Notes to the condensed consolidated financial statements

for the six months ended 31 January 2019

1. REPORTING ENTITY

EOH Holdings Limited (‘the Company’) is a holding company domiciled in South Africa, that is listed on the JSE Limited under the category Technology: Software and Computer Services. The condensed consolidated interim financial statements of the Group for the six months ended 31 January 2019 comprise the Company and its subsidiaries (together referred to as ‘the Group’ or ‘EOH’) and the Group’s interests in associates and joint ventures.

2. STATEMENT OF COMPLIANCE

These condensed consolidated interim financial statements have been prepared in accordance with IAS 34 – Interim Financial Reporting and Financial Reporting Pronouncements as issued by Financial Reporting Standards Council, the JSE Listings Requirements and the Companies Act of South Africa.

3. BASIS OF PREPARATION

The accounting policies applied in the presentation of the condensed consolidated financial statements are consistent with those applied for the year ended 31 July 2018, except for the new standards (refer to note 4) that became effective for the Group’s financial period beginning 1 August 2018.

The condensed consolidated interim financial statements have not been audited or reviewed by the Group’s external auditors nor have the restated balances at 31 July 2018.

The condensed consolidated interim financial statements have been prepared on the historical cost basis, except for financial instruments at fair value through profit or loss, under the supervision of Megan Pydigadu CA(SA), Chief Financial Officer.

The comparative financial information in the condensed consolidated interim financial statements has been restated based on information available at 31 July 2018, which was interpreted differently at the time. Refer to note 5 for further information.

4. CHANGES IN ACCOUNTING POLICIES

The Group has adopted the following new standards, including any consequential amendments to other standards, with a date of initial application of 1 August 2018:

IFRS 9 – Financial Instruments

The adoption of IFRS 9 – Financial Instruments has had a material impact on the Group’s condensed consolidated annual financial statements at 31 July 2018. The Group has applied IFRS 9 retrospectively, with the initial application date of 1 August 2018 with no adjustments to comparative information.

The effect of adopting IFRS 9 is:

Figures in Rand thousand Classification Restated IAS 39 1 August 2018 remeasurement IFRS 9  
Impairment allowance:          
Other financial assets Amortised cost 167 106 35 521 202 627  
Trade and other receivables Amortised cost 447 154 126 826 573 980  
Contract assets Amortised cost 37 534 37 534  
Finance lease receivables Amortised cost 9 909 9 909  

The adoption of IFRS 9 fundamentally changed the Group’s accounting for impairment losses for financial assets by replacing IAS 39’s incurred loss approach with a forward looking expected credit loss approach. IFRS 9 requires the Group to recognise an allowance for expected credit losses for all financial assets not held at fair value through profit or loss and contract assets.

The additional impairments recognised with regard to other financial assets; trade and other receivables, contract assets and finance lease receivables result in a decrease in retained earnings of R210  million as at 1 August 2018.

Upon the adoption of IFRS 9, the Group had the following required or elected reclassifications:

Disclosed as: IAS 39 classification IFRS 9 classification
Loans and receivables at amortised cost Amortised cost Fair value through profit or loss

The reclassified loans and receivables balances were R10  million.

There were no changes in classification and measurement for the Group’s financial liabilities.

IFRS 15 – Revenue from contracts with customers

The adoption of IFRS 15 – Revenue from Contracts with Customers did not have a material impact on the Group’s condensed consolidated financial statements. The Group has applied IFRS 15 retrospectively, with the initial application date of 1 August 2018 with no adjustments to comparative information.

5. RESTATEMENT OF FINANCIAL STATEMENTS

In February and March 2019, the Group undertook a detailed review of its balance sheet as an integral part of the strategic process, as mentioned in the CEO 100-day update on 11 December 2018, to ensure that the investments in various tangible and intangible assets are appropriately valued.

Due to the change in management, an error in consideration of the impact of the impairment indicators on the measurement of TTCS Zimbabwe has been re-evaluated as follows:

  • the recoverability of trade receivables and loan balances and the expected cash flows were re-evaluated in terms of IAS 39 resulting in a prior year impairment provision of R208  million for the trade receivables and R43  million for the loans being recognised; and
  • the carrying value of the investment in the TTCS Group was re-evaluated, resulting in an impairment of R291  million being recognised.
Figures in Rand thousand Audited at
31 July 2018
Restatement  Restated
unaudited at
31 July 2018
 
Equity-accounted investments 452 609 (291 343) 161 266  
Other financial assets 87 087 (42 749) 44 338  
Trade and other receivables 424 204 (208 379) 215 825  

In addition, an error in consideration of the impact of impairment indicators on the GCT Group receivable has been evaluated and the recoverability of expected cash flows re-calculated in terms of IAS 39, resulting in a prior year impairment provision of R124  million being recognised, after considering any collateral (inventory and debtors).

Figures in Rand thousand Audited at
31 July 2018
Restatement  Restated
unaudited at
31 July 2018
 
Other financial assets 424 319 (124 357) 299 962  

The errors have been corrected by restating each of the affected financial statement line items for the prior period as follows:

Statement of financial position (extract) as at 31 July 2018

Figures in Rand thousand Audited at
31 July 2018
Restatement  Restated
unaudited at
31 July 2018
 
Equity-accounted investments 822 204 (291 343) 530 861  
Other financial assets 907 359 (167 106) 740 253  
Trade and other receivables 5 583 044 (208 379) 5 374 665  
Net assets 7 312 607 (666 828) 6 645 779  
Retained earnings 3 184 359 (666 828) 2 517 531  

Statement of profit or loss (extract) for the year ended 31 July 2018

Figures in Rand thousand Audited at 
31 July 2018 
Restatement  Restated 
unaudited at 
31 July 2018 
 
Continuing operations        
Gross profit 4 817 381  –  4 817 381   
Net impairment losses for financial assets carried at amortised cost (181 998) (375 485) (557 483)  
Operating expenses (3 827 494) (291 343) (4 118 837)  
Operating profit before interest and equity-accounted profits 807 889  (666 828) 141 061   
Profit before taxation 556 717  (666 828) (110 111)  
Profit for the period from continuing operations 288 257  (666 828) (378 571)  
EBITDA 1 390 657  (375 485) 1 015 172   

Basic and diluted earnings per share has been restated as a result of the errors. The impact on earnings per share and headline earnings per share from continuing operations is as follows:

Figures in cents Audited at
31 July 2018
Restatement  Restated 
unaudited at 
31 July 2018 
 
Earnings per share 202 (462) (260)  
Diluted earnings per share 196 (456) (260)  
Headline earnings per share 278 (260) 18   
Diluted earnings per share 271 (253) 18   

The impact on earnings per share and headline earnings per share including discontinued operations is as follows:

Figures in cents Audited at 
31 July 2018 
Restatement  Restated 
unaudited at 
31 July 2018 
 
Earnings per share (70) (461) (531)  
Diluted earnings per share (68) (463) (531)  
Headline earnings per share 283  (260) 23   
Diluted earnings per share 276  (253) 23   

The restatement adjustments are all non-cash adjustments and therefore do not impact cash generated before working capital changes.

6. GOODWILL

Figures in Rand thousand Unaudited at 
31 January 2019 
    Unaudited at 
31 January 2018 
Audited at 
31 July 2018 
 
Opening balance 4 255 281      4 625 403  4 625 403   
Acquired in business combinations 70 877      347 998  340 255   
Foreign currency translation 3 194      (30 292) 9 268   
Disposals (5 220)     (607 984) (634 935)  
Impairments (1 138 413)     –  (84 710)  
Closing balance 3 185 719      4 335 125  4 255 281   

A number of economic, operational and negative events during the six months ended 31 January 2019 had a significant negative impact on EOH’s market capitalisation and certain underlying businesses. The Group has also gone through a review of its strategy which has impacted the CGU allocations and the carrying value of goodwill. As a result, the Group performed a half-year review of goodwill for impairment, resulting in impairments of R1 138  million (R311  million in the EOH ICT segment and R827  million in NEXTEC).

EOH ICT

The impairments to goodwill in EOH ICT relate mainly to EOH’s public sector-focused ERP businesses. After impairing part of the goodwill in one of these CGUs in FY2018, the remaining goodwill (R144  million across a number of CGUs) was impaired due to continued project complexities, slow debtor recoveries and the impact of no further large ERP projects on the continuing outsourcing business.

EOH ICT International businesses were impaired by R32  million due to continuing project delivery difficulties in the Middle East and East Africa.

In addition, goodwill arising on the change of control of the TTCS Group of R70  million was impaired. Refer to note 15 for further details.

The balance of the of the EOH ICT impairments comprise a number of CGUs which were impacted by the negative events and challenging South African market conditions, resulting in an impairment of R65  million.

NEXTEC

Industrial Technologies, a division of NEXTEC, includes a number of impairments:

  • The rail transport technologies CGU was impaired in full (R146  million), due to continuing difficulties in completing active contracts and ongoing delays in starting new contracts which have driven continued underperformance against budgets.
  • Despite project awards and sign-off for various REIPP projects in the energy sector (electricity generation), there have been continued delays in award and completion of transmission and distribution projects both in South Africa and Mozambique, resulting in an impairment of R140  million in these CGUs.
  • CGUs providing water infrastructure solutions continue to be impacted by delays in starting delivery on projects in hand, as well as new project awards as a result of public sector funding and administrative delays, which has resulted in continued underperformance to budgets resulting in impairments of R131  million.
  • Margins within the digital infrastructure businesses have also been negatively impacted by original equipment manufacturers selling directly to customers and despite the business adopting a service-based model, expected performance levels have not been achieved resulting in an impairment of R90  million.

Business Process Outsourcing (‘BPO’), a division of NEXTEC, also includes a number of impairments

  • A number of CGUs which provide employee services, were impacted more than expected by the recent High Court ruling related to temporary staffing. This resulted in decreased customer activity and reduced margins, driving an impairment of R94  million.

The balance of the NEXTEC impairments relate to a number of CGUs impacted by the negative events and challenging South African market conditions, resulting in further impairments of R95  million in smaller Industrial Technologies CGU’s; R50  million in the Health businesses in BPO and a further R81  million in smaller BPO CGUs.

7. INTANGIBLE ASSETS

Figures in Rand thousand Unaudited at 
31 January 2019 
    Unaudited at 
31 January 2018 
Audited at 
31 July 2018 
 
Opening balance 1 265 220      1 449 296  1 449 296   
Additions 97 917      124 509  336 591   
Acquired in business combinations –      126 716  141 801   
Foreign currency translation 6 082      (7 807) (425)  
Impairments (480 691)     –  (8 665)  
Disposals (1 601)     (378 010) (390 660)  
Amortisation (134 982)     (120 469) (262 718)  
Classified as assets held for sale (23)     –  –   
Closing balance 751 922      1 194 235  1 265 220   

Impairments to intangible assets largely relate to:

  • Internally developed software templates of R265  million (focused on municipalities, the water industry; and the waste industry, among others) were impaired in the ICT and International businesses as a result of continued project complexities, slow debtor recoveries and no further large ERP projects being delivered.
  • A R61  million impairment of internally developed, water infrastructure management software, which, despite early success, has not realised the expected market traction given the delays in the award and commencement of contracts in the water industry.
  • Internally developed payroll software was impaired by R46  million as the business strategically shifted to a product agnostic solution offering, from its historic capital intensive software offering. This change was largely as a result of increasing market and customer demands.
  • A further R74  million was impaired for customer relationships and customer contracts after the profitability of the related relationships and contracts deteriorated below expected levels.
  • The remaining impairments relate to other internally generated software in a number of underperforming CGUs in which goodwill impairments have been recognised (R35  million).

8. EQUITY-ACCOUNTED INVESTMENTS

Figures in Rand thousand Unaudited at 
31 January 2019 
    Unaudited at 
31 January 2018 
Audited at 
31 July 2018 
 
Opening balance 530 861      847 917  847 917   
Dividends received –      –  (3 638)  
Foreign currency translation (86 027)     (91 758) (60 298)  
Foreign currency translation recognised in profit or loss 94 547      –  –   
Disposals* (146 460)     –  –   
Capital contribution 3 243      –  –   
Impairment (100 293)     –  (301 343)  
Share of equity-accounted profits (13 950)     6 371  48 223   
Closing balance 281 921      762 530  530 861   

* Refer to note 15 for further information regarding the change of control in the TTCS Group.

Equity-accounted investments have been impaired by R100  million:

  • R41  million of the impairments relate to EOH’s investments in Turkey as a result of increased levels of political and macro-economic risk causing delays in project kick-offs and a deterioration in cash recovery rates.
  • Margin erosion, deterioration in pipeline and reduced cash recovery rates triggered an impairment of R40  million in EOH’s South American based ERP utilities investment.
  • The remaining impairment of R19  million relates to EOH’s Middle East based ERP utilities business which has also suffered a reduction in cash conversion and slower execution of its Saudi Arabian based projects.

The equity-accounted investments are as follows:

Figures in Rand thousand Unaudited at
31 January 2019
    Unaudited at
31 January 2018
Audited at
31 July 2018
 
TTCS Group     396 491 161 266  
Virtuoso Consulting 101 798     89 345 112 636  
Asay Group 61 726     84 567 80 037  
Bessertec Group 44 235     65 696 80 886  
Acron 28 763     67 005 40 199  
Cozumevi 25 156     44 921 35 934  
Other 20 243     14 505 19 903  
Total 281 921     762 530 530 861  

* Refer to note 5 for further information regarding the prior year restatement.

9. OTHER FINANCIAL ASSETS

Figures in Rand thousand Unaudited at
31 January 2019
    Unaudited at
31 January 2018
Restated
unaudited at
31 July 2018
 
Financial assets at fair value through profit or loss 49 162     123 462 138 788  
Listed equity-linked investments     84 000 89 020  
Other financial instruments 49 162     39 462 49 768  
Debt instruments at amortised cost 321 967     760 608 601 465  
Amounts receivable from sale of the GCT Group 220 501     493 250 299 962  
Equity-accounted investment receivables 40 898     106 756 124 819  
Enterprise development loan receivables 17 544     92 027 76 733  
Other loans and receivables 43 024     68 575 99 951  
Total financial assets 371 129     884 070 740 253  
Non-current other financial assets 146 006     477 952 534 561  
Current other financial assets 225 123     406 118 205 692  
  371 129     884 070 740 253  

Financial assets at fair value through profit or loss include investments in listed and unlisted equity shares. Unlisted financial assets are classified as Level 3 and are valued based on discounted cash flows or asset values adjusted for risks inherent in the nature of the underlying operations.

Impairment allowance

At 31 January 2019, a total impairment allowance of R240  million (2018: R167  million) has been raised against debt instruments carried at amortised cost.

An impairment allowance of R193  million (2018: R124  million) was raised for amounts receivable from the sale of the GCT Group. The allowance was raised based on the general approach and considers their current probability of default and collateral provided as security for the loan. The directors are actively engaged in the recovery of the receivables. The receivable from GCT Group is considered to be a stage 3, non-performing receivable.

The remaining shares receivable (199 257) from the acquirers of the GCT Group were received on 6 April 2019. Certain cash balances remain overdue and outstanding.

The balance of the impairment allowance is related to the other debt instruments and has been shown net of the gross amount. The allowances raised are based on the general approach, considering the probability of default and collateral (if any).

Refer to note 4 for further information regarding the transition to IFRS 9 and note 5 for further information regarding the prior year restatement.

Figures in Rand thousand Unaudited at 
31 January 2019 
    Unaudited at
31 January 2018
Restated 
unaudited at 
31 July 2018 
 
Reconciliation of movements of debt instruments measured at amortised cost            
Opening balance 601 465      236 847 236 847   
Equity adjustment relating to IFRS 9 (35 521)     –   
Net cash paid/(received) (28 873)     22 419 83 187   
Disposal of businesses (97 441)     499 870 459 163   
Reclassification to fair value through profit or loss (9 912)     (4 910)  
Movement in provision for debt instruments (95 183)     (186 322)  
Classified as held for sale (2 733)     –   
Other movements (9 835)     1 472 13 500   
Closing balance 321 967      760 608 601 465   

10. TRADE AND OTHER RECEIVABLES

Figures in Rand thousand Unaudited at 
31 January 2019 
    Unaudited at 
31 January 2018 
Restated 
unaudited at 
31 July 2018 
 
Financial instruments            
   Trade receivables 3 561 056      3 805 760  3 857 664   
      Gross trade receivables 4 288 032      3 917 295  4 328 838   
      Provision for credit notes (22 760)     (25 907) (24 020)  
      Impairment allowance (704 216)     (85 628) (447 154)  
   Contract assets* 943 750      1 743 841  1 107 926   
   Other receivables 57 499      74 738  89 916   
Non-financial instruments 271 943      296 963  319 159   
  4 834 248      5 921 302  5 374 665   

* Contract assets were previously disclosed as work-in-progress.

Refer to note 4 for the transition impact of IFRS 9 on the financial instruments (trade receivables, contract assets and other receivables) and refer to note 5 for further information regarding the prior year restatement.

11. ASSETS HELD FOR SALE

On 11 December 2018, the Group announced that opportunities would be explored for the sale of certain non-core assets and as a result of an active programme to locate a buyer for the Mehleketo Group, the associated assets and liabilities have been presented as held for sale. In addition, other small businesses were disposed of during the period.

The loss for the period from the assets held for sale is analysed as follows:

Figures in Rand thousand For the 
six months 
ended 
31 January 2019 
For the 
six months 
ended 
31 January 2019 
For the 
six months 
ended 
31 January 2019 
 
  Mehleketo Group  Other  Total   
Revenue 167 844  –  167 844   
Cost of sales (170 210) –  (170 210)  
Gross loss (2 366) –  (2 366)  
Net finance asset impairment losses (9 058) –  (9 058)  
Operating expenses (19 075) (10 395) (29 470)  
Investment income 16  –  16   
Finance costs (136) –  (136)  
Loss before taxation (30 619) (10 395) (41 014)  
Taxation (180) –  (180)  
Loss for the period (30 799) (10 395) (41 194)  
The net cash flows incurred by the Mehleketo Group for the relevant periods were as follows:        
Operating activities (92 709) –  (92 709)  
Investing activities 88 116  –  88 116   
Financing activities 2 183  –  2 183   
Net cash outflow (2 410) –  (2 410)  
Net assets classified as held for sale 118 045  –  118 045   

The discontinued operation (GCT Group) was disposed of during the year ended 31 July 2018, as a result no assets were held for sale at 31 July 2018.

12. OTHER FINANCIAL LIABILITIES

Figures in Rand thousand Unaudited at
31 January 2019
    Unaudited at
31 January 2018
Audited at
31 July 2018
 
Interest-bearing liabilities 2 775 049     3 529 770 3 404 595  
   Interest-bearing bank loans secured through security SPV* 2 508 303     2 964 406 2 841 518  
   Unsecured interest-bearing bank loans 248 787     529 793 537 844  
   Interest-bearing bank loans secured by certain property 17 959     35 571 25 233  
Non-interest-bearing liabilities 477 391     902 982 699 401  
   Vendors for acquisition 418 628     824 129 633 709  
   Other non-interest-bearing liabilities 58 763     78 853 65 692  
  3 252 440     4 432 752 4 103 996  
Non-current other financial liabilities 2 143 395     3 115 042 3 208 415  
Current other financial liabilities 1 109 045     1 317 710 895 581  
  3 252 440     4 432 752 4 103 996  

* Larger subsidiaries have pledged cash and trade receivables.

Vendors for acquisition (measured at fair value through profit or loss)

Financial liabilities measured at fair value through profit or loss are classified as Level 3 as the valuation techniques used are based on unobservable inputs for the liability.

The vendors for acquisition balance relates to the contingent consideration where business combinations are subject to profit warranties. The profit warranties allow for a defined adjusted value to the consideration payable in the event that the warranted profit after tax is not achieved, or in the event that it is exceeded, an agreed sharing in the surplus. The fair value of the contingent arrangement is estimated by applying the income approach to calculate the present value of the expected settlement. Profit warrant periods normally extend over a 24-month period.

Unobservable inputs include budgeted results based on margins and revenue growth rates historically achieved by the various segments. Changing such inputs to reflect reasonably possible alternative assumptions does not significantly change the fair value of the vendors for acquisition liability. EOH has an established control framework with respect to the measurement of fair values. This includes a valuation team that reports directly to the Group CEO who oversees all significant fair value measurements.

13. TRADE AND OTHER PAYABLES

Figures in Rand thousand Unaudited at
31 January 2019
    Unaudited at
31 January 2018
Audited at
31 July 2018
 
Financial instruments 2 619 382     1 728 437 1 951 216  
   Trade payables 1 431 846     952 657 1 245 207  
   Other accrued expenses 1 175 878     734 961 693 164  
   Other payables 11 658     40 819 12 845  
Non-financial instruments 831 578     595 823 809 067  
  3 450 960     2 324 260 2 760 283  

14. OPERATING (LOSS)/PROFIT BEFORE INTEREST AND EQUITY-ACCOUNTED (LOSS)/PROFIT

Figures in Rand thousand Unaudited 
for the 
six months to 
31 January 2019 
    Unaudited 
for the 
six months to 
31 January 2018 
Restated 
unaudited 
12 months to 
31 July 2018 
 
Operating (loss)/profit before interest from continuing operations  (2 878 298)     784 184  141 061   
Depreciation and amortisation 235 665      213 865  414 038   
Impairments of assets 1 719 396      –  411 850   
Share of equity-accounted (loss)/profit (13 950)     6 371  48 223   
Loss on deemed disposal 146 460      –  –   
EBITDA (790 727)     1 004 420  1 015 172   
Discontinuing 584 724      88 939  362 237   
Once-off, cash normalisation adjustments 182 817      –  –   
Non-cash normalisation adjustments 409 979      (5 180) 320 514   
Normalised EBITDA 386 793      1 088 179  1 697 923   
Operating profit before interest is stated after taking into account the following other items:            
Employee costs 2 871 846      2 764 235  5 722 266   
Employee share-based payments expense 43 380      47 976  95 562   
Lebashe share-based payments expense 157 445      –   
Foreign exchange loss (14 415)     24 791  (32 338)  
Fair value (gain)/loss on remeasurement of contingent consideration (17 215)     (14 617) (9 156)  
Operating lease charges 140 796      166 677  280 087   

 

15. CHANGE OF CONTROL IN INVESTMENT IN ASSOCIATE

The Group gained control of the TTCS Group of companies (‘TTCS’) on 17 January 2019 as a result of the board of directors of TTCS being reconstituted to afford EOH 60% of the voting rights. The direct and effective shareholding in each entity was unchanged.

TTCS provides system integration, product delivery, maintenance and support services predominantly to customers in Zimbabwe and is focusing on growing operations in Zambia, Malawi, Kenya, Uganda, Rwanda, Tanzania, Ghana, Botswana and Nigeria, as well as other project delivery in sub-Saharan Africa.

As a result of the deemed disposal of the investment in TTCS, a loss on disposal of R146  million was recognised. This loss was as a result of the Group’s reliance on the Zimbabwean operations and the recent and continuing disruptions within Zimbabwe, as well as the impact of the changes in local currency. The (loss)/profit for the period from the deemed disposal is:

Figures in Rand thousand Five months 
ended 
31 December 2018 
    Six months
ended
31 January 2018
 
Share of (loss)/profit for equity-accounted associate investments (14 297)     10 263  
Non-cash, once-off, accounting loss on deemed disposal of associates* (146 460)      
  (160 757)     10 263  
* The value of the TTCS Group is based on a valuation of the current shareholding and the following key assumptions:
  a four-year forecast for the TTCS Group’s operations;
  a weighted average cost of capital of between 17.0% and 23.6% (depending on the country of operation);
  a terminal growth rate of 2.1%; and
  discounts of 10% to 30% for a lack of marketability and the current illiquid nature of the investments which increased significantly as a result of the recent deterioration in local currency, as recognised through the Old Mutual Implied Rate.

The businesses were valued at approximately R64  million at 31 December 2018. Conservatively, as a result of the continuing uncertainty regarding Zimbabwe and the new currency, management’s expectation is that dividends are not likely to be paid in the medium to long term. Therefore, conservatively when calculating goodwill and the loss on disposal, an enterprise value of Rnil has been used.

The subsequent deemed acquisition of TTCS impacts the Group as follows:

Figures in Rand thousand 31 December 2018**  
Fair value of assets and liabilities acquired    
Non-current assets 37 148     
Current assets 48 590     
Current liabilities (including minority portion of EOH payables)*** (387 346)    
Net liabilities acquired (301 698)    
Non-controlling interests measured at their share of the fair value of net assets/    
value of the TTCS Group (including minority portion of EOH payables)*** 300 448     
Amount capitalised (1 250)    
Goodwill 70 877     
Goodwill impairment (70 877)    
Net cash outflow* (1 250)    
* Given the nature of the acquisition, there is no additional consideration payable.
** The fair value of the assets and liabilities acquired has been translated to ZAR based on an Old Mutual Implied Rate of 2.79 at 31 December 2018 for TTCS Zimbabwe, resulting in a negative net asset value as the majority of the Group’s loans and trade payables are denominated in foreign currencies, while current assets are predominantly USD RTGS based. The loans of R86  million and trade payables of R480  million payable to EOH at 31 December 2018 are included in current liabilities and have been eliminated against trade receivables and loans on consolidation.
*** Minority proportion of EOH payables are eliminated on consolidation.
Figures in Rand thousand For the 
six months to 
31 January 2019 
 
Contribution to trading results for the period    
Revenue 83 049   
Profit before tax 2 369   
Contribution had the effective date been 1 August 2018    
Revenue 96 584   
Loss before tax (4 229)  

There were no acquisition-related costs during the six months ended 31 January 2019 included in operating expenses in the statement of profit or loss and other comprehensive income.

The contribution of the trading results of the TTCS Group have been accounted for from the effective date of the business combination. The accounting of these subsidiaries is based on best estimates and provisional fair values. The Group has not completed its assessment of the fair value of all identifiable assets, liabilities and/or contingent liabilities. The fair values will be accurately determined within 12 months from the acquisition date.

16. STATED CAPITAL

Figures in Rand thousand Unaudited 
for the 
six months to 
31 January 2019 
    Unaudited 
for the 
six months to 
31 January 2018 
Restated 
unaudited 
12 months to 
31 July 2018 
 
Issued            
Reconciliation of the number of shares in issue:            
Opening balance 152 797      150 095  150 095   
Shares issued for cash* 22 495      –  –   
Shares issued as a result of the acquisition of businesses 1 203      1 503  2 207   
Shares issued to the Group’s share incentive and retention schemes 50      411  495   
Shares in issue at the end of the period 176 545      152 009  152 797   
Less:            
Treasury shares held in the Group’s share incentive schemes (2 357)     (2 370) (2 367)  
Treasury shares held by wholly owned subsidiaries of the Company that will not be cancelled (5 870)     (5 616) (5 530)  
  168 318      144 023  144 900   
EOH A shares of no par value:            
Shares issued as a result of the Lebashe BBBEE transaction* 40 000      –  –   
  40 000      –  –   
* The Lebashe transaction was approved by shareholders on 18 September 2018 and effectively implemented on 1 October 2018. Since the date of approval Lebashe has:
  invested R750  million in three tranches in EOH ordinary shares based on a 30-day VWAP at a 10% discount for an average share price of R33.59; and
  received 40  million unlisted EOH A shares which will be redeemed in five years on 1 October 2023 through an ordinary share issue. The A shares rank equal to an EOH ordinary share in respect of voting rights and each EOH A share will receive cash dividends in an amount equal to the value of 15% of dividends paid to EOH to ordinary shareholders. The remaining 85% of the dividend value will be accrued and redeemed through the redemption of the A shares. Despite the variability in number of EOH ordinary shares that will be issued, the obligation to Lebashe is treated as an equity transaction as the settlement will be undertaken in ordinary shares and the transaction is therefore within the scope of IFRS 2.

The related IFRS 2 share-based payment charge of R157  million has been recognised in the statement of profit or loss.

Figures in Rand thousand Unaudited 
for the 
six months to 
31 January 2019 
    Unaudited 
for the 
six months to 
31 January 2018 
Restated 
unaudited 
12 months to 
31 July 2018 
 
Opening balance 3 443 223      3 333 678  3 333 678   
Shares issued for cash 713 115      –  –   
Shares issued as a result of the acquisition of businesses 48 430      156 182  210 503   
Shares issued to the Group’s share incentive and retention schemes 1 170      7 768  10 248   
Treasury shares (9 824)     (120 955) (111 206)  
  4 196 114      3 376 673  3 443 223   

 

17. CASH GENERATED FROM OPERATIONS

Figures in Rand thousand Unaudited 
for the 
six months to 
31 January 2019 
    Unaudited 
for the 
six months to 
31 January 2018 
Restated   
unaudited* 
12 months to   
31 July 2018   
 
(Loss)/profit before taxation from: (3 113 933)     273 575  (486 272)   
   Continuing operations (3 072 919)     649 736  (110 111)   
   Discontinued operations (41 014)     (376 161) (376 161)   
Adjustments for:            
   Depreciation and amortisation 238 619      202 041  425 861    
   Impairment of assets 1 719 396      –  411 850    
   Loss on disposal of subsidiaries and property, plant and equipment 156 685      384 251  392 880    
   Share-based payments expense 200 825      47 976   95 562    
   Net finance costs 180 791      143 230  301 806    
   Net financial asset impairment losses  523 044      –  557 483    
   Inventory write-off/impairment 86 912      –  –    
   Deferred income non-cash movement (131 614)     –  –    
   Other non-cash items 6 358      3 382  (106 650)   
Cash (consumed)/generated from operations before changes in working capital (132 917)     1 054 455  1 592 520   
Working capital changes net of effects of disposal of subsidiaries 215 282      (995 074) (326 499)   
   (Increase) in inventories (27 147)     (37 195) (411)   
   (Increase) in trade and other receivables (431 909)     (349 293) (424 746)   
   (Increase) in contract assets 80 973      (375 270) 260 644    
   Increase/(decrease) in trade and other payables 604 690      (232 760) 258 429    
   (Decrease)/increase in deferred income (11 325)     (556) (56 419)   
Cash generated from operations  82 365      59 381  1 266 021    

* Refer to note 5 – Restatement of financial statements for further information.

18. CONTINGENCIES AND COMMITMENTS

The Group has issued guarantees and performance bonds from various Group companies as well as through available third-party facilities. At this stage, the Group is not aware of any guarantees or bonds issued which may be exercised by holders. The balance at 31 January 2019 was R528  million (2018: R425  million).

19. CHANGE IN DIRECTORATE

During the period since 1 August 2018 there were several changes to the Board:

  • Stephen van Coller was appointed as Group Chief Executive Officer effective 1 September 2018.
  • John King resigned as Group Financial Director effective 3 October 2018.
  • Megan Pydigadu was appointed as Group Chief Financial Officer effective 15 January 2019
  • Asher Bohbot resigned as non-executive Chairman effective 28 February 2019.
  • Rob Sporen resigned as lead independent non-executive director effective 28 February 2019.
  • Tshilidzi Marwala resigned as non-executive director effective 28 February 2019.
  • Jesmane Boggenpoel was appointed as interim Chairperson effective 22 March 2019.
  • Tebogo Maenetja resigned as executive director effective 31 March 2019.

20. STATED CAPITAL

Assets held for sale

As mentioned in the CEO 100-day update on 11 December 2018, the Group is considering disposing of certain businesses. Various disposal processes are expected to be realised before 31 July 2019, but have not met the criteria to be recognised as assets held for sale by 31 January 2019.

To date, agreements have been reached for the sale of a number of smaller businesses for an estimated total consideration of R100  million resulting in an estimated loss on disposal of R37  million.

Other

As announced on 19 February 2019, EOH initiated investigations into public sector contracts entered with the support of ENSafrica. This includes investigations related to Microsoft contracts referenced in the SENS. The investigations continue around four large public sector contracts and are expected to be concluded by 31 May 2019.

Microsoft issued a notice of termination in respect of EOH’s channel partner agreement, and cancelled the related partnership agreements. Further details regarding this development were provided in the SENS issued on 25 March 2019.