Financial risks

In the course of its business, the Group is exposed to a number of financial risks: credit risk, liquidity risk and market risk (including foreign currency, interest rate and other price risks). This note presents the Group’s objectives, policies and processes for managing its financial risk and capital.

Risk management is monitored and managed by key personnel of each entity in the Group on a daily basis based on their specific operational requirements.

Classes of financial instruments

* Trade and other receivables and trade and other payables exclude non-financial instruments.

Credit risk
Credit risk arises because a counterparty may fail to meet its obligations to the Group.

The Group is exposed to credit risk on financial assets mainly in respect of trade receivables, loan receivables and cash and cash equivalents. Refer to note 2.1 for credit risk on associates and joint ventures.

Trade receivables
Trade receivables consist primarily of invoiced amounts from normal trading activities. The Group has a diversified customer base and policies are in place to ensure sales are made to customers with an appropriate credit history and payment history. Individual credit limits are set for each customer and the utilisation of these credit limits is monitored regularly. Customers cannot exceed their set credit limit, without specific Senior Management approval. Such approval is assessed and granted on a case-by-case basis. Management regularly reviews the debtors age analysis and follows up on long-outstanding debtors. Where necessary, a provision for impairment is made. A portion of the Group’s customer base is made up of major retailers and wholesalers with the balance of the customer base being widely dispersed

During the period, the Group identified a significant increase in the credit risk of one of its major wholesale customers. This was not as a result of the customer failing to pay amounts as they became due and payable, but rather as a result of other external factors that have affected them. As a result of this, the Group performed a detailed impairment calculation to determine if an impairment of the trade and other receivables balance from this customer was required. This included an analysis of the root cause of the increase in credit risk of the customer. Through discussions with the customer, management have prepared detailed budgets and projections of the likely scenarios that the customer will embark upon to mitigate the root cause of the increase in their credit risk. Management have considered the customer’s business plan and the likelihood of the various scenarios and determined that, at the reporting period, there is no impairment required to this balance. The Group’s maximum gross exposure to credit risk of this counterparty amounted to R562 million at 31 May 2017. However, the Group has collateral in place that would mitigate this risk, with a result that the net maximum exposure, albeit highly unlikely, to this customer is R287 million at 31 May 2017.

Starter packs
The risk of starter pack receivables is assessed as low due to the fact that annuity income through activation and ongoing revenue is utilised in the settlement of the receivable balances. These receivables are recoverable within a period which may exceed 12 months.

Loans receivable
Loans are only granted to holders with an appropriate credit history, taking into account the holder’s financial position and past experience.

Cash and cash equivalents
The Group places cash and cash equivalents with major banking groups and quality institutions that have high credit ratings.

The Group has significant concentrations of credit risk with Investec Bank Limited in line with its treasury function. Investec Bank Limited has a credit rating of BB+ based on the latest S&P Global Ratings local currency long-term issuer default ratings.

The Group’s maximum credit risk exposure is the carrying amount of all financial assets on the statement of financial position and sureties provided with the maximum amount the Group could have to pay if the sureties are called on, amounting to R85.5 million (2016: R98.8 million). The Group holds collateral in the form of sureties in respect of 50% of the loan receivable from 2DFine Holdings Mauritius (refer to note 8).

Liquidity risk
Liquidity risk arises when a company encounters difficulties in meeting commitments associated with liabilities and other payment obligations. The Group’s objective is to maintain prudent liquidity risk management by maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Group aims to maintain flexibility in funding by keeping committed credit lines available.

Cash flow forecasting is performed in the operating entities of the Group to ensure sufficient cash to meet operational needs while maintaining sufficient headroom to ensure that borrowing limits (where applicable) are not breached.

Surplus cash held by the operating entities over and above the balance required for working capital management is transferred to the Group treasury. Group treasury invests surplus cash in interest-bearing accounts, identifying instruments with sufficient liquidity to provide adequate headroom as determined by the above mentioned forecasts.

The Group has a short-term loan facility with Investec Bank Limited of R1.5 billion (2016: R1.5 billion). The facility was unutilised at year-end. Drawdowns were made and fully repaid during the year.

The facility bears certain debt covenants. The Group has not been in breach in respect of these covenants. The Group has pledged certain securities in respect of this facility. Refer to notes 3.1.2, 3.1.3 and 4.4.

The Company and a subsidiary company issued a cross surety in respect of an overdraft facility in the amount of R19.85 million (2016: R19.85 million) in favour of FNB, a division of First National Bank Limited (FNB). This facility was unutilised as at 31 May 2017. In addition, the Company and four of its subsidiaries issued a cross surety in the amount of R1.3 million in respect of credit card facilities granted by FNB.

Guarantees to the value of 319.4 million (2016: R116 million) are issued by the Group’s bankers in favour of suppliers on behalf of the Group. The Group does not have access to this cash while amounts owing to suppliers are outstanding.

A guarantee to the value of R19.7 million has been issued by the Group’s bankers in favour of RBL Bank on behalf of the Group. The Group does not have access to this cash while the guarantee is in place.

Maturity of financial liabilities
The table below analyses the Group’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the statement of financial position date to the contractual maturity date.

The amounts disclosed in the table are the contractual undiscounted cash flows.

* Trade and other payables exclude non-financial instruments, being VAT and certain amounts included within accruals and sundry creditors.