Report of the group financial director

Financial strategy

Grindrod experienced continued improved trading conditions following the recovery in the commodity and drybulk markets in the second half of the prior year. The Grindrod board, has for many years reiterated the intention to separate the Shipping business from the balance of the group. Following the change in the business cycle, the board announced the decision to consider the separate listing of the shipping business, to unlock shareholder value.

Impact of the strategy

The separate listing and exit of the Rail leasing and assembly businesses resulted in:

  • The classification of their respective operating results as discontinued operations and
  • Disclosure of the carrying value of the assets and liabilities as non-current assets held-for-sale.

Continuing operations

The group reported an increase in group revenue, inclusive of joint ventures, of 14.0 percent to R21 275.9 million (2016: R18 660.1 million) and earnings before interest, taxation, depreciation and amortisation, inclusive of joint ventures, of R953.6 million was 44.7 percent higher than the prior year R658.9 million. Headline earnings of R570.8 million, a marked improvement on prior year (2016: R208.8 million).

The increase was primarily as a result of improved terminal utilisation and strong performance in continuing operations.

The depreciation and amortisation charge in the group was lower in the current year largely due to the strengthening of the rand/US$ exchange rate.

Taxation, inclusive of joint ventures, was R236.5 million (2016: R211.0 million) largely remained unchanged.

Discontinued operations

As a consequence, and ahead of the Spin-off, specific ships and goodwill of R619.7 million have been impaired. Note however, that the realisation of the substantial foreign currency translation gain, arising from the Shipping dollar based net asset, will occur on listing in 2018 and could not be offset against the impairment.

Group results

As a result of the significant impairments, the group reported an attributable loss of R582.7 million for the year ended 31 December 2017 (2016: R1 907.7 million).

Ordinary shares in issue remained unchanged at 762 553 314 shares.

For an analysis of the income statement in the manner in which management reviews the results on a management basis (i.e. proportionate basis) refer to the segmental report.

Statement of financial position

With total assets of R34 949.0 million (2016: R36 179.2 million) and nil gearing (2016: two percent), the group’s financial position remains strong. Book net asset value per share is 1 790 cents (2016: 2 007 cents).

Shareholders’ equity decreased to R14 152.8 million (December 2016: R15 752.4 million) mainly as a result of losses, impairments and strengthening of the rand. The decrease of R797.4 million to the foreign currency translation reserve was due to the strengthening of the rand/US$ exchange rate from R13.69/US$ to R12.39/US$.

Borrowings, cash flow and liquidity

Long-term debt decreased to R1 015.6 million (2016: R2 226.8 million) largely as a result of the classification of the shipping business as held for sale.

Cash and cash equivalents, excluding Financial Services, decreased by 8.1 percent to R1 975.1 million (2016: R2 149.9 million). Total bank and cash decreased by 5.4 percent to R8 970.3 million (2016: R9 478.1 million) arising from increased deposits in the Financial Services division.

Cash generated from operations was R559.2 million (2016: R491.7 million). Working capital contributed to a net inflow of R97.6 million (2016: R65.7 million).

Proceeds of R238.1 million were received in 2017 (2016: R180.8 million) on the disposal of ships.

Loans to joint ventures of R22.1 million (2016: R644.3 million) were advanced during the year to meet capital requirements.

Dividends of R67.7 million (2016: R113.5 million) were paid to ordinary and preference shareholders.

Capital expenditure

The group continues to remain committed to strategic investments.

Total capital and investment expenditure was R658.0 million (2016: R1 128.0 million), of which 55 percent was expansionary and the balance maintenance or replacement capital expenditure. The capital expenditure mainly comprised payments on the final payment on the acquisition of a dry-bulk ship, berth deepening and expenditure in Nacala.

Capital commitments of R329.0 million were approved as at 31 December 2017 (2016: R721.0 million). The commitments are primarily to execute a long-term pit-to-port logistics contract for Syrah Resources in Nacala.

The approved commitments exclude planned expansion which is subject to final board consideration.

The capital commitments table includes R269.0 million (2016: R303.0 million) relating to joint ventures.

The group reviewed its weighted average cost of capital (WACC) calculation and project hurdle rates to ensure these reflected current market conditions and market outlook. All projects are deemed to be high risk, unless substantiated otherwise. The project hurdle rates, using project internal rate of return (IRR) have remained unchanged from the prior year and are set out in the table below:

  High risk Medium risk Low risk
Hurdle rate 18% 15% 12%

Foreign currency exposures

The group has US$540.9 million (2016: US$622.6 million) net assets based outside of South Africa with US$ cost bases, generating US$ revenues. Foreign exchange risks are monitored and mitigated in terms of approved policies.

Taxation

The Group Tax Compliance and Tax Risk Management Policy requires that the group complies fully with the tax laws and regulations of the countries/jurisdictions in which it operates. Risks associated with taxation are monitored and mitigated with reference to the approved policy.

Interest rate exposures

The group’s South African interest rate exposure is currently not fixed. Opportunities to lock in low rates continue to be evaluated and will be entered into at the appropriate time to limit exposure to increasing interest rates, in line with the group’s interest cover policy.

Financial controls and risk management

Key financial personnel are employed across the group to manage the financial departments which monitor and support the operations through the analysis and reporting of results. These finance teams, with the support of financial systems, ensure that financial information reported is complete, accurate, relevant and timely.

Internal control systems are designed to provide reasonable assurance against material losses and the misstatement of financial results and are intended to manage all significant risks. The safeguarding and prevention of misuse of assets is another important aspect of internal control.

Principal features of the group’s internal financial controls are:

  • an organisational structure comprising clearly defined reporting lines, responsibilities and levels of authority;
  • policies, procedures and guidelines to ensure that best practice standards are maintained and achieved;
  • a system of financial planning, budgeting and reporting which enables performance to be monitored against predetermined objectives;
  • internal financial controls which are supported by the group’s IT systems;
  • a finance team with the appropriate level of skill and technical training; and
  • independent oversight by the internal audit division through the development and testing of financial control frameworks.

During 2017, internal financial control frameworks were tested by the internal audit division at a number of locations. Areas of non-compliance were reported to and discussed with management, following which action plans were drafted and implemented to address the risk of material misstatement of financial results.

Basis of preparation

The audited summarised consolidated financial statements have been prepared in accordance with the Framework concepts recognition and measurement criteria of IFRS and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council, and as a minimum, contain the information required by IAS 34 Interim Financial Reporting and the Companies Act of South Africa requirements applicable to summarised financial statements.

The provisional accounting relating to the fair value on acquisition of a prior year business combination has been completed. Consequently the comparative figures have been adjusted retrospectively. The effect of the adjustment resulted in an increase in the value of leasehold land and buildings, intangible assets and related deferred tax liability offset by a decrease in goodwill.

In the prior year, ships held for sale was incorrectly disclosed as held for sale assets under inventory instead of remaining in ships, property, terminals, machinery, vehicles and equipment. This prior period error was due to an incorrect interpretation on the treatment of a change in intention relating to dual purpose assets under IAS 16 Property, plant and equipment. The effect of the adjustment resulted in an increase in value of ships offset by a decrease in inventory. There is no impact on profit or loss.

As a result of the decision to separately list the Group’s Shipping business and the decision to exit the Rail operations, the Group’s prior year summarised consolidated income statement and summarised segmental analysis have been re-presented to take into account the requirements of IFRS 5 Non-current assets held for sale and discontinued operations. The Group’s summarised consolidated statement of other comprehensive income, summarised consolidated statement of financial position and summarised consolidated statement of changes in equity are not required to be re-presented.

The full consolidated annual financial statements from which these summarised consolidated financial statements were derived are electronically available on the group’s website www.grindrod.com.

These summarised consolidated financial statements, which appear in the summarised consolidated financial statements section and the full set of consolidated annual financial statements have been prepared under the supervision of AG Waller, CA(SA) and were approved by the board of directors on 23 March 2018, on the recommendation of the audit committee.

Accounting policies

The accounting policies adopted and methods of computation used in the preparation of the consolidated financial statements are in terms of IFRS and are consistent with those of the annual financial statements for the year ended 31 December 2017.

Refer to note 1 of the annual financial statements available on the company’s website for further detail on new standards and interpretations not yet adopted.

Critical judgements in applying the group’s accounting policies/key sources, are dealt with in detail in the accounting policies section in the annual financial statements.

Provisional financials

Summarised consolidated financial statements have been included in the integrated annual report.

Events after the reporting date

There were no events after the reporting date to report subsequent to 31 December 2017, except for the impact of the separate listing of the shipping business.

Focus for 2018

In addition to the strategic financial areas outlined under financial strategy, key financial focus areas for 2018 will be:

  • maximise asset utilisation
  • improve operating efficiencies and cost
  • improve process and controls, and
  • management control through improved reporting platforms.

The full set of annual financial statements and notes are available on www.grindrod.com. The audit opinion is available to view at the registered office.

2017: The group remained focused on the strategic execution to unlock shareholder value.

Andrew Waller

Group financial director

23 March 2018