Annual financial statements

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 JUNE 2018

GROUP				COMPANY

2018 R’000	2017 R’000			2018 R’000	2017 R’000
		11	INVESTMENT PROPERTIES
			Cost
270	270		Balance at the beginning of the year
270	270		Balance at the end of the year
			Accumulated depreciation
(261)	(255)		Balance at the beginning of the year
–	(6)		Depreciation for the year
(261)	(261)		Balance at the end of the year
			Carrying amounts
9	15		Balance at the beginning of the year
9	9		Balance at the end of the year
338	284		Rental income derived from investment properties
(135)	(188)		Direct operating expenses generating rental income
203	96		Net profit arising from investment properties carried at net book value
			The fair value of the property is R1.6 million (2017: R1,4 million).
			The fair value of investment properties has been determined based on valuations performed by “The Property Partnership”, an accredited independent valuer, “The Property Partnership” is an industry specialist in valuing investment properties.
			The valuation was determined by using the capitalisation of future rentals technique. It was based on a net annual rental income of R203 000 (2017: R181 000) and a rental capitalisation into perpetuity factor of 13% (2017: 13%) and is considered to be a Level 3 fair value disclosure.

12	INTANGIBLE ASSETS

	GROUP

	2018
	Goodwill R'000	Trademarks and customer lists R'000	Software licences R'000	Right-of-use R'000	Capital work- in-progress – software R'000	Total R'000
Cost
Balance at 1 July 2017	402 324	180 721	125 323	9 579	48 685	766 632
Capital Expenditure	–	–	–	–	3 425	3 425
Capitalised	–	–	25 079	–	(25 079)	–
Disposals and scrappings	–	–	(5 536)	–	–	(5 536)
Balance at 30 June 2018	402 324	180 721	144 866	9 579	27 031	764 521
						–
Accumulated amortisation and impairment						–
Balance at 1 July 2017	(1 311)	(36 876)	(72 927)	(4 855)	–	(115 969)
Amortisation for the year	–	(12 684)	(11 672)	(2 841)	–	(27 197)
Disposals and scrappings	–	–	5 316	–	–	5 316
Balance at 30 June 2018	(1 311)	(49 560)	(79 283)	(7 696)	–	(137 850)
Net book value as at 30 June 2018	401 013	131 161	65 583	1 883	27 031	626 671

	GROUP

	2018
	Goodwill R'000	Trademarks and customer lists R'000	Software licences R'000	Right-of-use R'000	Capital work- in-progress – software R'000	Total R'000
Cost
Balance at 1 July 2016	380 745	142 505	125 758	9 579	48 745	707 332
Capital Expenditure	–	–	–	–	1 571	1 571
Capitalised	–	–	1 631	–	(1 631)	–
Additions through business combinations	21 579	38 216	–	–	–	59 795
Disposals and scrappings	–	–	(2 066)	–	–	(2 066)
Balance at 30 June 2017	402 324	180 721	125 323	9 579	48 685	766 632

Accumulated amortisation and impairment						–
Balance at 1 July 2016	(1 311)	(25 687)	(65 204)	(2 939)	–	(95 141)
Amortisation for the year	–	(11 189)	(9 711)	(1 916)	–	(22 816)
Disposals and scrappings	–	–	1 988	–	–	1 988
Balance at 30 June 2017	(1 311)	(36 876)	(72 927)	(4 855)	–	(115 969)
Net book value as at 30 June 2017	401 013	143 845	52 396	4 724	48 685	650 663

An impairment test is done annually at the Group’s financial year-end on goodwill acquired through business combinations. The value-in-use of the businesses are represented by the present value of future cash flows generated by the businesses estimated for a five-year period and is based on:

Current net profit before tax, projected forward at an average growth of between 5%-10% (2017: 5%-10%) and adjusted for non-cash items; movements in working capital; and a before tax discount rate of 19,16% (2017: 19,27%).

Goodwill has been allocated to Clover Industries Group (excluding the Frankies Business and Clover Pride) and then to the Frankies Business and Clover Pride respectively as the smallest separately identifiable cash-generating units due to income, cost, assets and liabilities not being possible to be split into smaller cash-generating units. The respective calculated recoverable amounts exceeds the carrying amount of the cash-generating unit. No reasonably possible change will result in the carrying amount exceeding the recoverable amount of the cash-generating unit.

	GROUP

Goodwill has been allocated to the following cash-generating units for purposes of the impairment review:	2018 R'000	2017 R'000
Clover Industries*	373 894	373 894
Frankies CGU	5 540	5 540
Clover Pride	21 579	21 579
Clover Industries Group	401 013	401 013
*Clover Industries Limited does not hold any goodwill at a company level.

GROUP					COMPANY

2018 R’000	2017 R’000				2018 R’000	2017 R’000
		13	OTHER FINANCIAL ASSETS AND FINANCIAL LIABILITIES
			13.1	Other financial assets
				Financial assets at fair value through profit or loss
1 329	2 309			Investment in Guardrisk Cell Captive
				Derivatives not designated as hedges
1 795	–			Call option to acquire remaining shares in Clover Pride
2 657	856			Call option to acquire remaining shares in Clover Good Hope
				Non-current financial assets at amortised cost
439 042	–			Revolving credit facility (RCF) made available to Dairy Farmers of South Africa (Pty) Ltd
(439 042)	–			Allowance for impairment
5 781	3 165			Total financial instruments at fair value
5 781	3 165			Total other financial assets
	–			Total current
5 781	3 165			Total non-current
				Clover has granted DFSA two 20 year revolving credit facilities (“RCF”) of R450 million and R100 million respectively in order for DFSA to fund its operations and the inventory it initially acquired from the Group at the time the DFSA business was established. In terms of the requirements of IAS 39 management tested the revolving credit facility for impairment taking into account all relevant information available up to the point of publishing these results. As discussed in detail here and note 29, due to untenable tension between losing milk producers or losing market share, the CEO of DFSA has resigned with effect from 30 April 2019. Unfortunately, the Chairman of DFSA also resigned at the same time, and felt it prudent that the B-shareholders (the producers) appoint their own new independent chairman along with a new CEO. Given the imminent change of leadership of DFSA, the board of Clover decided to rather impair the full RCF of R439,0 million at 30 June 2018. The impairment of the RCF will be assessed on a continuous basis.
				Reconciliation of allowance for impairment:
–	–			Balance at the beginning of the year
439 042	–			Charge for the year
–	–			Impairment loss written off
439 042	–			Balance at the end of the year

Call option to acquire remaining shares in Clover Good Hope

Good Hope granted Clover the irrevocable right to purchase Good Hope’s 49% of the issued share capital in Clover Good Hope (“Call shares”). The call option may be exercised by Clover within three months after each 12 month period from the fifth anniversary of the effective date. The purchase price of the call shares will be determined by way of an earnings before interest tax depreciation and amortisation (EBITDA) multiple formula.

((A - C) x B) x 49%
A – Average annual EBITDA of Clover Good Hope for the two financial years preceding the call option
B – EBITDA multiple. If Clover’s EBITDA multiple is 7 or lower the EBITDA multiple will be 6. If Clover’s EBITDA multiple is above 7 then the EBITDA multiple will be 7
C – Actual average net financing cost of Clover Good Hope for the two financial years preceding the call option

The value of the call option was calculated by comparing the expected price as per the contract to a price calculated by using a discounted cash flow model. The discounted cash flow valuation of the call option was based on the following inputs; estimated annual free cash flow of R2,4 million; free cash flow growth per annum of between 5% to 10% and a discount rate of 17,98%

Call option to acquire remaining shares in Clover Pride

AECI granted Clover the irrevocable right to purchase AECI’s 49% of the issued share capital in Clover Pride (“Call shares”). The call option may be exercised by Clover within three months after each 12 month period from the third anniversary of the effective date. The purchase price of the call shares will be determined by way of an earnings before interest tax depreciation and amortisation (EBITDA) multiple formula.

(A x B - C + D -E) x 49%
A – 6.21 (EBITDA multiple)
B – Average normalised EBITDA
C – Clover Pride's debts
D – Working capital on hand
E – Normal working capital

The value of the call option was calculated by comparing the expected price as per the contract to a price calculated by using a discounted cash flow model. The value of the call option was calculated by comparing the expected price as per the contract to a price calculated by using a discounted cash flow model. The discounted cash flow valuation of the call option was based on the following inputs; estimated annual free cash flow of R9,8 million; free cash flow growth per annum of between 5% to 6% and a discount rate of 18.54%

GROUP				COMPANY

2018	2017			2018	2017
		13.2	Other financial liabilities
			Financial liabilities at fair value through profit or loss
			Derivatives not designated as hedging instruments:
–	638		Foreign exchange contracts
16 415	13 521		Clover Industries shares forward purchases
			Financial liabilities designated as hedging instruments:
			Derivatives designated as hedging instruments:
–	1 665		Cash flow hedge – Diesel hedge
16 415	15 824		Total financial instruments at fair value
16 415	15 824		Total other financial liabilities
13 639	6 141		Total current
2 776	9 683		Total non-current

Foreign exchange contracts

Foreign exchange contracts through profit or loss are those foreign exchange forward contracts that are not designated in hedge relationship as they are intended to reduce the level of foreign currency risk for expected sales and purchases.

Clover Industries shares forward purchase

The Group had entered into a forward contract to purchase 1 824 195 (2017: 2 132 695) Clover Industries shares, this transaction was entered into to hedge a portion of the share appreciation rights issued to management.

The fair value of the shares forward purchases was determined by Investec Bank Limited. The fair value was determined by calculating the future settlement price after the following inputs were taken into consideration, a dividend of 1,61% (2017: 3,92%), a credit spread of 2,80% (2017: 2,75%), a spot rate of R16,40 (2017: R16,55) and a swap interest rate reflecting the term of each tranche of the hedge.

	2018		2017
Expiry date	Number of forwards	Forward price per share (Rand)	Number of forwards	Forward price per share (Rand)
2 October 2017			308 500	23.20
29 June 2018			308 500	23.97
31 July 2018	519 442	24.29	519 442	24.29
3 June 2019	476 810	26.48	476 810	26.48
28 June 2019	519 443	25.72	519 443	25.72
1 July 2019	308 500	25.60
Total	1 824 195		2 132 695

13.3

Fair value hierarchy

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique;

Level 1: quoted prices in active market for identical assets or liabilities.
Level 2: other techniques for which all inputs that have a significant effect on the recorded fair value are observable, either directly or indirectly.
Level 3: techniques that use inputs that have a significant effect on the recorded fair value that are not based on observable market data.

As at 30 June 2018, the Group held the following financial instruments carried at fair value in the Statement of financial position:

	GROUP

	30 June 2018 R’000	Level 1 R’000	Level 2 R’000	Level 3 R’000
Assets measured at fair value
Derivatives not designated as hedging instruments:
Call option to acquire remaining shares in Clover Good Hope (Pty) Ltd	2 657	–	–	2 657
Call option to acquire remaining shares in Clover Pride (Pty) Ltd	1 795	–	–	1 795
Investment in cell captive	1 329	–	1 329	–
Liabilities measured at fair value
Derivatives not designated as hedging instruments:
Clover Industries shares forward purchases	16 415	–	16 415	–
During the reporting period ended 30 June 2018, there were no transfers between Level 1 and Level 2 fair value measurements.

	30 June 2017 R’000	Level 1 R’000	Level 2 R’000	Level 3 R’000
Assets measured at fair value
Derivatives not designated as hedging instruments:
Call option to acquire remaining shares in Clover Good Hope (Pty) Ltd	856	–	–	856
Investment in cell captive	2 309	–	2 309	–
Liabilities measured at fair value
Derivatives not designated as hedging instruments:
Foreign exchange contracts	638	–	638	–
Clover Industries shares forward purchases	13 521	–	13 521	–
Derivatives designated as hedging instruments:
Diesel hedge	1 665	–	1 665	–
During the reporting period ended 30 June 2017, there were no transfers between Level 1 and Level 2 fair value measurements.

		Fair value measurement and valuation techniques for level 2 and level 3 financial instruments

Type of financial instrument Fair value 2018	Fair value R’000	Valuation technique	Significant inputs
Financial assets at fair value through profit or loss	5 781

Call option to acquire remaining shares in Clover Good Hope (Pty) Ltd	2 657	DCF	Free cash flow forecast Market interest rate

Call option to acquire remaining shares in Clover Pride (Pty) Ltd	1 795	DCF	Free cash flow forecast Market interest rate

Investment in cell captive	1 329	NAV	Cash and cash equivalents Investment in unit trusts Insurance fund liabilities (which carrying value approximates their fair values)


Financial liabilities at fair value through profit or loss	16 415

Clover Industries shares forward purchase	16 415	DCF	Share price Yield curves

Fair value 2017	Fair value R’000	Valuation technique	Significant inputs
Financial assets at fair value through profit or loss	3 165


Call option to acquire remaining shares in Clover Good Hope (Pty) Ltd	856	DCF	Free cash flow forecast Market interest rate

			Cash and cash equivalents Investment in unit trusts

Investment in cell captive	2 309	NAV	Insurance fund liabilities (which carrying values approximates their fair values)


Financial liabilities at fair value through profit or loss	14 159


Foreign exchange contracts	638	DCF	Yield curves Market interest rate Market foreign exchange rate



Clover Industries shares forward purchase	13 521	DCF	Share price Yield curves

Financial liabilities at fair value through OCI	1 665

Diesel hedges	1 665	DCF	Market forward ICE gasoil price Yield curves Market foreign exchange rate

GROUP			COMPANY

2018 R’000	2017 R’000		2018 R’000	2017 R’000
		Reconciliation of fair value measurement of level 3 financial assets
		Call option to acquire remaining shares in Clover Good Hope (Pty) Ltd
856	560	Balance at the beginning of the year
–	–	Initial recognition through OCI
1 801	296	Remeasurement recognised through statement of profit or loss
2 657	856	Balance at the end of the year
		Call option to acquire remaining shares in Clover Pride (Pty) Ltd
–	–	Balance at the beginning of the year
–	–	Initial recognition through OCI
1 795	–	Remeasurement recognised through statement of profit or loss
1 795	–	Balance at the end of the year
Refer to Note 29.1 (iv) to 29.1 (v) for further disclosure.

GROUP				COMPANY

2018 R’000	2017 R’000			2018 R’000	2017 R’000
		14	DEFERRED TAXATION
(175 569)	(155 339)		Balance at the beginning of the year	77	77
(54 537)	(20 230)		Movements during the year:
(56 125)	(14 411)		Charge to profit or loss
(4 839)	(590)		Deferred tax write down
9 147	3 105		Prior year over provision
–	970		Change in rate
(359)	520		Foreign currency translation effect
–	938		Charge from/(to) other comprehensive income
(617)	79		(Charge)/Credit to the statement of changes in equity
(1 744)	(10 841)		Unbundling of Dairy Farmers of South Africa (Pty) Ltd / Acquisition of subsidiaries
(230 106)	(175 569)		Balance at the end of the year	77	77
			The balance is constituted as follows:
			Deferred tax assets
1 615	1 668		Doubtful debts provision	77	77
4 236	3 356		Credit note accrual
534	1 138		Leases straight-lined
45 960	47 205		Employee related expenses that are only deductible when paid
4 149	5 400		Income received in advance
19 599	21 138		Other accruals
68 836	96 882		Assessed loss carried forward
2 371	1 636		Foreign tax credits
4 351	4 578		Other financial liabilities
151 651	183 001		Total deferred tax assets	77	77
			Deferred tax liabilities
(373 776)	(351 872)		Property, plant and equipment
(2 687)	(2 069)		Prepayments
(3 614)	(3 150)		Consumable stores
(1 540)	(1 358)		Pension fund asset
(140)	(121)		Other
(381 757)	(358 570)		Total deferred tax liabilities
(230 106)	(175 569)		Net deferred tax (liability)/asset	77	77
			The Statement of financial position disclosure for deferred tax assets is the total amount for all Group companies with net deferred tax assets. Likewise the deferred tax liability represents the total of all companies with net deferred tax liabilities. Note 14, however, groups all deferred tax assets and liabilities in the Group, irrespective of the net position of individual Group companies.
			Reflected in the Statement of financial position as follows:
30 203	45 496		Deferred tax assets	77	77
(260 309)	(221 065)		Deferred tax liabilities
(230 106)	(175 569)		Net deferred tax (liability)/asset	77	77
			In assessing the availability of sufficient future taxable profit for utilisation against unused tax losses, cognisance was taken of the Group’s vision, goals and strategies. The board is of the opinion that future taxable profits would be adequate to utilise the unused tax losses.

GROUP				COMPANY

2018 R’000	2017 R’000			2018 R’000	2017 R’000
		15	INVENTORIES
154 165	170 659		Raw materials
128 317	99 221		Work-in-progress
125 201	115 403		Consumable stores
461 408	579 347		Finished goods
869 091	964 630		Total inventories
			The amount of the write-down of inventories recognised as an expense is R17.2 million (2017: R22,4 million). This expense is included in the cost of sales line item as a cost of inventories.

GROUP				COMPANY

2018 R’000	2017 R’000			2018 R’000	2017 R’000
		16	TRADE AND OTHER RECEIVABLES
1 181 770	1 182 775		Trade receivables	–	13 061
42 676	36 515		Trade receivables from principals
186 870	11 640		Trade receivables from JV's and associates
88 122	127 622		Other receivables and deposits	50 969	275
2 725	2 585		Loans to executive directors and other executives	2 725	2 585
			Inter-company loan: Clover SA	549 363	547 578
			Loan: CIL Share Purchase Plan Trust	9	9
(5 856)	(6 517)		Allowance for impairment	(275)	(275)
(17 217)	(13 309)		Credit note accrual
1 479 090	1 341 311		Total trade and other receivables	602 791	563 233

			Clover SA securitised its trade debtors, excluding debtors generated from export sales, through a special-purpose entity, Clover Capital. Clover Capital is consolidated into the results of the Group.
			The loans to directors and other executives were made to finance ordinary shares in CIL issued to them on 31 May 2010. The terms of the loans are as follows: they will bear interest at 90% of the prime rate of Absa Bank, interest will be capitalised on a monthly basis, repayable by management on the sale of the ordinary shares or within two months of leaving the employment of Clover or within six months in the case of death. All proceeds of the ordinary shares are ceded to CIL as security for the loans. The loan agreements have been amended to make provision for a final repayment date of the respective loans linked to the normal retirement date for each of the executives. See note 28.2 for further details.
			See note 29.5 for age analysis on trade receivables and on credit risk of trade receivables to understand how the Group manages and measures credit quality of trade receivables that are neither past due nor impaired.
			Trade receivables are non-interest-bearing and the payment terms are 30 days after the end of the month in which the goods were delivered.
			As at 30 June 2018, trade receivables with an initial value of R5,9 million (2017: R6,5 million) were impaired and fully provided for. See below for the movement in the provision for impairment of receivables.
6 517	3 847		Balance at the beginning of the year	275	275
(230)	4 978		(Credit)/charge for the year
(431)	(2 308)		Impairment loss written off
5 856	6 517		Balance at the end of the year	275	275

GROUP				COMPANY

2018 R’000	2017 R’000			2018 R’000	2017 R’000
		17	CASH AND SHORT-TERM DEPOSITS
			Cash at bank earns interest at floating rates based on daily deposit rates. Short-term deposits are made for periods varying between one day and three months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. At 30 June 2018, the Group had available R318 million (2017: R14 million) of unutilised committed borrowing facilities in respect of which all conditions precedent had been met.
			For the purpose of the consolidated cash flow statements, cash and short-term deposits comprise the following:
			Cash at bank and on hand
234	335		On hand
178 602	73 584		Outstanding deposits
173 843	54 829		Call deposits	16 335	53 592
408 014	416 115		Cash in banks	12 699	9 649
760 693	544 863		Total cash and short-term deposits	29 034	63 241

GROUP				COMPANY

2018 Number of shares	2017 Number of shares			2018 Number of shares	2017 Number of shares
		18	SHARE CAPITAL AND SHARE PREMIUM
			Ordinary shares
			Authorised
			2 billion (2017: 2 billion) ordinary shares with a par value of 5 cents (2017: 5 cents) each
			Shares issued
190 835 364	190 314 350		Ordinary shares in issue at the beginning of the year	190 835 364	190 314 350
			Share appreciation rights exercised:
–	38 397		Issued on 15 September 2016	–	38 397
–	482 617		Issued on 24 April 2017	–	482 617
190 835 364	190 835 364		Ordinary shares in issue at the end of the year	190 835 364	190 835 364

GROUP			COMPANY

2018 R’000	2017 R’000		2018 R’000	2017 R’000
		Ordinary share capital
9 542	9 542	190,8 million (2017: 190,8 million) ordinary shares of 5 cents (2017: 5 cents) each	9 542	9 542
		Ordinary share premium
892 692	892 692	Ordinary share premium on 190,8 million (2017: 190,8 million) ordinary shares	892 692	892 692
902 234	902 234	Total ordinary share capital and ordinary share premium	902 234	902 234
		Shares were issued as follows during the year
		Ordinary shares:
–	26	Ordinary shares of 0,5 cents (2016: 0,5 cents) each	–	26
–	9 918	Ordinary share premium of R19,04 (2016: R17,19) per share	–	9 918
–	9 944	Total ordinary share capital raised during the year	–	9 944

GROUP				COMPANY

2018 R’000	2017 R’000			2018 R’000	2017 R’000
		19	OTHER CAPITAL RESERVES
			Share-based payments reserve
78 082	73 868		Balance at the beginning of the year	2 169	2 169
(2 593)	5 865		Share based (credit)/expense
(4 223)	(1 651)		Share appreciation rights exercised
71 266	78 082		Balance at the end of the year	2 169	2 169
			Call options
560	1 005		Balance at the beginning of the year
–	–		Initial recognition of call options
–	(445)		Transfer to retained earnings
560	560		Balance at the end of the year
			Put liability
–	–		Balance at the beginning of the year
33 863	–		Remeasurement of put liability
33 863	–		Balance at the end of the year
105 689	78 642		Total other capital reserves at the end of the year	2 169	2 169

GROUP					COMPANY

2018 R’000	2017 R’000				2018 R’000	2017 R’000
		20	OTHER COMPONENTS OF EQUITY
			20.1	Foreign currency translation reserve
9 637	24 147			Balance at the beginning of the year
				Movements:
7 523	(14 510)			Foreign exchange translation differences
7 523	(14 510)			Net foreign exchange translation movement
17 160	9 637			Balance at the end of the year