| 28. | FINANCIAL INSTRUMENTS |
| OVERVIEW | |
| The Group is exposed to credit, liquidity, interest rate and currency risk due to the effects of changes in debt, exchange rates and interest rates experienced in the normal course of business. The Group’s objective is to effectively manage each of the risks associated with its financial instruments in order to minimise the potential adverse effect on the financial performance and position of the Group. | |
| The Board is ultimately responsible for ensuring that adequate procedures and processes are in place to identify, assess, manage and monitor financial risks. A treasury committee, appointed by the Board, comprising executive directors and senior executives, sets and monitors the adherence to appropriate risk limits and controls. Risk management is carried out by a central treasury department in line with the overall treasury policy as reviewed and approved by the Board on a regular basis. | |
| 28.1 | Credit risk |
| Credit risk is the risk of financial loss to the Group if a counterparty to a financial instrument fails to meet its contractual obligations. Financial assets, which potentially subject the Group to concentrations of credit risk, consist principally of cash and cash equivalents, trade and other receivables, loans and participation in export partnerships. | |
| The Group’s cash is placed with major South African and international financial institutions of high credit standing with a long-term rating of AAA (zaf) (refer note 19). | |
| Trade and other receivables mainly relate to amounts owing by franchisees and are presented net of impairment losses (refer note 18). Rigorous credit granting procedures are applied to assess the credit quality of the debtors, taking into account its financial position and credit rating. The Group obtains various forms of security from its franchise debtors, including bank guarantees, notarial bonds over inventory and moveable assets and suretyships from shareholders. The total credit risk with respect to receivables from franchise debtors is further limited as a result of the dispersion amongst the individual franchisees and across different geographic areas. Consequently, the Group does not consider there to be any significant concentration or exposure to credit risk. | |
| Loans mainly comprise employee loans granted in line with the Group’s remuneration policy. Loans are granted after reviewing the affordability for each employee and, where appropriate, suitable forms of security are obtained. Refer note 15. | |
| A JSE listed company has warranted all material cash flow aspects of the Group’s participation in export partnerships. The Group’s directors have considered the credit risk relating to these aspects warranted and have satisfied themselves as to the creditworthiness of the warrantor company. Refer note 12. | |
| 28.2 | Liquidity risk |
| Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group manages this risk by maintaining adequate reserves and borrowing facilities and by continuously monitoring forecasted and actual cash flows, ensuring that the maturity profiles of financial assets and liabilities do not expose the Group to liquidity risk. In terms of the Company’s Memorandum of Incorporation the Group’s borrowing powers are unlimited, however, the treasury committee maintains strict control over the acceptance and draw-down of any loan facility. |
|
| On average, trade and other receivables and inventory are realised within 30 days and trade and other payables are settled within 60 days. To the extent that the Group requires short-term funds, it utilises the banking facilities available. Long-term borrowings are utilised to fund capital expenditure. Liquidity risk has been mitigated by substantial unutilised borrowing facilities as illustrated below. |
| Group | |||
| 2013 | 2012 | ||
| Rm | Rm | ||
| Total borrowing facilities granted by financial institutions | 5 723.7 | 5 739.7 | |
| Total actual borrowings and utilisation of facilities | (2 862.7) | (1 840.2) | |
| Unutilised borrowing facilities | 2 861.0 | 3 899.5 | |
|
The following are the undiscounted contractual maturities of financial liabilities, including estimated interest payments: |
||||||
| Carrying amount Rm |
Contractual cash flows Rm |
Within 1 year Rm |
2 to 5 years Rm |
Over 5 years Rm |
||
| Pick n Pay Stores Group | ||||||
| 2013 | ||||||
| Secured loans – note 22.1 | 804.0 | 986.9 | 100.0 | 877.6 | 9.3 | |
| Unsecured loans – note 22.1 | 400.0 | 405.3 | 405.3 | |||
| Trade and other payables – note 24 | 6 543.1 | 6 543.1 | 6 543.1 | |||
| Bank overdrafts – note 19 | 25.6 | 25.6 | 25.6 | |||
| Overnight bank borrowings – note 19 | 1 500.0 | 1 500.0 | 1 500.0 | |||
| Forward exchange contracts – note 28.3.1 | 3.1 | 3.1 | 3.1 | |||
| Total financial obligations | 9 275.8 | 9 464.0 | 8 577.1 | 877.6 | 9.3 | |
| 2012 | ||||||
| Secured loans – note 22.1 | 814.5 | 1 077.7 | 114.6 | 939.9 | 23.2 | |
| Unsecured loans – note 22.1 | 650.0 | 667.8 | 667.8 | |||
| Trade and other payables – note 24 | 6 691.5 | 6 691.5 | 6 691.5 | |||
| Forward exchange contracts – note 28.3.1 | 5.7 | 5.7 | 5.7 | |||
| Total financial obligations | 8 161.7 | 8 442.7 | 7 479.6 | 939.9 | 23.2 | |
| Pick n Pay Holdings Group | ||||||
| 2013 | ||||||
| Secured loans – note 22.1 | 804.0 | 986.9 | 100.0 | 877.6 | 9.3 | |
| Unsecured loans – note 22.1 | 400.0 | 405.3 | 405.3 | |||
| Trade and other payables – note 24 | 6 548.7 | 6 548.7 | 6 548.7 | |||
| Bank overdrafts – note 19 | 25.6 | 25.6 | 25.6 | |||
| Overnight bank borrowings – note 19 | 1 500.0 | 1 500.0 | 1 500.0 | |||
| Forward exchange contracts – note 28.3.1 | 3.1 | 3.1 | 3.1 | |||
| Total financial obligations | 9 281.4 | 9 469.6 | 8 582.7 | 877.6 | 9.3 | |
| 2012 | ||||||
| Secured loans – note 22.1 | 814.5 | 1 077.7 | 114.6 | 939.9 | 23.2 | |
| Unsecured loans – note 22.1 | 650.0 | 667.8 | 667.8 | |||
| Trade and other payables – note 24 | 6 695.2 | 6 695.2 | 6 695.2 | |||
| Forward exchange contracts – note 28.3.1 | 5.7 | 5.7 | 5.7 | |||
| Total financial obligations | 8 165.4 | 8 446.4 | 7 483.3 | 939.9 | 23.2 | |
| 28.3 | Market risk management |
| Changes in market prices relating to foreign exchange rates and interest rates will affect the Group’s financial result or position. The objective of market risk management is to manage and control exposure to market risk, while optimising the return on the risk. | |
| 28.3.1 | Currency risk management |
| Transactional currency risk | |
| The Group operates internationally and is exposed to currency risk through the importation of merchandise. Investments in foreign operations and master franchise agreements with international counterparties do not contribute to transactional currency risk as the related transactions and balances are denominated in South African Rands. | |
| The following exchange rates applied during the period: |
| Average rate | Closing rate | ||||
| 2013 | 2012 | 2013 | 2012 | ||
| US Dollar/ZAR | 8.28 | 7.25 | 9.02 | 7.53 | |
| Euro/ZAR | 10.97 | 9.86 | 11.83 | 10.11 | |
| GBP/ZAR | 12.84 | 11.61 | 13.73 | 11.94 | |
|
Although the Group is exposed to currency risk through the importation of merchandise it does not have significant foreign creditors as inventory imports are mostly prepaid. The currency risk relating to future cash flows of import orders is managed by entering into forward exchange contracts (FECs). FECs are taken out when an order is placed with a foreign supplier. The Group does not use FEC’s for speculative purposes and does not apply cash flow hedge accounting. |
|||||
| Forward exchange contracts | Contract foreign currency m |
Rand equivalent Rm |
Average rate R |
Fair value adjust- ment Rm |
|
| 2013 | |||||
| US Dollars | 11.6 | 103.8 | 8.95 | 3.3 | |
| Euro | 1.1 | 12.7 | 11.55 | (0.1) | |
| GBP | 0.4 | 5.1 | 12.75 | (0.1) | |
| 121.6 | 3.1 | ||||
| 2012 | |||||
| US Dollars | 9.7 | 78.0 | 8.00 | 4.1 | |
| Euro | 3.4 | 36.4 | 10.67 | 1.6 | |
| 114.4 | 5.7 |
| Sensitivity of the Group’s exposure to material foreign currencies is estimated by assessing the impact of a reasonable expected movement of the currencies on the profit and equity of the Group. A sensitivity analysis is not presented as the expected movement in currencies is not material. | |
| In relation to the participation in export partnerships, a fixed rate of exchange was set for the purposes of converting the foreign currency receipts in respect of the partnership’s sales into Rands. Any exchange differences are for the account of the managing partner of the partnerships and will have no impact on the earnings of the Group. | |
| Currency translation risk | |
| The Group has investments in foreign subsidiaries and the translation of the underlying assets and liabilities from the functional currency to the Group’s reporting currency exposes the Group to currency translation risks. The Group also has foreign cash balances that are exposed to currency translation risks. These risks are not considered material and therefore no sensitivity analysis is presented and the risks are not hedged. |
| 28.3.2 | Interest rate risk management |
| The Group’s interest rate risk arises from borrowings, cash and cash equivalents and loans. Fixed rate borrowings expose the Group to fair value interest rate risk. Variable rate borrowings, loans and cash and cash equivalents result in cash flow interest rate risk. The exposure to interest rate risk is managed though the Group’s cash management system taking into account expected movements in interest rates when funding or investing decisions are made. | |
| The effective rates on financial instruments at end of period are: |
| 2013 Weighted average interest rate % |
2012 Weighted average interest rate % |
||
| Financial assets | |||
| Cash at bank and cash on hand (note 19) | 4.8 | 4.8 | |
| Cash investments (note 19) | 5.7 | 5.6 | |
| Loans (note 15) | 4.7 | 4.7 | |
| Financial liabilities | |||
| Variable-rate interest-bearing debt | |||
| Bank overdraft (note 19) | 7.0 | 7.5 | |
| Overnight bank borrowings (note 19) | 5.4 | 5.8 | |
| Finance leases (note 22.2) | 6.5 | 7.0 | |
| 3-month corporate paper (note 22.1) | 5.5 | 5.8 | |
| Fixed-rate interest-bearing debt | |||
| Secured loans (note 22.1) | 8.8 – 11.4 | 8.8 – 11.4 |
| Interest rate sensitivity analysis | |
| Sensitivity of the Group’s exposure to interest rate risk is estimated by assessing the impact of a reasonable expected movement in the relevant interest rates on the profit and equity of the Group based on the period end closing balances. We expect interest rates to remain unchanged for the following financial period, therefore there will be no impact on profit before tax. During the previous period an expected movement of 1% would have resulted in an increase or decrease of R8.5 million in profit before tax. |
| 28.4 | Fair value of financial instruments | ||||||||
| Financial instruments measured at fair value are classified using a 3-level hierarchy to rank inputs used in measuring fair value. The levels are explained below: |
|||||||||
|
|||||||||
| Available-for-sale investments are measured at fair value. The investment in Business Partners Limited is classified at level 2. | |||||||||
| Foreign exchange contracts are measured at fair value and classified at level 2. | |||||||||
| Financial liabilities | |||||||||
| Fair value is determined by calculating the present value of future cash outflows discounted at a market interest rate at the reporting date. With regard to retirement benefit obligations, fair value is determined by a qualified actuary using actuarial assumptions. | |||||||||
| Other financial assets (including cash and cash equivalents and loans) | |||||||||
| Fair value is estimated as the present value of future cash inflows discounted at a market interest rate at the reporting date. |
| 28.5 | Capital management | ||||||||
| The Group’s strategy is to maintain a strong capital base (represented by total shareholders’ equity) so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board of directors is ultimately responsible for capital management and has the following responsibilities in this regard: | |||||||||
|
|||||||||
|
|||||||||