan to play an
active role in the long term strategy of the company,
ensuring that our interests are aligned.
2016 2015
R R
6. EARNINGS AND HEADLINE EARNINGS
per share
Earnings and headline earnings per
shares are based on the profit
attributable to ordinary and
preference shareholders in issue
during the year.
Number of shares in issue
Ordinary shares 5 000 000 5 000 000
Preference shares 45 000 000 45 000 000
Earnings
Net profit after tax 136 078 122 286 409 443
Adjusted to headline earnings
as follows:
Reclassification of fair value
gains through profit or loss on
disposal of available-for-sale
financial instruments (93 094 588) (17 149 208)
Impairment – 21 225 692
Tax adjustment – (760 944)
Headline earnings 42 983 534 289 724 983
Basic and diluted earnings per
ordinary and preference
shares (cents) 272 573
Headline earnings per ordinary and
preference shares (cents) 86 579
7. SUBSEQUENT EVENTS
Subsequent to year-end the following significant transactions
have occurred in RIH:
– RIH issued another 50 preference shares for R1 million
each to ABSA Bank Limited on 6 April 2016 in order to
raise additional capital for future investments.
Subsequent to year-end, RIH has entered into an agreement
through which it will exercise a call option to acquire
20,81% of the issued share capital of Goldrush for an
aggregate consideration of R221 176 302 which will be
settled via the following means:
– R100 000 000 in cash from existing resources;
– R50 996 000 through the issue of 2 200 000 fully paid-up
non-cumulative redeemable participating preference shares
in RAC at a price of 2 318 cents per share. Application
will be made for the listing of such preference shares on
the JSE once issued; and
– a deferred cash payment of R70 180 302 by no later than
30 September 2017. The amount of the deferred payment will
increase at a rate equivalent to South African headline
consumer price inflation from 31 March 2016 up to date of
final settlement.
The transaction will increase RIH’s shareholding and voting
rights in Goldrush to 52,21%.
The transaction is subject to a number of conditions and
approvals, which will be obtained in the course of business.
RECM AND CALIBRE LIMITED
(“RAC” or “the Company”)
COUNTRY OF INCORPORATION AND DOMICILE: South Africa
NATURE OF BUSINESS AND PRINCIPAL ACTIVITIES: Investments as
principal activities
COMPANY REGISTRATION NUMBER: 2009/012403/06
PREFERENCE SHARE CODE: RACP
ISIN: ZAE000145041
DIRECTORS:
T de Bruyn (Executive Director)
Z Matlala (Independent Non-Executive Director)
T Rossini (Independent Non-Executive Director)
JG Swiegers (Independent Non-Executive Director)
JC van Niekerk (Executive Financial Director)
PG Viljoen (Executive Chairman)
COMPANY SECRETARY:
G Simpson
FINANCIAL STATEMENTS INTERNALLY COMPILED BY:
D Schweizer – Chartered Accountant (S.A.)
REGISTERED OFFICE AND BUSINESS ADDRESS:
8th Floor, Claremont Central
8 Vineyard Road
Claremont
Cape Town, 7700
POSTAL ADDRESS:
PO Box 45040
Claremont
7735
TELEPHONE NUMBER: (021) 657 3440
EMAIL ADDRESS: info@recm.co.za
WEBSITE: www.racltd.co.za
SPONSOR:
Questco (Pty) Ltd
1st Floor, Yellowwood House
Ballywoods Office Park
33 Ballyclare Drive
Bryanston 2021
(PO Box 98956, Sloane Park, 2152)
TRANSFER SECRETARIES:
Link Market Services South Africa (Pty) Ltd
13th floor, Rennie House
19 Ameshoff Street
Braamfontein, 2004
(PO Box 4844, Johannesburg, 2001)
Date: 13/06/2016 11:10:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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