Wrap Text
Abridged Annual Financial Statements for the year ended 31 March 2017
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 2017
Shareholders’ letter
To our fellow shareholders
RECM and Calibre (“RAC”) is a long-term investment vehicle that was set up in a specific way in order to achieve a high
rate of growth in per share net asset value (“NAV”) over time. As such, our long-term goal is to build an exceptional
investment company. To our mind, an exceptional investment company implies a company that generates returns better
than most investment alternatives, be they companies, funds or an index replicating a stock market.
The past financial year has been a good one for your company. We have managed to allocate more capital to our core
group of companies – businesses with good management where we have control, or at least significant influence. We
have also managed to profitably reduce exposure to the investments where we only own a minority stake – our so-called
“portfolio investments”.
The effect on our NAV per share has been positive, both from a quantitative and a qualitative point of view. Growth in per
share NAV (our preferred method of measuring value creation) was more than quite satisfactory at 39,1%. This compares
to the All Share Index total return for the year of 2,5%. Equally important, we think that the quality of our NAV – that which
is not historically measurable – has improved substantially and as a result, we calculate two outcomes in future:
• The annual rate at which our per share NAV compounds will increase.
• The amount of capital we can deploy into our core growth opportunities will increase.
We listed RAC in 2010, almost 7 years ago. Initially our performance was somewhat lackluster, as we took time to identify
and acquire investments that met our strict criteria. It took us 4 years to fully invest our capital and since then our
performance has accelerated. For the first time since listing, the growth of our NAV since inception has exceeded the growth
from the All Share Index. To become an exceptional investment vehicle takes time, but we believe we are firmly on the right
path. Since inception, RAC’s NAV per share has compounded by 16,1% p.a., while the All Share Index returned 14,1%
annually.
The following chart shows our progression against the JSE All Share Index, including dividends. R10 invested in RAC
participating preference shares in June 2010 has grown to R27,35 in Net Asset Value after all fees and taxes. The same
amount invested in the JSE All Share Index would have grown to R23,53, before taking any fees and taxes into account.
ALSI total return
Reporting date (based to R10) RAC NAV/share
10 June 2010 10.00 10.00
30 September 2010 10.97 10.09
31 March 2011 12.15 10.26
30 September 2011 11.37 10.45
30 March 2012 13.06 11.12
28 September 2012 14.15 11.26
28 March 2013 16.00 11.83
30 September 2013 17.96 11.85
31 March 2014 19.77 12.32
30 September 2014 20.73 12.59
31 March 2015 22.24 18.64
30 September 2015 21.73 19.86
31 March 2016 22.95 19.66
30 September 2016 23.16 22.42
31 March 2017 23.53 27.35
The NAV per share growth of 39,1% over the last year implies an increase of R415,7mn. The composition of this increase
on a look-through basis is as follows:
2017 2016
R R
Interest and dividends 339 583 909 17 522 958
Realised profits on sale of assets 30 027 593 2 149 792
Adjustments to fair value of assets 114 212 226 58 973 515
Share issue and buy back 24 502 250 –
Operating expenses (20 752 921) (15 907 690)
Financing expenses (17 123 473) (3 185 319)
Tax paid (11 021 088) (9 681 439)
Tax (provided for)/reversed (43 740 480) 6 256 054
Net increase in NAV 415 688 016 56 127 871
By far the largest component of return was in the form of dividends. This partially reflects the way our investment in
Dischem was structured via Fledge Holdings, as a result of which the proceeds from the sale of this investment of R324mn
was paid out as a dividend.
During the course of the year, we completely sold out of our minority interests in Gooderson, American Homes and
Afrocentric Health for a small profit. We reduced our minority interest in Sovereign Foods for a profit of over R20mn. We
spent just over R250mn on investments, the largest portion of which went into Goldrush, as we acquired control from the
Hipkin family.
After starting the year with around R3mn investable cash, the net effect of our transactions was to increase this balance
to R171mn by year-end.
Our main operating expense is the management fee we pay. This fee amounts to 1,14% (including VAT) of the portfolio.
During the period under review, RAC appointed RAC Advisory Services (RAC AS) as an additional manager to RECM.
RAC AS is a corporate advisory firm in the RECM group of companies. As the investments of RAC have moved further
away from outside passive minority interests in listed entities towards controlling interests in unlisted entities, the skill set
of RAC AS has become more relevant, which led to the appointment of the manager. The fee rate itself is unchanged.
The increase in our operating expenses was solely due to our NAV showing strong growth. Other expenses (directors
fees, audit fees, bank charges etc.) in the aggregate declined by 28%. Our financing expenses increased due to our
further drawdown of the facility with ABSA. This will increase further in the coming years, as we intend to use a reasonable
amount of debt to expand our investment activities. We generally prefer using a responsible level of debt over equity, as
equity is a much more expensive form of finance. Each additional share we issue has to be serviced in perpetuity, while debt
is repayable.
We provided for capital gains tax (CGT) on our unrealized gains at the statutory rate.
OUR INVESTMENTS
As we do not aim to be a diversified outside passive minority investor, but rather a controlling (or at least influential) owner
of businesses, we have changed the way we present our holdings this year.
Our core investments, where we have a significant stake in the business, and associated influence, are grouped together.
We expect to be long-term capital partners of these businesses and their management teams. At year-end, this made up
85,5% of our asset base. Our minority stakes are now grouped separately, and make up 12,4% of our asset base. We will
either increase our ownership or sell out of these businesses over time. There is a third group called other investments. This
consists of interests in businesses we are either in the process of exiting or acquiring. Either way, we do not think it is in our
shareholders’ best interest that we disclose any specifics, as this could have the effect of jeopardizing the transaction.
Here are the companies and management teams in which we have placed our confidence:
% Directors’ % of
Owner- Cost fair value (1) net asset
Notes ship Rm Rm value
Core investments 708,8 1 195,60 85,5
Goldrush 2 53,3 406,0 816,4 58,4
Trans Hex 3 25,5 96,1 110,0 7,9
West Coast Resources 3 27,2 39,4 53,3 3,8
JB Private Equity Investors Partnership 4 90,0 71,1 100,9 7,2
Outdoor Investment Holdings 5 28,3 41,1 59,9 4,3
College SA 6 88,1 55,1 55,1 3,9
Portfolio investments 114,1 175,4 12,4
Conduit 7 5,4 20,9 46,2 3,3
La Concorde 8 5,1 32,3 42,3 3,0
Excellerate 9 6,2 14,7 34,0 2,4
ELB Group 10 3,3 29,0 21,2 1,5
Sovereign Food 11 2,7 11,1 18,4 1,3
KLK Landbou 12 6,2 6,1 13,3 0,9
Other investments 13 139,6 145,3 10,4
Receivables 8,3 0,6
Cash and cash equivalents 170,6 12,2
Liabilities (mainly CGT) 14 (146,3) (10,46)
Preference shares issued to ABSA (150,1) (10,73)
Net asset value 1 398,8 100,0
NAV per share (“R”) 27,35
Notes:
1. IFRS requires RAC, as an investment entity, to place a fair value on all its assets. We have not changed our valuation
method. Where possible, we use market prices, either listed or over the counter. 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. In select circumstances, we have provided
debt to some of our investee companies. In these rare instances, our valuations above include both equity and debt.
We tend to value our unlisted investments towards the lower end of a fair value range, which implies a significant
discount to the values of similar companies in the listed environment. As a result our balance sheet naturally provides
our shareholders with protection against random negative surprises – the sort of surprises that hit even the best listed
business prices from time to time. If such once-off bad things happen, we are less likely to be forced to reduce the
valuations at which we carry our investments. Conversely our shareholders could expect the odd windfall gain, when,
as a result of corporate action, value is added to a previously discounted asset through better liquidity and visibility.
This year, we had a perfect example of such a situation. Our investment in Dischem was held in an unlisted holding
company called Fledge Holdings, over which we had no influence or control. Although we recognized that Dischem
was a valuable business, we placed a big discount on its valuation due to the lack of influence and given the fact that
we could not freely transact in Fledge shares. Once Dischem listed, the Fledge structure was unwound, and value was
realised. To be exact, the value that emerged was R187mn in excess of our prior carrying value, or R3,61 per RAC
share.
We expect more realisations like this in the future – we just don’t know the timing or magnitude. Valuation is as much
an art as a science, and any attempt to place a fair value on an asset should be accompanied by warnings and
disclaimers. The accounting profession’s increased use of the fair value methodology brings about much false precision,
and heightened risk for naive users of financial statements. It also creates significant opportunity for promoters to
misrepresent reality – a very common occurrence in the stock market. We intend to do our best to avoid such
situations.
Our fair value is an imprecise estimate of the intrinsic value of RAC, but we do try to pitch it at the lower bound of this
wide grey area. It would be fair to say that we would be more inclined buyers than sellers at the fair values of the assets
in our portfolio.
2. Goldrush has grown into the largest alternative gaming group in the country. At year end, Goldrush operated 14 Bingo
sites. The group had rolled out 1 614 limited payout machines out of a total licensed opportunity of 4 085. The group
also operated 23 sports betting shops out of a potential opportunity of 36 licenses.
Goldrush today operates in all 9 provinces of the country, as well as in Lesotho and Tanzania. The group employs
more than 1 400 staff throughout its operations. Its customers are served under the Goldrush (Bingo, LPM), Crazy
Slots (LPM) and G-bets (Sports betting) brands.
As disclosed in our last commentary, Goldrush has entered into an agreement to purchase the Boss Gaming Group,
an operator of Bingo and LPMs in the Eastern Cape and KZN regions. This transaction is still subject to Competition
Commission approval, but there is no reason for us to expect the transaction not to conclude. The delays are purely
administrative. Once the transaction is concluded, our Bingo customers will be served under the Goldrush and Bingo
Royale brands. The transaction with Crazy Slots became unconditional in March 2017, and had a negligible impact
on our results for the year.
As an operator in a highly regulated industry, the primary value of our business derives from the ownership of its
licenses. Without the entrenched rights to operate these licenses, our business would be less valuable. As Goldrush
matures and improves the scale of its operations, the group has become more successful at:
• acquiring licenses, both through a very competitive bidding process for new licenses and through acquisition
of existing licenses from other operators; and
• rolling out existing licenses.
The table below shows that management has almost doubled the number of licenses across all segments over the
last two years. This still excludes the Boss Gaming transaction.
Summary of gaming licenses in the group
Mar 2015 Mar 2016 Mar 2017
Bingo Licenses Owned 11 14 18
Licenses Rolled out 11 14 14
LPM * Route/ISO Licenses Owned 4 6 9
Machines Approved 1 900 2 520 4 085
Machines Rolled out 1 042 1 360 1 614
Sports Betting Licenses Owned 19 30 36
Licenses Rolled out 15 18 23
* A 1 000 machine Route license has become the subject of a review process during the year, and is therefore excluded from these
numbers.
In the past financial year, the group increased revenue by 19,1%, while sustainable EBITDAR (the measure we use
to evaluate the progress of the business) increased by 26,5%. Progress was held back a little by delays in rolling out
more limited payout machines in some of our newer territories. Bingo operations and Sports betting set the pace this
year.
Selected financial information for the Goldrush Group
Mar 2015 Mar 2016 Mar 2017
(Rmn) (Rmn) (Rmn)
Total Revenue 517,4 627,1 747,2
Sustainable EBITDAR 151,2 181,3 229,5
Net Financial Indebtedness 101,0 96,1 112,8
Our valuation for Goldrush is based on an earnings multiple for the existing operations (as reflected in sustainable
EBITDAR) and an adjustment for the balance sheet structure. This includes financial indebtedness as reflected above,
plus market- related valuations for non-operational licenses.
During the last financial year, RAC acquired control of Goldrush and at year end owned a direct stake of 53,3% in the
Group. The multiple used for our valuation increased slightly over the last year from 6 to 6,5 to reflect RAC acquiring
control, the increased quality of the business due to scale and to acknowledge positive developments in the regulatory
environment.
Earlier in our letter we referred to opportunities to deploy more capital into high quality businesses. Goldrush is a
shining example of the potential outcome of a good management team in charge of a good business. Due to its nature,
Goldrush still has a long growth path ahead of it as existing operations mature and new operations are initiated.
3. At Trans Hex (“Transhex” or “TSX”) diamond prices have stabilized over the past 12 months, but the strong rand has
had a negative impact on revenue. Transhex has an interest in 3 operations: The Lower Orange (LOR – 100% owned),
West Coast Resources (WCR – 40% owned) and Angolan-based Luarica Resources (LR, 40% owned).
Transhex reported disappointing results for the year, primarily driven by underperformance in terms of volumes at both
WCR and LOR. LOR is nearing the end of its life, and management is addressing the issue pro-actively. Results from
this operation will continue to be even more lumpy than usual. WCR has delivered results below even our early
conservative expectations. LR is performing very well, and has scope to expand its operations.
Our interest in WCR has been further impaired due to the operational underperformance.
Please see Transhex’s results for more detail.
During the course of the year, companies aligned with Dr. CH Wiese acquired over 50% of the shares in issue of
Transhex. RAC entered into an agreement with these entities to make an offer to all other minorities in Transhex. As
a result, RAC acquired an additional 402 206 shares, and the consortium now controls 75% of the shares of Transhex.
The board has been reconstituted and we are working hard to get the business back on an upwards trajectory.
Our investment in TSX is carried at the market price, while our investment in WCR is carried at net asset value. This
valuation has been reduced over the past year to reflect the continuing operational underperformance.
4. RAC owns 90% of JB Private Equity (“JB”) an entity that has as its only investment a 37% stake in Sentula Mining, a
mining services company listed on the JSE. JB increased its shareholding in Sentula marginally during the course of
the year. At the time of our initial investment we appointed our co-investor, Jacques Badenhorst, as the CEO.
During the past financial year Sentula completed the bulk of the restructuring and repositioning of the Group and its
operating subsidiaries. This included a further reduction in Group overhead expenses, closing down the contract
mining operations, investing in the drilling and blasting and heavy crane lifting businesses, raising R150mn financing
for the expansion of the anthracite mine as well as repaying the senior debt term facility. Although not dependent on
it, the operating subsidiaries are well-positioned to take advantage of any sustained upswing in the commodity cycle.
We value the partnership based on its holding of Sentula, which in turn, is valued at its listed price. Over the past year
we have seen a nice uplift in the markets estimate of the value of the business, as expressed in its share price. Time
will tell if the market is appraising Jacques’ efforts accurately.
5. RAC owns 28,3% of Outdoor Investment Holdings (OIH). 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. Revenue was up by more than 10% for the year, and operating profits by a similar
amount. OIH, has performed in line with expectations for the year ended 28 February 2017. Retail consumers are
under pressure and with more than 360 competitors, the market is currently overtraded. Gross margin and inventory
management will be a major focus point for the coming year. Safari & Outdoors’ new East Rand store started trading
during March 2017. This increases the store base to 4, and the effect on OIH will be evident in next year’s results. We
have valued OIH at the same multiple as last year – an EBITDA multiple of 4 times. As profits have been just about flat,
there has been very little change in the value of OIH over the past year.
6. During the year, we invested a further R 28,5mn into College SA, the company that houses our education-focused
assets. This tertiary education group serves students under three brands, namely “College SA”, “Tabaldi Online
Accounting Classroom” and “IASeminars”.
College SA employs – beyond business management – dedicated academics, administrators, client services
professionals, education lawyers and systems developers. We pro-actively work with our regulators, as we have learnt
over time that regulation provides valuable barriers to entry.
Through the three brands, the business served almost 5 000 active students last year. We deliver a wide range of options
– from supporting UNISA students studying to become Chartered Accountants, to Middle Eastern central bankers that
want to sharpen their international accounting skills, and full-time employees that want to progress in their career
through completing a business analyst course. Of course there are also young South African school leavers that could
not gain entrance to the public tertiary system due to lack of capacity, funding or quota systems.
One of the very near term objectives is to develop and obtain accreditation for more of our own courses and programs
and to obtain even higher accreditation for our businesses. This might take a bit longer, but it is certainly a lot cheaper
than buying them in the market currently.
While the group of businesses making up College SA were attractively priced and reasonably profitable at the time,
we see attractive returns on capital invested in the business as it grows scale, brands and reach. We therefore plan to
reinvest all our cash flow from our existing business and some further capital into these high-return opportunities.
Since we have made meaningful further investments during the year, our range of valuations for College SA still falls
fairly close to the book value of our investment, which is also our fair value for the investment at this stage.
7. RAC owns 5% of Conduit Capital, a listed specialist insurance business. We have a high regard for management and
their business and investment strategy. Our shareholding has remained unchanged, and we value Conduit at its listed
price.
8. RAC owns 5,1% of La Concorde (previously called KWV), an unlisted wine and spirits producer. Our all-in-cost is just
over R9 per share. During the financial year, Niveus (the controlling shareholder of KWV) sold the operating assets of
KWV for R16,91 per share. In addition, La Concorde shareholders (including RAC) still retain certain assets, which
could be worth an additional R3 to R4 per La Concorde share. At year-end, we were carrying our investment in La
Concorde at R12,05 per share, the last traded price.
9. RAC owns 6,8% of Excellerate Holdings, an unlisted property services company. Profits from continuing operations
grew by 7% for the 6 months to December, as the business was affected by a weak local economy. Recently, Excellerate
entered into an alliance agreement with Cushman and Wakefield, the second largest Global Real Estate Service
Company in the world. Management is making good progress on building scale in the business.
Our interest in the business has increased, due to a share buyback. We continue to value this unlisted business at
the price of the most recent buyback, which translates to a historical P/E ratio of 6.
10. RAC owns 3% of the ELB Group. Their strategic focus is on being an internationally-recognised holistic engineering
solutions provider to the mining, minerals, power, port, construction and industrial sectors in the fields of materials
handling, mineral separation, industrial projects and power solutions. Over the 6 months to December the group
returned to profitability after a difficult period in the previous year. RAC increased its holding in ELB during the course of
the year under review. We value this listed investment at its market price.
11. At year-end RAC owned 2,7% of Sovereign Foods, a listed poultry producer. We feel that the ongoing hostile battle for
the business by a competitor has dented the intrinsic value of the business. As such, we reduced our investment
during the course of the year. We value the business at its listed share price.
12. RAC owns a 6,2% investment in KLK Landbou, an unlisted farming co-op headquartered in Upington. Their main lines
of business include meat-processing, fuel sales, raisin-processing and a motor dealership. Profits were under pressure
during their last financial year, declining by 10%. We have valued this investment at its over-the-counter trading price
which translates to a PE ratio of 4.
13. The grouping of “Other Investments” consists of investments we are in the process of exiting, or where we are building
a position. This grouping includes some listed equities, as well as derivative positions. Over time we expect the size
of this category to decline substantially.
14. 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 should include this real liability. We have provided for the CGT
payable if we were to sell our investments, but 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. Importantly, we have some control over
when and how a tax event takes place.
Events subsequent to year-end
• We have sold out of our investment in Sovereign Foods completely, realising a profit of R29mn (58cps) on the total
investment.
• Our sister company, RECM, launched a deep value fund, using a Collective Investment Scheme structure that is
appropriate for Qualified Investors. The fund also has liquidity terms that suits long term investors willing and able to
make a long term commitment. RAC became the anchor investor in the fund, by injecting our holdings of undervalued
minority stakes from our portfolio investments into the fund. These included ELB and KLK. We believe value investing
is poised for an upswing, and RECM is the best fund manager to take advantage of this. The stocks we injected into
the fund are all undervalued, but in return we received units in a fund with a slightly wider portfolio of similarly
undervalued assets. We believe the dedicated focus of the deep value fund will lead to better returns.
It is worth repeating what a fellow value investor recently said:
“In environments with wide spreads like today, the historical data have been quite compelling; wide valuation spreads
and the resolution of uncertainties have generally led to extended periods of value outperformance.” – Rich Pzena
• We have concluded negotiations with ABSA to increase their debt facility to us by a further R200mn to a total of R350mn.
This gives us additional flexibility to invest into our existing set of opportunities, or take advantage of any new
opportunities. The terms are the same as for our existing facility.
• We receive an increasing amount of phone calls around new investment opportunities. While we appreciate these,
and look forward to receiving even more over time, most of the time the answer from our side is no. During the year
we did get a call that piqued our interest however. The company in question is Distribution and Warehousing Network
Limited (“DAWN”), which recently fell on hard times. It was a classic “platform” type situation, where management
thought they could acquire multiple businesses, and simply add them to the existing platform of corporate services.
The theory was that costs could be reduced and revenue synergies achieved. And for a while the market agreed.
DAWN’s share price peaked at around R18 per share, valuing the business at R4bn.
At the time of the call to us, the company was in dire straits with its bankers, and needed emergency funding. At the
time, the share price was R2,20. We stepped in to underwrite a deeply discounted rights issue, priced at R1,00 per share.
Most shareholders followed their rights, but we did end up with 18% of the company, which cost us R101mn. New
management has been appointed and our partner, Theunis de Bruyn has agreed to join the board. The business has
a tough outlook for the next year or two, but we think the price we paid protects us if things don’t improve as planned.
Our Strategy
To become an exceptional investment business is simple but not easy. We are not able to forecast the gyrations of the
economy, the machinations of politicians or the madness of crowds, but we can control:
a. What we buy and what price we pay
We prefer capital-light businesses that are scalable. We also prefer honest politicians. Unfortunately, both are scarce.
So far, we have invested more than half of our capital in our preferred type of businesses. But, having a “grand
strategy” generally does not sit well with us. We prefer to be flexible in our thinking, and opportunistic in execution.
Given the current condition of the economy (poor), we are finding opportunities in capital-intensive businesses and
turnarounds, due to the prices at which these type of businesses are becoming available (low).
Regardless of the type of business we invest in, we think the price we pay will be an important determinant of whether
the investment turns out successfully. We cannot avoid risk, we can only manage it, and the best risk management tool
is still the price one pays for an asset.
b. Who we choose to partner with
We think the people we choose to partner with in our companies, are as important as the price we pay. Sometimes it
turns out to be even more important. Over the long term, a person’s character has a strong positive correlation with
success. Character also informs how people choose to deal with adversity, of which any business will face its fair share
over time.
The deal is simple: we leave our managers alone to manage their businesses as best they see fit. In return, our structure
provides a long term home for them, safe from the vagaries and short term demands of the stock market. To execute on
this simple strategy successfully requires a high level of mutual trust. In building trust, character is key.
c. The leakages in the system – fees, costs, taxes etc.
We aim to minimize leakages as far as possible. Our main cost is contractual. But there are other costs borne by the
company in addition to the management fee. So far these costs in absolute terms have not been high. However, relative
to the current size of our capital base they are too high. There are two things to keep in mind here – the first being you get
what you pay for. More importantly however, our capital base should grow faster than our cost base.
The second leakage – tax – is unavoidable. But it is possible to delay the actual payment thereof. Deferred taxes allow
us to retain capital temporarily, and in so doing, compound more capital at our (hopefully) high internal rate.
We will continue to focus on these “controllables” relentlessly.
Our Structure
At year-end, control of the Company vested with the two of us, as we own all the ordinary shares in the Company. This is a
change from last year, when Theunis de Bruyn was part of the control consortium. He remains our partner, but has relinquished
his executive duties, as he wishes to spend more time on his own investment vehicle, Calibre Capital – the Calibre in the
RECM & Calibre. As such, he opted to exchange his (unlisted but voting) ordinary shares for (listed but non-voting) participating
preference shares. He remains a significant shareholder with all of us.
The three of us – Jan, Theunis and Piet – all have a very long investment horizon. We plan to remain invested in, and managing
the affairs of RAC for a very, very long time. Most investment partnerships do not last a long time, as the partners have different
views on important issues. Our partnership disagrees on many things, but not the important ones mentioned above in the
strategy section. Unlike most marriages these days, we plan on staying the course.
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.
We also do not intend to pay dividends, given that the tax on dividends is roughly the same as CGT for most investors. So
if you need income, you can sell some of your shares. Importantly this way you have much more flexibility and control over
how and when you want to create a tax liability.
Our shareholders letter has been prepared on a look-through basis to the underlying investments, and therefore ignores RIH,
which is a 100% owned investment subsidiary of RAC.
The Future
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 really comes out in transactions. The rest of the time it is just that
– an opinion. And it is one of the opinions that should be held lightly.
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.
As the Rolling Stones sang:
“You can’t always get what you want, but if you try sometimes, well you just might find –
You get what you need”
Sometimes we want things that just don’t matter, but we believe markets will always give us what we need – good assets
at the right price, run by people who we admire. Negative economic environments increase the odds of this happening.
In the meantime, we have secured debt funding to grow our asset base, if and when we come across more such opportunities.
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. 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.
Finally, to all our shareholders – thank you for entrusting your capital to us.
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 26 July 2017 at the Southern Sun Hotel in
Newlands, Cape Town, at 11:00. At the meeting, we look forward to discussing our investment operations, and answering
as many questions as you have. Some of our CEOs will also be present, if you wish to speak to them about their
businesses. There is an invitation enclosed and we would appreciate it if you would let us know whether you will be
attending.
Piet Viljoen Jan van Niekerk
Chairman Executive Financial Director
Cape Town
20 June 2017
Statement of financial position at 31 March 2017
2017 2016
Notes R R
ASSETS
Non-current assets 1 396 876 924 983 290 784
Investments 5 1 396 876 924 983 290 784
Current assets 2 681 458 1 381 153
Investments 5 2 409 514 –
Current tax receivable 223 307 –
Cash and cash equivalents 48 637 1 381 153
Total assets 1 399 558 382 984 671 937
EQUITY AND LIABILITIES
Equity 1 398 789 332 983 101 316
Share capital – ordinary shareholders 18 206 250 50 000 000
Share capital – preference shareholders 506 296 000 450 000 000
Retained income 874 287 082 483 101 316
Liabilities
Current liabilities 769 050 1 570 621
Trade and other payables 769 050 1 504 352
Current tax payable – 66 269
Total equity and liabilities 1 399 558 382 984 671 937
Net asset value
Net asset value attributable to ordinary shareholders 102 550 538 98 310 132
Net asset value attributable to preference shareholders 1 296 238 794 884 791 184
Net asset value per ordinary share (cents) 2 735 1 966
Net asset value per preference share (cents) 2 735 1 966
Statement of comprehensive income for the year ended 31 March 2017
2017 2016
Notes R R
Revenue 30 163 291 6 601 449
Operating expenses (1 517 457) (1 401 609)
Operating profit 28 645 834 5 199 840
Other income – 93 094 588
Fair value gains on subsidiary 362 590 140 29 505 129
Profit before taxation 391 235 974 127 799 557
Taxation (50 208) 8 278 565
Profit for the year 391 185 766 136 078 122
Other comprehensive income:
Items that may be reclassified subsequently to profit or loss:
Realised gain on sale of available-for-sale investments recycled
to profit or loss – (93 094 588)
Taxation related to components of other comprehensive income – 13 144 337
Other comprehensive income for the year net of taxation – (79 950 251)
Total comprehensive income 391 185 766 56 127 871
Earnings and headline earnings per share
Per share information (ordinary and preference)
Basic and diluted earnings per share (cents) 6 765 272
Basic and diluted headline earnings per share (cents) 6 765 86
Statement of changes in equity for the year ended 31 March 2017
Fair value
adjustment
assets Total
Preference Ordinary available- share-
share share for-sale Retained holders’
capital capital reserve income equity
R R R R R
Balance at 31 March 2015 450 000 000 50 000 000 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 450 000 000 50 000 000 – 483 101 316 983 101 316
Profit for the year – – – 391 185 766 391 185 766
Share issues 56 296 000 – – – 56 296 000
Share buy back – (31 793 750) – – (31 793 750)
Other comprehensive income – – – – –
Balance at 31 March 2017 506 296 000 18 206 250 – 874 287 082 1 398 789 332
Statement of cash flows for the year ended 31 March 2017
2017 2016
R R
Cash flows from operating activities
Cash utilised in operations (2 252 759) (728 983)
Interest income 169 541 106 824
Dividends received 3 500 000 6 500 000
Tax paid (339 784) (7 846 641)
Net cash inflow/(outflow) from operating activities 1 076 998 (1 968 800)
Cash flows from investing activities
Purchase of investments (2 409 514) –
Net cash outflow from investing activities (2 409 514) –
Net movement in cash and cash equivalents (1 332 516) (1 968 800)
Cash and cash equivalents at the beginning of the year 1 381 153 3 349 953
Cash and cash equivalents at the end of year 48 637 1 381 153
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.
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 from capital appreciation, investment income or both.
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 made either through a fully owned subsidiary incorporated in South Africa, RAC
Investment Holdings (Pty) Ltd, (“RIH”) or directly.
During the prior year 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 opening
balance of the loan to RIH of R114 059 440 as at 1 April 2015 was converted to share capital by RIH issuing an
additional 10 shares to RAC during the prior year. 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. Notes 5.1 and 5.3 disclose the investment in RIH as required by IFRS and notes 5.2 and 5.4 provide additional
disclosures that the directors deem useful by looking through RIH to the underlying investments. The transfer of the
investments, (previously held as available- for-sale), to RIH resulted in the unrealised gains of R93 094 558, previously
recognised in other comprehensive income, being reclassified to profit or loss during the prior year. All fair value
movements on the investment in RIH are recognised in profit or loss.
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 5 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 applied the exemption in IAS 28 to carry
any interests in associates and joint ventures at fair value through profit or loss. Such application 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 report.
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. 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,
which exclude the shareholders’ letter, 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 2017 available
for download from www.racltd.co.za.
2017 2016
R R
5. INVESTMENTS
Fair value hierarchy of financial assets
Level 2
Class 4 – Money market fund 2 409 514 –
2 409 514 –
Level 3
Class 5 – Unlisted shares – Unquoted – fair value through profit or loss 1 396 876 924 983 290 784
1 396 876 924 983 290 784
Total financial assets at fair value 1 399 286 438 983 290 784
Total assets at fair value through profit or loss 1 399 286 438 983 290 784
Non-current assets – fair value through profit or loss 1 396 876 924 983 290 784
Current assets – fair value through profit or loss 2 409 514 –
Total investments 1 399 286 438 983 290 784
Management classifies money market fund as current
and other investments as non-current.
Level 3 reconciliation
Opening balance 983 290 784 441 731 147
Purchases 50 996 000 836 735 038
Sales – (324 680 530)
Gains on investments recognised in profit or loss 362 590 140 29 505 129
Closing balance 1 396 876 924 983 290 784
Please refer to the group structure note on page 14 which explains the transfer of investments to RIH in the prior year.
Level 1
Class 1 financial assets are valued at the listed price per the exchange on which they trade.
Class 2 financial assets are valued at the quoted price based on the latest over the counter trades.
Level 2
Class 3 financial assets are valued based on the price of the underlying assets.
Class 4 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
Class 6 financial assets are unlisted shares valued at the last traded price between third parties if the transaction
occurred within the last 6 months.
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 • Price/Earnings ratio
• Equity and net debt of investee • Expected cash flows
• Return on capital • 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. Management are responsible for preparing the valuations which are reviewed by the Audit and Risk
Committee and approved by the Board.
In terms of IFRS, RAC is an Investment Entity, and therefore no consolidated results are 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.
2017 2016
R R
Fair value hierarchy of financial assets held by RAC Investment
Holdings (Pty) Ltd
Level 1
Class 1 – Listed shares – Quoted 205 119 811 218 701 832
Class 2 – Unlisted shares – Quoted 55 550 183 28 723 525
260 669 994 247 425 357
Level 2
Class 3 – Derivative instruments 130 879 183 –
Class 4 – Money market fund 158 886 872 63 715
Class 6 – Unlisted shares – last traded price – available-for-sale 34 031 981 –
Class 6 – Unlisted shares – last traded price – fair value through
profit or loss 49 736 932 –
373 534 968 63 715
Level 3
Class 5 – Unlisted shares – Unquoted – available-for-sale 4 038 769 71 393 813
Class 5 – Unlisted shares – Unquoted – fair value through profit or loss 993 249 079 753 455 736
997 287 848 824 849 549
Total financial assets at fair value 1 631 492 810 1 072 338 621
Non-current assets 1 472 605 938 1 042 743 917
Current assets 158 886 872 29 594 704
Total investments 1 631 492 810 1 072 338 621
Summary of Net Asset Value of RIH
Total investments from above 1 631 492 810 1 072 338 621
Loans and receivables 56 749 640 82 037 280
Cash and cash equivalents 4 665 742 1 798 625
Deferred tax (117 389 895) (76 469 122)
Contingent consideration and options (22 123 176) (19 129 854)
Loans and payables (6 518 197) (27 284 766)
Preference shares (150 000 000) (50 000 000)
Net Asset Value of RIH 1 396 876 924 983 290 784
31 March 2017
5.1 Description of significant unobservable inputs and their sensitivities of RAC (level 3 investments).
Fair Significant
Valuation value unobservable Input
technique Rm inputs value Sensitivity
RAC NAV 1 397 Earnings and multiple N/A A change in the multiple of the underlying
Investment of the underlying investments by 1 would result in a change
Holdings investments (refer to in value of R106m.
(“RIH”) breakdown below)
5.2 The below table shows the sensitivities per underlying investment held by RIH as if these were held directly by RAC
(level 3 investments).
Retail: Multiples 49,9 EBITDA, Sales, PE 4–8 A change in multiple by 1 would result in an
Safari and increase in fair value of approximately R14m.
Outdoor;
(excluding
non-equity
invest-
ments)
Goldrush Multiples 816,4 EBITDAR 6,5 An increase or decrease in the EBITDAR
Group multiple by 1 would result in a change in fair
value of our investment of approximately R122m.
JB Private NAV 100,9 N/A N/A The NAV of the JB Private Equity Investors
Equity Partnership is directly linked to the underlying
Investors investment in Sentula Mining Limited which is listed
Partnership 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 R8,7m impact on the Partnership
NAV.
Mining:
West NAV 26,1 Valuation of mining 19% A multi-period excess earnings method was
Coast rights discount used to calculate the mining rights in WCR.
Resources rate A change in the value of the mining rights by
(excluding 10% would result in a R24,7m change in the NAV
non-equity of WCR.
invest-
ments)
Other level 3 investments 4,0
Total 997,3
31 March 2016
5.3 Description of significant unobservable inputs and sensitivities of RAC (level 3 investment).
Fair Significant
Valuation value unobservable Input
technique Rm inputs value Sensitivity
RAC NAV 983,3 Fair values of the N/A A 10% increase/decrease in the fair value of the
Investment underlying investments underlying investments would result in an
Holdings (refer to breakdown increase/decrease in value of R98m.
(“RIH”) below)
5.4 The below table shows the sensitivities per underlying investment held by RIH as if these were held directly by
RAC (level 3 investments).
Retail: Multiples 192,1 EBITDA 4–8 A change in multiple up by 1 would result
Safari and in an increase in fair value of approximately
Outdoor; R35m.
Fledge
(excluding Discount for lack of 35% – 45% A change in discount rate of 10% would result in a
non-equity marketability and change in fair value of approximately R66m.
invest- liquidity to listed entity
ments)
Goldrush Multiples 446,8 EBITDAR 5–7 A decrease in the EBITDAR multiple by 1
Group 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 for lack of 1,50% A change in discount rate to 10% would result in a
marketability and change in fair value of approximately R2,3m.
liquidity available NAV
on latest
as a check on last
traded price
JB Private NAV 61 N/A N/A The NAV of the JB Private Equity Investors
Equity Partnership is directly linked to the underlying
Investors investment in Sentula Mining Limited which is listed
Partnership 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:
West NAV 73,5 Valuation of mining 10% A multi-period excess earnings method was
Coast rights used to calculate the mining rights in WCR.
resources There are unseen inputs into this calculation.
(excluding A change in the value of the mining rights by 10%
non-equity would result in a R14 million change in the NAV of
invest- WCR.
ments)
Education: Multiples 21,2 EBITDA 4–6 A change in multiple up by 1 would result
SA College in an increase in fair value of
approximately R4 million.
Other level 3 investments 3,9
Total 824,8
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 hunting equipment industry has 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. SA College and Excellerate have been classified
as level 2 in the current year as they have been valued using the last traded price.
2017 2016
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 at year-end
Ordinary shares 3 750 000 5 000 000
Preference shares 47 400 000 45 000 000
Reconciliation of issued shares to weighted average number
of shares
Ordinary shares
Opening balance 5 000 000 5 000 000
Share buy back (393 836) –
Weighted average number of ordinary shares 4 606 164 5 000 000
Preference shares
Opening balance 45 000 000 45 000 000
Share issues 1 534 795 –
Weighted average number of preference shares 46 534 795 45 000 000
Total weighted average number of shares 51 140 959 50 000 000
Earnings
Net profit after tax 391 185 766 136 078 122
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)
Headline earnings 391 185 766 42 983 534
Basic and diluted earnings per ordinary and preference shares (cents) 765 272
Basic and diluted headline earnings per ordinary
and preference shares (cents) 765 86
7. SUBSEQUENT EVENTS
Subsequent to year end the following significant transactions have occurred in RIH:
The Distribution and Warehousing Network Limited (“DAWN”) rights issue closed, resulting in RIH subscribing
for 100 640 017 shares at R1 per share.
Investment in Sovereign Foods was sold for a profit of R29m.
An investment was made into the RECM Flexible Value Prescient QI Hedge Fund totalling R40,7m.
ABSA has made another R200m of financing available to RIH on the same terms as the current R150m of
preference shares. RIH has drawn down on R50m of this subsequent to year-end.
A loan facility totaling R24m has been provided to Trans Hex which will be available for draw down as and when
required. The loan repayment date is 30 June 2018 and it will attract interest at 24% per annum.
Corporate information
RECM AND CALIBRE LIMITED AUDITORS
(“RAC” or “the Company”) Ernst & Young
Inc. Waterway
COUNTRY OF INCORPORATION AND DOMICILE House 3 Dock
South Africa Road
V&A Waterfront
NATURE OF BUSINESS AND PRINCIPAL ACTIVITIES
Cape Town 8001
Investments as principal activities
(PO Box 656, Cape Town, 8000)
COMPANY REGISTRATION NUMBER
SPONSOR
2009/012403/06
Questco (Pty) Ltd
PREFERENCE SHARE CODE 1st Floor, Yellowwood House
RACP Ballywoods Office Park
33 Ballyclare Drive
ISIN Bryanston 2021
ZAE000145041 (PO Box 98956, Sloane Park, 2152)
DIRECTORS TRANSFER SECRETARIES
T de Bruyn (Non-Executive Director) Link Market Services South Africa (Pty)
Z Matlala (Independent Non-Executive Director) Ltd 13th floor, Rennie House
T Rossini (Independent Non-Executive Director) 19 Ameshoff Street
JG Swiegers (Independent Non-Executive Director) Braamfontein, 2004
JC van Niekerk (Executive Financial Director) (PO Box 4844, Johannesburg, 2001)
PG Viljoen (Executive Chairman)
BANKERS
COMPANY SECRETARY The Standard Bank of South Africa
G Simpson Ltd Park Vista Building
Cnr Hendrik Verwoerd & Embankment Street
FINANCIAL STATEMENTS INTERNALLY COMPILED BY Centurion
D Schweizer – Chartered Accountant (S.A.) (PO Box 9633, Centurion, 0046)
REGISTERED OFFICE AND BUSINESS ADDRESS ATTORNEYS
6th Floor, Claremont Central 8 Cliffe Dekker Hofmeyr
Vineyard Road 11 Buitengracht
Claremont Street
Cape Town, 7700 Cape Town, 8001, South Africa
(PO Box 695, Cape Town, 8000)
POSTAL ADDRESS
PO Box 45040 FINANCIAL SERVICES PROVIDERS
Claremont 7735 Regarding Capital Management (Pty)
Ltd RAC Advisory (Pty Ltd
TELEPHONE NUMBER
6th Floor, Claremont Central
(021) 657 3440
8 Vineyard Road
EMAIL ADDRESS Claremont
info@recm.co.za Cape Town, 7700
(PO Box 45040, Claremont, 7735)
WEBSITE
www.racltd.co.za
21 June 2017
Sponsor: Questco (Pty) Ltd
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