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CONDUIT CAPITAL LIMITED - Condensed Consolidated Unaudited Results for the Six Months Ended 31 December 2018

Release Date: 29/03/2019 17:45
Code(s): CND     PDF:  
 
Wrap Text
Condensed Consolidated Unaudited Results for the Six Months Ended 31 December 2018

CONDUIT CAPITAL LIMITED
Incorporated in the Republic of South Africa
(Registration number: 1998/017351/06)
Share code: CND        ISIN: ZAE000073128
(“Conduit” or “Conduit Capital” or “the Group”)

CONDENSED CONSOLIDATED UNAUDITED RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2018

Review of Results and Commentary

Conduit Capital is a holding company primarily invested in the insurance industry. Conduit’s objective is to
support the development of a diversified insurance group complemented by a value-oriented, non-insurance
investment programme. The Group’s key aim is to compound underlying business value per share over the
long-term, at rates greater than the market in general.

During the six months ended 31 December 2018, the net asset value (“NAV”) per share increased by 1.7%
from 198.0 cents to 201.4 cents. When compared to 31 December 2017, the increase was 6.8%. Headline
earnings for the six months ended 31 December 2018 were 3.3 cents, compared to 9.5 cents for the six
months ended 31 December 2017 (“the Prior Period”). In management’s view, the change in net asset value
per share more accurately reflects the change in underlying business value, as compared to the change in
headline earnings per share. The reason is that the company’s primary earnings drivers, being insurance
underwriting, and the mark-to-market changes in the value of the investment portfolio, are by their nature
volatile. However, the net asset value itself understates the intrinsic value of the business because of the way
in which various assets and investments are accounted for. This volatility is magnified due to the high growth
phase in which the company is in.

At 31 December 2018 the Group’s total equity was R1.42 billion compared to R1.35 billion as at
31 December 2017, reflecting an increase of 5.2%. Total assets increased over the corresponding period by
22.1% from R2.22 billion to R2.71 billion. Equity in the insurance operations (including the value of equities
investments held by the insurers) was R1.04 billion. Shareholders have 215.6 cents per share in investments
(excluding operating businesses and cash) working for them.

Constantia Insurance Group (“Constantia”)

Constantia, which is wholly owned by Conduit, comprises the Group’s insurance operations. A separate board
of directors governs each insurance subsidiary 1. Constantia’s management team centrally manages each
business through a delegated decision-making structure. The assessment of results is on an “all in” basis i.e.
not per individual entity or business, but rather the group as a whole.

Compared to the Prior Period, Constantia's gross written premium increased by 23.8% to R898.4 million. Net
written premium, adjusted for solvency reinsurance, increased by 43.7% to R856.2 million. Constantia uses
solvency reinsurance to reduce the statutory capital that it is required to hold against certain lines of business.
While this facility reduces the required amount of statutory capital, it also reduces the reported level of net
premium. Therefore, the company provides net written premium on an adjusted basis for better period on
period comparison. Constantia mostly retains the underwriting risk on this ceded premium.




1
  Constantia Insurance Company Limited (“CICL”), Constantia Life and Health Assurance Company Limited (“CLAH”) and Constantia Life
Limited (“CLL”).
Constantia’s gross and net premium and underwriting margin by line of business, for the period under review
and the prior period, were as follows:

Table 12
                                     Six months to 31 December 2018                          Six months to 31 December 2017
                                                          Net excl.      Under-                                   Net excl.      Under-
                                                          solvency       writing                                  solvency       writing
                               Gross           Net     reinsurance      result 1)       Gross           Net    reinsurance      result 1)
                               R’000         R’000           R’000        R’000         R’000         R’000          R’000        R’000
Motor                        251   960      24   695      244   749    (71 368)      136   521      56   380      109   044    (47 911)
Property                      85   787       8   284       82   150     (4 013)       69   631      18   128       27   919     (5 366)
Accident and Health          437   723      42   435      422   567    (12 006)      413   585      18   685      386   490       (986)
Guarantee                     13   791       6   309        6   557       (624)       13   245       7   159        7   159         633
Miscellaneous                 17   554       1   900       17   284     (1 461)       28   128       7   818       14   205     (1 827)
Liability                     74   403      62   062       65   747     (7 236)       36   540      22   643       22   643    (29 735)
Assistance                    17   148      17   148       17   148    (14 991)       28   186      28   186       28   186       3 275
Unallocated                          -             -              -     (2 741)              -             -              -     (4 763)
Underwriting result          898 366      162 833         856 202     (114 440)      725 836       158 999        595 646      (86 680)
Cost of solvency
reinsurance                                                            (12 473)                                                 (6 271)

Total                                                                 (126,913)                                                (92 951)


1)
     Including head office expenditure allocation


Premiums increased as the business scaled its capacity and penetration into the market. The goal is to
continue to build this scale in order to attract and retain high quality niche books which can meet the 95% (or
better) combined ratio3 target. Constantia has required large up-front investment to build the infrastructure,
people resource and systems necessary to support an eventual medium size insurance operation. Further
premium growth is expected in the remainder of the fiscal year and into the future toward the target of
around R3.00 billion in premium at a 95% (or better) combined ratio in the next few years.

Constantia’s combined ratio target is 95% or better. The lower the ratio, the better, as it means we are
creating assets to invest at no cost. The actual combined ratio for the period was 114.5%. Adjusted for new
ventures and start-up losses (which includes our conservative reserving for medical malpractice claims), the
ratio was 108.3%. The underwriting results’ contribution was 72.0% and net expenses contributed 36.3%.
The comparative numbers for the Prior Period were 115.7% and 109.7% respectively (underwriting
contributed 60.1% and net expenses 49.6%).


The first two months of the 2019 fiscal year saw material improvements in underwriting performance across
the board based on intelligent intervention in key books. However, during the second quarter, larger than
expected claims in various new books had the effect of eliminating the gains made in the first quarter and
pushing the business into negative underwriting territory.


2
  The pro forma information in Table 1 is presented to demonstrate the effect on the Group’s reported results if the net impact of all
solvency reinsurance were reflected as a single line item. The solvency reinsurance normalised information is the responsibility of the
Group’s Board of Directors and is presented for illustrative purposes only. Due to the nature of this information, it may not fairly present
the Group’s financial position, changes in equity and results of operations or cash flows. The pro forma information has been compiled in
terms of the JSE Listings Requirements and the Revised Guide on Pro Forma Information by SAICA and the accounting policies of the
Group as at 31 December 2018. The illustrative solvency reinsurance normalised information has been derived from the Group’s
unaudited financial information.

3
   The combined ratio is calculated as net claims plus expenses divided by net earned premium.
                                                                                                                                           2
However, the underwriting problem areas are identifiable, solvable and fixable. Constantia has redoubled
efforts to focus on immediate improvement in underwriting by intervening in books much more quickly,
accessing necessary data at granular level and improving the take-on process of new books. The early signs
are positive: the months of December 2018 and January 2019 averaged net underwriting profits (before
operating expenses) in excess of R10 million per month. This area is receiving much attention at Constantia,
where the team is moving fast to improve their new business due diligence processes and remedial action
agility and effectiveness.

Weakness in some books was offset by better results in Constantia’s healthcare division:

-   The medical malpractice business now insures 1,200 specialists in South Africa, from a zero start just
    more than 24 months ago. During the 2018 calendar year the company spent R21.8 million on
    reinsurance for Medical Malpractice (for client credibility, not risk). The July renewal on this policy is
    expected to reduce reinsurance cost by 50.0%, reducing the combined ratio on the book (currently
    reflected at 96.9%, before head office costs) by a full 8.7 percentage points.
-   The GAP product offers insurance to people that are already medically insured and provides access to
    higher quality healthcare facilities for specified medical procedures. In GAP insurance (where Constantia is
    one of the largest players in South Africa), recent premium increases have positioned this business to
    deliver combined ratios toward the 90.0% range in the second six months of the financial year. Going
    forward, GAP cover will be a narrower, more limited product to control risk exposures as medical cost
    inflation accelerates. Through the introduction of improved claims analysis, this business has recently
    been able to reduce claims by several million rand per month.
-   The Primary Healthcare business offers high value for money health benefits and is positioned to become
    a dominant player in the lower to middle income segment of the population. It is estimated that there are
    10 million employed South African with no or inadequate health cover. Performance in this line has been
    very good.


The Property and Casualty (“P&C”) market in South Africa is estimated at R70 billion in annual premiums.
Access to new brokers and networks through the P&C business should provide significant cross-sell
opportunities for the health and life products. P&C is also an area full of opportunity to innovate and create
new products. Constantia’s entry into P&C has been the major source of increased premiums and claims.
However, the strategy to access new distribution paths and remediate new books that are taken on is
sustainable. Several previously problematic books were successfully remediated, although this process takes
time (up to 18 months in some cases). Certain new books that were added to the business are in various
stages of improvement but are unfortunately still loss-making. The business has become a lot more efficient
in the due diligence and remediation process and it is expected these initiatives will reduce the impact of
higher than expected losses from new books. The Heavy Commercial Vehicle business in particular has been
reassessed, new technology requirements for drivers and trucks implemented and new expertise appointed to
better manage this area.

New products such as Small and Medium Enterprise Group Life, Body Corporate and value-add motor
insurance are being readied for distribution through broker networks in the second half of the year. The
partnership with Extreme Fighting Championship (“EFC”) was renewed and has proven to be a highly effective
marketing channel of the Constantia brand. Excluding the short-term negative impact of new business taken
on, the underwriting result for the full year is expected to improve from the first six months.

                                                                                                             3
The company successfully invested in Rikatec Proprietary Limited (“Rikatec”), a company owning a predictive
analytics platform that is able to predict mechanical breakdown in any motor vehicle manufactured since
1996. Rikatec uses algorithms that sift through live data generated from a motor vehicle’s internal computer
to alert drivers or fleet managers to upcoming mechanical issues before they occur. After period end, the
National Empowerment Fund became an investor in Rikatec alongside Constantia at a valuation twice that of
Constantia’s investment cost. Constantia is a key investor in this business that has global potential and
patented technology in over 140 countries. The platform serves as a key component of Constantia’s motor
insurance programme going forward.


Constantia’s strategy can be divided into three distinct parts: Organic, Adjacent and Acquisition:

-   Organic refers to the development of existing business lines into annualised premium of around R3 billion
    over the next few years.
-   Adjacent refers to investments and initiatives ancillary to insurance opportunities that generate service
    income, such as value-add products or insurance industry servicing opportunities.
-   Acquisition refers to the opportunity to acquire smaller insurers, underwriting managers or portfolios of
    insurance, where Constantia can offer a more suitable home for these businesses.


The growth opportunities through these three channels are significant, and much work has been done to
position the company to optimise its strategy. With all good things, however, it takes times to build the scale
necessary. Constantia is, despite the accounting loss, creating tremendous value as it positions to rapidly and
sustainably grow into the medium size insurer of choice in the South African market.

Equity investments

The Group’s equity portfolio produced a pre-tax return of 15.3% for the period under review (32.8%
annualised). The equity portfolio is held in two subsidiaries at holding company level and various entities in
the insurance group (now including the Snowball Wealth portfolio). The subsidiaries outside of the insurance
operation are not subject to insurance regulation.

The Group’s strategy is to invest in a concentrated portfolio of compounding type businesses. The Group
invests in high conviction ideas where the risk of loss is limited and the upside potential uncapped due to the
durability of the underlying company’s competitive advantage. The Group invests in outstanding businesses
that have the capacity to compound their value at a high rate for a long time. It often invests in businesses
that are either misunderstood by, or uninteresting to the broader market, which allows for attractive entry
points. Conduit does not typically invest in businesses in which the majority of the investor community is
invested, as the company is of the view that such a strategy will not result in superior long-term performance
against the market in general. Conduit is not a trading operation with quick ins and outs, nor a short-term
focus; rather it makes select long-term investments in businesses it knows well. This is a key differentiator,
which allows the Group to focus on the long-term ownership of quality businesses. Equity investments are
viewed as part ownership in real businesses, much like Conduit owns Constantia. Part of this process is having
the ability to stay the course even during tough times, as business and the economy moves through cycles. It
would be a mistake, in management’s view, to sell at the bottom of the cycle when the news is worst, and
buy at the peak when the future appears certain. The investment and economic cycle is at an extremely low
point at this stage, creating opportunities for the Group.

Investment ideas are valuable intellectual property. The company does not make public its insurance
underwriting formulas or expose valuable data such as its trove of medical malpractice data. There are risks


                                                                                                             4
that trader-type market participants can “front-run” Conduit’s long-term investing ideas. As a result,
management has decided not to disclose further details about the public equity portfolio.

The Group’s view is that the equity portfolio valuation is significantly below a conservative estimate of the
underlying business value and consequently, it is believed that the portfolio will generate substantial returns
well into the future.

Private Investments

Conduit owns 51% of the issued ordinary shares in Deal Design Commercial Property and Business Broking
Proprietary Limited (“Deal Design”), the holding company of the Century 21 Realty Master Licence in South
Africa (“Century 21”). Century 21 is a global leader in real estate brokerage worldwide with approximately
9,400 franchise offices and more than 127,000 independent sales associates located in 80 countries and
territories. Century 21 does not own any agencies but rather provides agents with the license to trade under
the Century 21 brand, including access to the global marketing power and best in class systems of Century
21. The brand has significantly outperformed an extremely tough South African residential market, which is a
major credit to its leadership and people.

Conduit owns 40% of Anthony Richards and Associates Proprietary Limited (“ARA”), a credit recovery
specialist. After a period of weak performance, the turnaround at ARA continues, which includes the
appointment of a new CEO at the company. ARA generates large free cash from operations and contributed
R7.60 million to Conduit’s cash flows during the period under review.

Africa Special Opportunities Capital Proprietary Limited (“ASOC”) is an investment firm that provides
companies with tailored solutions to facilitate necessary restructuring or recapitalisation during times of
distress. Conduit is an investor in ASOC’s first investment fund and is a shareholder in the management
company. ASOC has completed three transactions in the education, media and logistics industries,
respectively. While the tough economy delays value realisation, it also creates great opportunities for add-on
investments.

Capital Management

Conduit repurchased 4.13 million shares on the open market at an average price of 172 cents (including
expenses) during the period under review. No interim dividend has been declared due to the growth
opportunities that require capital within the Group.

Prospects

The extremely tough South African economic conditions create headwinds for all of our investee companies
much as they do for the rest of South African business. This period has been a difficult one for all South
African citizens and corporates. Nevertheless, Conduit has a laser focus on the long-term. Constantia is
expected to achieve an underwriting profit after operating expenses in the second half of the fiscal year.
However, this profit is not expected to result in an underwriting profit for the full year. The numbers must be
seen in the context of Constantia continuing on its ambitious growth drive. The company is full of new and
extremely talented individuals who together can achieve great things given enough time and support.


Shareholders should remember that insurance underwriting is volatile, especially in a business that is growing
as quickly as Constantia. Many lessons have been learned and the business is improving at a rapid pace. The
private investment portfolio has three solid investments all of which are on course for improved economics in
the medium-term. The equity portfolio is and will remain volatile on a mark-to-market basis, and remains, in
management’s view, materially undervalued. While the past six months were tough, Conduit has an
unwavering drive to create value over the long-term through all cycles, even if the fruits will only be enjoyed
later.


Sean Riskowitz
Chief Executive Officer

Johannesburg
29 March 2019


INTERIM RESULTS CALL

Shareholders are advised that management will be hosting an investor call at 15:00 CAT on 2 April 2019 to
provide commentary in terms of the interim results for the six months ended 31 December 2018.

The call will focus on the Interim Results Announcement, which is available on the Group’s website at
http://www.conduitcapital.co.za/financial/financial_information.php, and how it contributed towards our long-
term vision and growth strategy.

Please send an email, by 1 April 2019, to results@conduitcapital.co.za to pre-register for the call.




                                                                                                             6
CONDENSED CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
                                                                                            Restated 1)
                                                                      Unaudited             unaudited                Audited
                                                                     six months            six months                    year
                                                                          ended                 ended                  ended
                                                                    31 Dec 2018           31 Dec 2017            30 Jun 2018
                                                                          R’000                 R’000                  R’000
     Gross written premium                                               898 366               725 836             1 536 885
     Reinsurance premium                                               (735 533)             (566 837)           (1 144 341)
     Net written premium                                                 162 833               158 999               392 544
     Net change in provision for unearned premium                         (4 553)               (5 615)                (716)
     Net insurance income                                                158 280               153 384               391 828
     Reinsurance commission received                                     218 404               247 931               532 035
     Other income                                                         18 040                24 428                53 440

     Income from insurance operations                                    394 724               425 743               977 303
     Total insurance expenses                                          (521 637)             (518 694)           (1 118 381)
     Net claims and movement in claims reserves                         (49   487)           (116   012)           (245   919)
     Insurance contract acquisition costs                              (135   662)           (113   346)           (257   035)
     Administration and marketing expenses                             (328   606)           (275   653)           (604   854)
     Other expenses                                                      (7   882)            (13   683)            (10   573)

     Net underwriting loss                                             (126 913)              (92 951)             (141 078)
     Net non-insurance income                                            173 180               189 645               345 098
     Investment income                                                    187 198              203 142               368 843
     Other income                                                           5 258                1 858                 7 359
     Administration and marketing expenses                               (19 241)             (15 355)              (30 912)
     Other expenses                                                          (35)                    -                 (192)

     Operating profit                                                     46 267                96 694               204 020
     Finance charges                                                       (296)                 (431)                (1 143)
     Equity accounted income                                               1 923                 4 510                  6 619
     Other expenses and losses                                                 -                 (230)                (8 191)

     Profit before taxation                                                47 894              100 543               201 305
     Taxation                                                            (25 692)             (43 154)              (73 831)
     Profit for the year                                                  22 202                57 389               127 474
     Other comprehensive income                                                -                     -                     -
     Total comprehensive income                                           22 202                57 389               127 474


     Attributable to:
     Equity holders of the parent                                         23 135                57 397               127 222
     Non-controlling interest                                              (933)                    (8)                  252
     Total comprehensive income                                           22 202                57 389               127 474


     Headline earnings                                                    23 135                57 859               133 548


     Earnings per share (cents)
     - Basic and Diluted                                                       3.3                  10.2                  20.0
     - Headline and Diluted Headline                                           3.3                  10.3                  21.0



1)
  The December 2017 numbers were restated to reflect the reclassification of ARA from “Assets held for sale” back to “Investment in
associates” due to a decision in June 2018 to take the company off the market. Also, refer to note 2.




                                                                                                                                 7
     CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
                                                                                             Restated 2)
                                                                             Unaudited       unaudited          Audited
                                                                           31 Dec 2018     31 Dec 2017      30 Jun 2018
                                                                                 R’000           R’000            R’000
       ASSETS
       Non-current assets                                                    1 695 595        1 297 742       1 512 591

       -   Property, plant and equipment                                        18 234           15   369        16 746
       -   Intangible assets                                                   114 660          103   557       122 878
       -   Loans receivable                                                          -            9   080             -
       -   Deferred taxation                                                    47 618           39   260        34 413
       -   Investment properties                                                 3 360            4   431         3 360
       -   Investment in associates                                            116 561          103   543       116 941
       -   Investments held at fair value                                    1 395 162        1 022   502     1 218 253

       Current assets                                                        1 010 510          924 711         892 726
       -   Insurance assets                                                    397 803          232 770         278 484
       -   Loans receivable                                                          -            7 149           6 330
       -   Investments held at fair value                                            2                -               2
       -   Insurance, trade and other receivables                              370 844          228 133         263 079
       -   Taxation                                                              2 509            5 528           4 741
       -   Cash and cash equivalents                                           239 352          451 131         340 090

       Total assets                                                          2 706 105        2 222 453       2 405 307

       EQUITY AND LIABILITIES
       Capital and reserves                                                  1 422 095        1 343 482       1 407 001
       - Stated capital                                                      1 163 605        1 185 463       1 170 713
       - Retained earnings                                                     248 987          156 027         225 852
       Equity attributable to equity holders of the parent                   1 412 592        1 341 490       1 396 565
       Non-controlling interest                                                  9 503            1 992          10 436

       Non-current liabilities                                                 268 344          198 670         235 282

       - Policyholder liabilities under insurance contracts                     31 494           29 384          37 200
       - Interest bearing borrowings                                               306              638             304
       - Deferred taxation                                                     236 544          168 648         197 778

       Current liabilities                                                   1 015 666          680 301         763 034
       -   Insurance liabilities                                               544 627          394 438         440 135
       -   Interest-bearing borrowings                                             309                -             307
       -   Insurance, trade and other payables                                 468 032          282 431         317 909
       -   Taxation                                                              2 698            3 432           4 654
       -   Bank overdraft                                                            -                -              29

       Total equity and liabilities                                          2 706 105        2 222 453       2 405 317



       Net asset value per share (cents)                                          201.4           188.2            198.0
       Tangible net asset value per share (cents)                                 185.1           173.7            180.6



2)
  The December 2017 numbers were restated to reflect the reclassification of ARA from “Assets held for sale” back to “Investment in
associates” due to a decision in June 2018 to take the company off the market. Also, refer to note 2.




                                                                                                                                 8
SEGMENTAL REPORT

SEGMENTAL REPORT FOR THE SIX MONTHS ENDED 31 DECEMBER 2018

                                                                             Insurance
                                                                              and Risk       Investments                 Total
                                                                                 R'000             R'000                R'000
 Income from operations                                                          394 724                  -            394 724
 Expenses                                                                      (521 637)            (2 259)          (523 896)
 Operating result                                                              (126 913)            (2 259)          (129 172)
 Equity accounted income (loss)                                                  (1 460)              3 383               1 923
 Investment income                                                                 7 260           179 334             186 594
 Other                                                                             (176)            (1 335)             (1 511)
 Profit (loss) before head office expenses and taxation                        (121 289)           179 123              57 834
 Unallocated net head office expenses                                                                                  (9 940)
 Taxation                                                                                                             (25 692)

 Profit for the period                                                                                                  22 202



 Capital utilised
 Capital employed at end of period                                            1 078 031            395,584           1 422 095
 Reallocation                                                                 (815 059)            815 059                   -

 Capital utilised at end of period                                              262 972          1 210 643           1 422 095


 Average capital utilised during the period                                     309 541            958 663           1 227 407




SEGMENTAL REPORT FOR THE SIX MONTHS ENDED 31 DECEMBER 2017 – RESTATED 3)

                                                                             Insurance
                                                                              and Risk       Investments                 Total
                                                                                 R'000             R'000                R'000

 Income from operations                                                          425 743                  -            425 743
 Expenses                                                                      (518 694)            (1 620)          (520 314)

 Operating result                                                               (92 951)            (1 620)           (94 571)
 Equity accounted loss                                                                 -              4 510              4 510
 Investment income                                                                 3 067           199 238             202 305
 Other                                                                             (368)              (501)              (869)
 Profit (loss) before head office expenses and taxation                         (90 252)           201 627             111 375
 Unallocated net head office expenses                                                                                 (10 832)
 Taxation                                                                                                             (43 154)

 Profit for the period                                                                                                  57 389



 Capital utilised
 Capital employed at end of period                                            1 051 257            265 620           1 345 733
 Reallocation                                                                 (869 135)            869 135                   -

 Capital utilised at end of period                                              182 122          1 134 755           1 345 733

 Average capital utilised during the period                                      94 387            862 309            890 428



   3)
     The December 2017 numbers were restated to reflect the reclassification of ARA from “Assets held for sale” back to “Investment in
   associates” due to a decision in June 2018 to take the company off the market. Also, refer to note 2.




                                                                                                                                    9
SEGMENTAL REPORT FOR THE YEAR ENDED 30 JUNE 2018

                                                           Insurance
                                                            and Risk       Investments            Total
                                                               R'000             R'000           R'000
 Income from operations                                        977 303                -          977 303
 Expenses                                                  (1 118 381)          (2 991)      (1 121 372)
 Operating result                                           (141 078)           (2 991)        (144 069)
 Equity accounted income (loss)                               (2 119)             8 738            6 619
 Investment income                                              8 463          358 144           366 607
 Other                                                        (1 004)                38            (966)
 Profit (loss) before head office expenses and taxation     (135 738)          363 929           228 191
 Unallocated net head office expenses                                                           (26 886)
 Taxation                                                                                       (73 831)

 Loss for the year                                                                              127 474



 Capital utilised
 Capital employed at end of year                            1 103 285          321 162        1 407 001
 Reallocation                                               (747 176)          747 176                -

 Capital utilised at end of year                              356 109         1 068 338       1 407 001

 Average capital utilised during the year                     217 122          889 864        1 066 025




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                             Unaudited       Unaudited          Audited
                                                            six months      six months              year
                                                                 ended           ended            ended
                                                           31 Dec 2018     31 Dec 2017      30 Jun 2018
                                                                 R’000           R’000            R’000

 Net cash flows from operating activities                       (94 454)        (77 794)       (112 732)
 -   Cash utilised by operations                               (102 587)        (81 700)       (127 785)
 -   Interest received                                             7 864           3 906          15 926
 -   Finance charges                                               (296)           (431)         (1 097)
 -   Dividends received from investments                             420             765           1 845
 -   Taxation received (paid)                                        145           (334)         (1 621)

 Net cash flows from investing activities                          2 146        (14 837)        (70 812)

 -   Net acquisition of associates                                     -         (5 500)         (8 395)
 -   Dividends received from associates                            3 600               -               -
 -   Acquisition of subsidiary                                         -        (15 432)        (15 257)
 -   Net acquisition of property, plant and equipment            (3 150)         (1 723)         (2 761)
 -   Net acquisition of intangible assets                          (309)         (1 380)         (9 986)
 -   Net disposal (acquisition) of financial investments           2 005           9 198        (34 413)

 Net cash flows from financing activities                        (8 401)        335 575          315 494
 -   Net proceeds from new share issue                                 -        340 573          340 450
 -   Treasury stock acquired                                     (7 108)         (1 713)        (16 340)
 -   Net movement in interest bearing borrowings                       4              (4)           (77)
 -   Net loans repaid by third parties                                 -           2 319           9 142
 -   Loans granted to associates                                 (1 297)         (5 600)        (17 681)

 Total cash movement for the period                            (100 709)        242 944          131 950
 Cash at the beginning of the period                             340 061        208 101          208 101
 Cash acquired                                                         -             86               10
 Total cash at the end of the period                            239 352         451 131          340 061




                                                                                                           10
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
                                                                                                     Non-
                                                                   Stated        Retained      controlling
                                                                   capital       earnings         interest       Total
                                                                    R'000           R'000           R'000        R'000
Balance at 1 July 2017                                            846 603           98 630             310     945 543
Total comprehensive income (loss) for the period                         -          57 397              (8)      57 389
Issue of share capital                                            350 000                -                -    350 000
Share issue costs                                                  (9 427)               -                -     (9 427)
Acquisition of non-controlling interest                                  -               -           1 690        1 690
Treasury stock acquired through subsidiaries                       (1 713)               -                -     (1 713)

Balance at 31 December 2017                                      1 185 463         156 027           1 992    1 343 482
Total comprehensive income for the period                                -          69 825             260       70 085
Share issue costs                                                    (123)               -               -        (123)
Acquisition of non-controlling interest                                  -               -           8 184        8 184
Treasury stock acquired through subsidiaries                      (14 627)               -               -     (14 627)
Balance at 30 June 2018                                          1 170 713         225 852          10 436    1 407 001
Total comprehensive income (loss) for the period                          -         23 135           (933)        22 202
Treasury stock acquired through subsidiaries                        (7 108)              -               -       (7 108)

Balance at 31 December 2018                                      1 163 605         248 987           9 503    1 422 095




NOTES TO THE CONDENSED CONSOLIDATED UNAUDITED RESULTS FOR THE SIX MONTHS
ENDED 31 DECEMBER 2018

1. Basis of preparation
    The accounting policies applied in the preparation of these condensed consolidated unaudited results for
    the six months ended 31 December 2018 (“Interim Results”) are in accordance with International
    Financial Reporting Standards (“IFRS”) and Financial Reporting Pronouncements as issued by the
    Financial Reporting Standards Council. These accounting policies are consistent with those applied in the
    annual financial statements for the year ended 30 June 2018. The Interim Results have been prepared
    making use of reasonable judgements and estimates and reporting is done in terms of IAS 34 – Interim
    Financial Reporting, the Companies Act (Act 71 of 2008), as amended, and the Listings Requirements of
    JSE Limited (“the JSE”) under the supervision of Mr Lourens Louw, the Chief Financial Officer. The
    Group’s auditors have not audited or reviewed the Interim Results.

2. Changes in accounting policies - Standards and interpretations effective and adopted in the
    current year
    During the current year, Conduit and the Group adopted the following standards and interpretations that
    are effective for the current financial year and that are relevant to its operations:


    2.1 IFRS 9: Financial instruments
          a. IFRS 9 introduces a new approach to the classification of financial assets, which is driven by the
               business model in which the asset is held and their cash flow characteristics. A new business
               model was introduced, which does allow certain financial assets to be categorised as “fair value
               through other comprehensive income” in certain circumstances. The requirements for financial
               liabilities are mostly carried forward unchanged from IAS 39. Some changes were however made
               to the fair value option for financial liabilities to address the issue of own credit risk.

          b. The new model introduces a single impairment model being applied to all financial instruments,
               as well as an “expected credit loss” model for the measurement of financial assets.



                                                                                                                    11
       c.   IFRS 9 carries forward the derecognition requirements of financial assets and liabilities from IAS
            39.

       d. Financial assets and financial liabilities are recognised on the Group’s balance sheet when the
            company becomes a party to the contractual provisions of the instrument.

       e. Loans and receivables and financial liabilities are measured at initial recognition at their fair value
            and are subsequently measured at amortised cost using the effective interest rate method.

       The adoption of this standard did not have any material impact on the results of the Group.


   2.2 IFRS 15: Revenue from Contracts with Customers
       This standard requires entities to recognise revenue to depict the transfer of promised goods or
       services to customers in an amount that reflects the consideration to which the entity expects to be
       entitled to in exchange for those goods or services. This core principle is achieved through a five step
       methodology that is required to be applied to all contracts with customers.

       The new standard will result in enhanced disclosures about revenue, provide guidance for
       transactions that were not previously addressed comprehensively and improve guidance for multiple-
       element arrangements.

       The adoption of this standard did not have any material impact on the results of the Group.

3. Re-presentation of comparative numbers
   In the latter half of the previous financial year, the investment in ARA was reclassified from “Assets held
   for sale” back to “Investment in associates” due to a decision to take the company off the market. In
   terms of IFRS 5.28 and IAS 28.21, the investment has to be recognised using the equity method
   retrospectively, as if it was never classified as held for sale, and tested for impairment as at each period-
   end. The comparative financial statements also have to be restated.

   This restatement has affected each of the following financial statement line items for the period ended
   31 December 2017 as follows:
                                                                             Previously
                                                                              reported    Adjustment    Restated
                                                                                 R’000         R’000       R’000

     Statement of Financial Position
     - Investment in associates                                                 13 543        90 000      103 543
     - Assets held for sale                                                     90 000      (90 000)            -
     - Deferred tax liability                                                (166 397)       (2 251)    (168 648)

                                                                                             (2 251)


                                                                             Previously
                                                                              reported    Adjustment    Restated
                                                                                 R’000         R’000       R’000

     Statement of Profit or Loss and Other Comprehensive Income
     - Equity accounted income (loss)                                             (84)         4 594       4 510
     - Other (expenses and losses) income                                        4 364       (4 594)       (230)
     - Taxation                                                                                1 029

                                                                                               1 029




                                                                                                               12
4. Changes in stated capital
   During the period under review Midbrook Lane Proprietary Limited (“Midbrook”) and Conduit Management
   Services Proprietary Limited (“CMS”), both wholly-owned subsidiaries, acquired an aggregate 4 130 613
   Conduit shares in the market for a total consideration of R7.11 million. The Group accounts reflect these
   shares as treasury shares.

   During the prior financial year, Conduit raised R350.0 million in cash by issuing 175 000 000 ordinary no
   par value shares by way of a rights offer. Share issue costs of R9.55 million were charged against stated
   capital. During that year, Midbrook and Constantia Insurance Company Limited (“CICL”), both wholly-
   owned subsidiaries, acquired an aggregate 8 189 497 Conduit shares in the market for a total
   consideration of R16.34 million. The Group accounts reflect these shares as treasury shares.

   Details of the shares in issue as at the reporting dates are as follows:
                                                                                31 Dec 2018        31 Dec 2017        30 Jun 2018
                                                                                        ’000               ’000               ’000

        Number of shares                                                             701 309           712 811            705 440

        - Shares in issue                                                            764 444            764 444            764 444
        - Shares held as treasury shares                                            (63 135)           (51 633)           (59 004)
        Weighted average number of shares on which earnings and diluted
                                                                                     703 410           562 618            635 674
        earnings per share calculations are based
        - Shares in issue                                                            764 444            609 417            686 293
        - Bonus issue for rights offer 1)                                                  -              4 115              2 075
        - Shares held as treasury shares                                            (61 034)           (50,914)           (52 694)

   1)
      As required by IAS 33: Earnings per share, we restated the weighted average number of shares in the prior periods by the Bonus
   issue amount due to the rights offer that took place on 11 December 2017.


5. Impairment assessment of associates
   No associate companies were impaired during the period under review. However, during the financial year
   ended 30 June 2018, the Group impaired its investment in ARA by R8.33 million.

6. Acquisition and disposal of subsidiaries
   The Group did not acquire or dispose of any of its subsidiaries during the period under review.

   During the financial year ended 30 June 2018, the Group acquired 51% of the issued share capital in Deal
   Design for a total consideration of R15.43 million. Deal Design has the South African licence for Century
   21, the world’s largest real estate brand, which offers representation in 80 countries and territories with 9
   400 offices and 127 000 property professionals globally.

   The purchase consideration was settled in cash and resulted in goodwill of R1.74 million. No goodwill was
   impaired.

   During that same financial year, Constantia sold its shareholding in a dormant subsidiary, The
   Sportpersons Insurance Broker Proprietary Limited, for a total consideration of R175 000, resulting in a
   profit of R94 000.

7. Financial instruments
   Fair value estimation
   The financial assets valued at fair value through profit and loss in the statement of financial position are
   grouped into the fair value hierarchy as follows:


                                                                                                                                 13
                                                               Level 1         Level 2    Level 3         Total
       Financial assets                                         R’000           R’000      R’000          R'000
       31 December 2018
       Listed investments                                   1 351 861               -          -       1 351 861
       Investment properties                                        -               -      3 360           3 360
       Unlisted investments                                         -          42 405        898          43 303

                                                            1 351 861          42 405      4 258       1 398 524


       31 December 2017
       Listed investments                                     994 488               -          -        994 488
       Investment properties                                        -               -      4 431          4 431
       Unlisted investments                                         -          22 875      8 040         30 915

                                                              994 488          22 875     12 471       1 029 834


       30 June 2018
       Listed investments                                   1 173 391               -          -       1 173 391
       Investment properties                                        -               -      3 360           3 360
       Unlisted investments                                         -          40 862      4 002          44 864

                                                            1 173 391          40 862      7 362       1 221 615


   There have been no transfers between Levels 1, 2 and 3 during the reporting period.
   The methods and valuation techniques used for the purpose of measuring fair value are unchanged
   compared to the previous reporting period:

   -      Financial assets classified in Level 1 have been valued with reference to quoted prices and market
          rates (unadjusted) in active markets for identical assets or liabilities;
   -      Financial assets classified in Level 2 have been valued by an independent third party (using the net
          asset value of the underlying assets in the investment as a basis) to determine at which value the
          investment could have been liquidated as at the reporting date; and
   -      The fair value of the financial assets classified in Level 3 has been determined by inputs that are not
          based on observable market data in that the future expected cash flows from the underlying unlisted
          entities have been discounted at market related rates.

   In carrying out the valuation of financial assets classified in Level 3 on 30 June 2018, the fair value of the
   investment property was determined on the income/investment approach (using the capitalisation of net
   income) by R.A. Gibbons (AEI (ZIM), FIV (SA)) from Mills Fitchet Magnus Penny Proprietary Limited, an
   independent valuator, after taking the following factors into consideration:
   -      location, size and nature of the building;
   -      supply, demand and ability to let of similar properties in the area;
   -      market rentals ranging between R60 and R100 per m2 in the general vicinity of the properties; and
   -      a capitalisation rate ranging between 9.5% and 10.5%, as used in the market for similar type
          properties,
   whereas the value of the unlisted investments has been determined based on the willing buyer/willing
   seller methodology.

8. Taxation
   CICL, in consultation with its auditors, decided not to increase its deferred tax asset beyond June 2017
   levels due to the underwriting loss incurred during the periods under review. This resulted in potential tax


                                                                                                               14
   assets of R20.65 million not being credited to the income statement and R47.95 million not being
   reflected in assets. The latter number includes the R27.30 million not raised during the prior financial
   year.

   The Group’s effective tax rate for the year under review is therefore 53.6% (Jun 2018: 36.7%). If the
   additional deferred tax asset were raised the effective tax rate would have been 10.5% (Jun 2018:
   23.1%). The difference between this rate and the standard company income tax rate of 28.0% can
   mostly be attributed to the fact that tax is provided on the Group’s investment income from equities at
   the capital gains tax rate, which is an effective 22.4%.

   This position will be reviewed on an ongoing basis.

9. Reconciliation of headline earnings

                                                                                        Restated
                                                                       Unaudited       unaudited         Audited
                                                                      six months      six months            year
                                                                           ended           ended           ended
                                                                     31 Dec 2018     31 Dec 2017     30 Jun 2018
                                                                           R’000           R’000           R’000
    Income attributable to ordinary equity holders of Conduit            23 135           57 397         127 222
    Loss on disposal of property, plant and equipment                         -                1                4
    Impairment of associates                                                  -              594            8 281
    Profit on disposal of subsidiary                                          -                -             (94)
    Tax on the items above                                                    -            (133)          (1 865)

    Headline earnings                                                    23 135           57 859         133 548


10. Contingent liabilities
   9.1. A portfolio acquisition agreement, effective 1 September 2015, exists between CICL and Dealers
           Indemnity Proprietary Limited ("Dealers"). Dealers receives a monthly annuity of R45 000 for the
           remainder of the vendor's natural life, subject to a minimum payment of R1.50 million ("the
           Minimum Payment").

           The present value of the annuity payments as at 30 June 2018 amounted to R2.90 million (“the
           Maximum Liability”) per an actuarial calculation based on published mortality tables. The Group has
           initially raised a liability to the value of R1.50 million, which was the minimum amount payable. This
           amount has now been paid in full. The Group therefore confirms that it has a contingent liability of
           R2.90 million as at the reporting date.

   9.2. During the 2017 financial year, the Group acquired the Natmed computer software that will be used
        to manage its medical malpractice business. Should it purchase the next version of the software in
        2020, the Group will pay to the seller of the software (“the Seller”) an additional consideration of
        1.65 times the annualised gross written premium invoiced on 1 March 2020 to medical malpractice
        policyholder clients that were introduced by the Seller, excluding those policyholder clients who
        already agreed to insure with the Group from 1 March 2017.

        In addition, the Group will pay to the Seller 5% of the gross written premium generated by medical
        malpractice policyholder clients introduced to it by the Seller between 1 March 2017 and 28 February
        2023, on the condition that the cumulative claims loss ratios of those clients during that period does
        not exceed 30%.
                                                                                                        15
    9.3. The Group is not aware of any current or pending legal cases that would have a material adverse
         effect on its results.

11. Directors
    No changes were made to the Board.

12. Dividends
    In line with the Group's strategy, the Board has not recommended any dividend payment to ordinary
    shareholders (2018: Nil).

13. Events after reporting period
    No events occurring between the reporting date and the date of publication of this report resulted in a
    material impact on the Group.



Directors:
Executive directors:          Sean Riskowitz (Chief Executive Officer), Lourens Louw (Chief Financial Officer)
Non-executive directors:      Ronald Napier (Chairman)*, Leo Chou, Adrian Maizey, Jabulani Mahlangu*,
                              William Thorndike*, Rosetta Xaba*
* Independent


Sponsor:
Merchantec Capital


Company secretary:
CIS Company Secretaries Proprietary Limited
Rosebank Towers, 15 Biermann Avenue
Rosebank, Johannesburg, 2196


Registered address:
Unit 9, 4 Homestead Avenue
Bryanston, 2191
PO Box 97, Melrose Arch, 2076
Telephone: +27 10 020 3460
Facsimile: +27 86 522 8742


Transfer secretaries:
Computershare Investor Services Proprietary Limited
Rosebank Towers, 15 Biermann Avenue
Rosebank, Johannesburg, 2196




                                                                                                                 16

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