Report of the group
financial director

Financial strategy

Grindrod remained focused on improving asset utilisation, operating efficiencies and cost containment. Positive cash generation and low gearing levels enabled the group to execute key capital projects.

Strategic financial focus was given to:

  • Maximising asset utilisation;
  • Improving operating efficiencies and costs;
  • Cash flow management; and
  • Execution of fit-for-purpose consolidated and standardised group shared services.

Group earnings

The group reported a decline in statutory group revenue of 12 per cent to R9.0 billion (2015: R10.2 billion) and earnings before interest, taxation, depreciation and amortisation of R469.3 million was 57 per cent lower than the prior year R1098.9 million. Headline loss of R459.5 million a marked decline on prior year headline earnings (2015: R558.8 million).

The decrease is primarily as a result of the exceptionally weak dry-bulk shipping rates and depressed commodity markets during the first quarter. Performance during the second half of the year reflected a gradual improvement in volumes and trading conditions, however improvement was insufficient to recover the first half losses. In addition headline losses include R138 million of net foreign exchange losses incurred primarily in the Mozambican operations and the UK investments.

The depreciation and amortisation charge in the group was lower in the current year largely due to the decreased asset base following the ship impairment in the prior year.

Following the strategic decision to exit the rail assembly business and constraints experienced within the Rail businesses, impairments of R1 318.8 million have been raised.

Taxation inclusive of joint ventures and associates was R214.4 million (2015: R236.3 million) largely due to the unshielded shipping losses and the impact of the devaluation of the metical against the dollar.

As a result of the significant impairments the group reported an attributable loss of R1 907.7 million for the year ended 31 December 2016 (2015: R1 426.5 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 analysis in the annual financial statements.

Statement of financial position

With total assets of R36 176.2 million (December 2015: R36 456.8 million) and low gearing of two per cent, the group’s financial position remains strong. Book net asset value per share is 2 007 cents (2015: 2 450 cents).

Shareholders’ equity decreased to R15 752.4 million (December 2015: R19 146.2 million) mainly as a result of losses, impairments and strengthening of the rand. The decrease of R1 396.5 million to the foreign currency translation reserve was due to the strengthening of the rand/US$ exchange rate from R15.60/US$ to R13.69/US$.

As a result of the board’s decision to exit the locomotive assembly business, this business has been transferred to non-current assets and liabilities associated with assets held for sale.

Borrowings, cash flow and liquidity

Long-term debt decreased by 22.1 per cent to R2 226.8 million (2015: R2 860.1 million) largely due to the impact of foreign denominated debt.

Cash and cash equivalents, excluding Financial Services, decreased by 33.7 per cent to R2 149.9 million (2015: R3 244.0 million). Total bank and cash increased by 12.9 per cent to R9 478.1 million (2015: R8 393.3 million) arising from increased deposits in the Financial Services division.

Cash generated from operations was R491.7 million (2015: R1 412.6 million). Working capital contributed to a net inflow of R65.7 million (2015: R221.7 million net inflow).

Proceeds of R180.8 million were received in 2016 (2015: R158.4 million) on the disposal of ships.

Loans to joint ventures of R644.3 million (2015: R264.0 million) were advanced during the year to meet working capital requirements.

Dividends of R113.5 million (2015: R355.6 million) were paid to ordinary and preference shareholders.

After investments and capital expenditure, the group continued to maintain low gearing of two per cent (2015: no net debt).

Capital expenditure

The group continues to remain committed to strategic investments. Key capital projects have experienced delays whilst others require an improvement in the commodity markets.

Total capital and investment expenditure was R1 128 million (2015: R1 354 million), of which 77 per cent was expansionary and the balance maintenance or replacement capital expenditure. The capital expenditure mainly comprised payments on the acquisition of dry bulk vessels and a product tanker acquired against long-term contracted employment.

Capital commitments of R721.0 million were approved as at 31 December 2016 (2015: R1 179.0 million). The commitments are for the completion of the berth deepening at Maputo Port, an integrated logistics facility, and the final payments on the newbuilding ships.

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

The capital commitments table includes R303.0 million (2015: R533.0 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$622.6 million (2015: US$720.1 million restated to include impairment of ships) net assets based outside of South Africa with US$ cost bases, generating US$ revenues. Foreign exchange risks are monitored and mitigated in terms of approved policies.

Taxation

At the commencement of the financial year the Group Tax Compliance and Tax Risk Management Policy was approved by the audit committee. The 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 2016, 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 annual financial statements have been prepared in accordance with IFRS and its interpretations adopted by the IASB in issue and effective for the group at 31 December 2016 and the South African Institute of Chartered Accountants (SAICA) Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council.

The annual financial statements comply with Schedule 4 of the South African Companies Act, No 71 of 2008 and the disclosure requirements of the JSE Listings Requirements.

The annual financial statements were approved by the board of directors on 1 March 2017, 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 2015.

Refer to note 1 of the annual financial statements 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.

Summarised consolidated financial statements

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 2016.

Focus for 2017

In addition to the strategic financial areas outlined under financial strategy, key financial focus areas for 2017 will be:

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

Andrew Waller

Group financial director

1 March 2017

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.


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