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Trading Statement and Accounting Effects Arising on Consolidation of Liberty Two Degrees into Liberty Holdings
Liberty Holdings Limited
Registration number 1968/002095/06
Incorporated in the Republic of South Africa
Share code: LBH
ISIN code: ZAE0000127148
("Liberty Holdings" or "the Company")
TRADING STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2016 AND ACCOUNTING
EFFECTS ARISING ON CONSOLIDATION OF LIBERTY TWO DEGREES INTO THE LIBERTY
HOLDINGS ANNUAL FINANCIAL STATEMENTS
TRADING STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2016
Shareholders are advised that Liberty Holdings is currently in the process
of compiling its results for the year ended 31 December 2016. This trading
statement provides an early indication of a range of basic, headline, and
normalised headline earnings per ordinary share pending finalisation of the
actuarial analysis of surplus and other year-end processes. Liberty
Holdings’ final results will be released on the Stock Exchange News Service
of the JSE Limited on 24 February 2017.
In accordance with section 3.4(b) of the JSE Listings Requirements,
shareholders are advised that basic earnings per ordinary share and
headline earnings per ordinary share are expected to be 40% to 60% (basic
earnings per ordinary share to be between 597,4 cents and 896,1 cents and
headline earnings per ordinary share to be between 611,3 cents and 916,9
cents per ordinary share) lower than the year ended 31 December 2015 (“the
comparative period”).
Shareholders are further advised that normalised headline earnings per
share are expected to be 35% to 55% (between 659,0 cents and 951,9 cents
per ordinary share) lower than the comparative period BEE normalised
headline earnings per ordinary share.
The main contributors to the reduction in earnings relative to the
comparative period are as follows:
- Lower returns on the shareholders’ investment portfolio in the second
half of the year due to poor portfolio returns, rand strength and the
write-down of infrastructure investments held in the alternatives
portfolio;
- Net negative actuarial assumption changes in the Individual
Arrangements business relating mainly to worsening persistency. This
follows the negative trends observed in the first half of the year
continuing in the second half due to ongoing difficult economic
conditions and increased pressure on consumers;
- Abnormally higher risk claims in the South African Individual
Arrangements and Liberty Corporate businesses, contributing to
reduced risk profits in the second half;
- Reduced earnings from STANLIB relating mainly to once off operational
write-offs in both the South African and East African asset
management businesses and the costs incurred on the implementation of
the outsourcing of the local retail administration function; and
- Negative accounting effects arising on consolidation of the recently
listed Liberty Two Degrees REIT (please see “Accounting effects
arising on consolidation of Liberty Two Degrees in Liberty Holdings
annual financial statements” set out below).
Management has taken action to address persistency and the operational
issues in the group. The customer facing units continue to write good
business and attract client flows. The group remains profitable and well
capitalised within its target range.
ACCOUNTING EFFECTS ARISING ON CONSOLIDATION OF LIBERTY TWO DEGREES IN THE
LIBERTY HOLDINGS ANNUAL FINANCIAL STATEMENTS
Liberty Group Limited (LGL), a 100% subsidiary of Liberty Holdings holds,
on behalf of policyholders and shareholders, investments in properties in a
ring-fenced on balance sheet asset portfolio, Liberty Property Portfolio
(LPP). These include direct investments in property and an undivided share
in the Melrose Arch precinct in Johannesburg, owned by Liberty PropCo
Proprietary Limited (PropCo).
Liberty Two Degrees (L2D) was constituted as a REIT and listed on the JSE
on 6 December 2016. As part of this transaction, LGL sold minority
undivided shares in each individual property in LPP and PropCo to L2D, in
exchange for units in the listed REIT.
On application of IFRS 10 (Consolidated Financial Statements), L2D will be
consolidated in the Liberty Holdings group annual financial statements.
Shareholders are advised that an accounting mismatch will arise on
consolidation of L2D as a result of the different measurement bases
required to be applied in the Liberty Holdings group annual financial
statements for L2D assets and for corresponding LGL policyholder
liabilities. Specifically:
- the investment property assets of L2D are to be included in the
Liberty Holdings group annual financial statements at open market
value; whereas
- the corresponding obligations to LGL’s policyholders in respect of
the REIT units are required under IFRS to continue to be measured in
the Liberty Holdings group annual financial statements at the listed
price of the L2D units.
The result of this accounting mismatch is that any increase in the premium
at which L2D’s listed units trade relative to the underlying net asset
value (based on the underlying open market value of the properties) of L2D,
will result in a reported loss in the Liberty Holdings group annual
financial statements. Conversely, any decrease in the premium (or change
from a premium to a discount) will result in a reported profit in the
Liberty Holdings group annual financial statements.
Liberty Holdings headline earnings will be normalised to reflect the
economic substance of the transaction detailed above as opposed to the
technical IFRS accounting treatment.
Accordingly, Liberty Holdings’ previously reported “BEE normalised headline
earnings per ordinary share” is to be replaced by “normalised headline
earnings per ordinary share”, which will be Liberty Holdings headline
earnings adjusted for:
- the reversal of the accounting mismatch arising on consolidation of
the listed REIT, net of tax; plus
- the accrued dividends on the BEE preference shares (not recognised as
a financial asset) which is consistent with prior period reporting;
divided by the weighted average number of ordinary shares assuming the BEE
allocated shares are in issue, which is also consistent with prior period
reporting.
The financial information on which this trading statement and addional
information has been based has not been audited or reviewed by the
company's auditors.
Queries:
Investor Relations
Sharon Steyn 011 408 3063
www.libertyholdings.co.za
27 January 2017
Sponsor:
Merrill Lynch South Africa (Pty) Limited
Date: 27/01/2017 10:30:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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