Notes to the condensed consolidated financial statements

for the six months ended 31 August 2018

Famous Brands Limited (the “company”) is a South African registered company. The condensed consolidated financial statements of the company comprise the company and its subsidiaries (together referred to as “the Group”) and the Group’s interest in associates.

1. Statement of compliance

These unaudited condensed consolidated interim financial statements have been prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards (IFRS) and its interpretations adopted by the International Accounting Standards Board in issue and effective for the Group at 31 August 2018, and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by Financial Reporting Standards Council, and as a minimum contains the information required by IAS 34 Interim Financial Reporting, the JSE Listings Requirements, and the Companies Act of South Africa.

2. Basis of preparation

The Group's unaudited condensed consolidated interim financial statements as at and for the period ended 31 August 2018 have been prepared on the going-concern basis. The accounting policies applied in the presentation of the condensed consolidated interim financial statements are consistent with those applied for the year ended 28 February 2018, except for the new standards that became effective for the Group’s financial period beginning 1 March 2018, refer to note 3.

The condensed consolidated interim financial statements have not been audited or reviewed.

The condensed consolidated interim financial statements were prepared on the historical cost basis, under the supervision of Kelebogile (Lebo) Ntlha CA(SA), Group Financial Director.

3. Changes in accounting policies

The Group has adopted all the new, revised or amended accounting standards which were effective for the Group from 1 March 2018.

  • IFRS 2 Share-based Payment Transactions (Amendment, effective for financial years beginning or after 1 January 2018); and
  • IFRIC 22 Foreign Currency Transaction and Advance Consideration (effective for financial years beginning on or after 1 January 2018).

These do not have a significant impact on the Group’s financial results or position.

IFRS 9 Financial Instruments

IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement. The standard, inter alia, introduces a new approach to the classification of financial assets, which is driven by the business model in which the asset is held and their cash flow characteristics. The standard further introduces a single impairment model being applied to all financial instruments, as well as an Expected Credit Loss (ECL) model for the measurement of financial assets. It introduces a new hedge accounting model that is designed to be more closely aligned with how entities undertake risk management activities when hedging financial and non-financial risk exposures.

The adoption of IFRS 9 from 1 March 2018 resulted in changes in accounting policy, as referred to below:

Overall financial impact

The transition to IFRS 9 does not have a quantitative financial impact on the condensed consolidated statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows and Segment report.

Overall effect on classification and measurement of financial assets and financial liabilities

The classification categories for financial assets under IAS 39 were as follows: held to maturity, loans and receivables, fair value through profit or loss (FVTPL), and available-for-sale, which determined instrument's measurement. These are replaced by categories that reflect the measurement per IFRS 9, namely amortised cost, fair value through other comprehensive income (FVOCI) and FVTPL.

The classification categories for financial liabilities under IFRS 9 remain relatively unchanged from IAS 39. The financial liabilities continue to be classified as amortised costs or fair value through profit or loss (when they are held for trading).

IFRS 9 bases the classification of financial assets on the contractual cash flow characteristics and the entity's business model for managing the financial asset, whereas IAS 39 based the classification on specific definitions for each category. Overall, the IFRS 9 financial asset classification requirements are considered more principle-based than IAS 39.

A financial asset is measured at amortised cost if it meets the criteria below and is not designated as measured at FVTPL:

  • The financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and
  • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

A financial asset shall be measured at FVTPL unless it is measured at amortised cost or at FVOCI.

Initial recognition

At initial recognition, the Group measures financial asset at fair value plus, in the case of financial asset not at FVTPL, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVTPL are expensed in profit and loss.

Subsequent recognition

Financial assets at FVOCI

These assets are measured at fair value. Movements in the carrying amount are taken to OCI, except for impairment, interest income and foreign exchange gains and losses which are recognised in profit and loss. On derecognition, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit and loss except for equity investment, and management has made election to present fair value gains and losses on equity investments in OCI. There is no subsequent reclassification on derecognition of the investment.

Financial assets at FVTPL

These assets are subsequently measured at fair value. Gains or losses arising on remeasurement of these assets are recognised in profit and loss.

Financial assets at amortised cost

These assets are subsequently measured at amortised cost using the effective interest method. Interest income, foreign exchange gain and losses and impairment are recognised in profit and loss. Any gain or loss on derecognition is recognised in profit
and loss.

The effects of adopting IFRS 9 on classification and measurement is noted below in the table:

Original classification
under IAS 39
New classification
under IFRS 9
Carrying
amount
Trade receivables Loans and receivables Amortised cost No change
Cash and cash equivalents Loans and receivables Amortised cost No change
Receivables from Group companies Loans and receivables Amortised cost No change

Overall effect on impairment of financial assets

The impairment requirements under IFRS 9 are different from those under IAS 39. The standard introduces a single impairment model being applied to all financial instruments, as well as an ECL model for the measurement of financial assets, which is a move from the Incurred Loss model.

Under IFRS 9, loss allowances are measured on either of the following bases:

– 12-month ECLs: there are ECLs that result from possible default events within the 12 months after the reporting date; and

– lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument (simplified approach).

The expected credit loss model takes into account past events, current conditions, reasonable and supportable forward-looking information that is available without undue cost or effort.

The Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables.

The adoption of the ECL impairment model did not have a material impact on the impairment allowances recognised in the prior and current year.

Overall effect on hedge accounting

Hedge accounting has been simplified in IFRS 9 and basically expanded the scope of possibility to hedge. It makes application of hedging more principle-based. It allows entities to designate non-derivative financial instruments, that are accounted for at FVTPL, as hedging instruments.

The Group has the option to continue to apply the hedge accounting requirements of IAS 39 until the current macro hedging project is finalised, as all documentation is already in place. Accordingly, the Group has elected not to adopt the hedge accounting requirements of IFRS 9, but to continue applying the hedge accounting requirements of IAS 39 on existing hedges.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 introduces a comprehensive framework for determining when to recognise revenue and how much revenue to recognise. It replaces IAS 18 Revenue and related interpretations. The framework is a five-step model to be applied to each individual contract. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled for transferring goods or services to a customer.

Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. The Group recognises revenue when it transfers control over a product or services to a customer.

The Group has elected to not restate prior period figures and adopt a cumulative effect method.

Overall financial impact

The transition to IFRS 15 does not have a quantitative financial impact on the condensed consolidated statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows and Segment report.

Overall effect on disclosures

IFRS 15 requires the Group to disclose the disaggregated revenue by categories that depict the nature, amount, timing or uncertainty of revenue. This information is disclosed in note 7.

4. Property, plant and equipment

      Unaudited
six months
ended
31 August
2018
R000
    Unaudited
six months
ended
31 August
2017
R000
Audited
year
ended
28 February
2018
R000
 
Property, plant and equipment                
Opening balance     1 339 789     1 397 601 1 397 601  
Additions     48 241     114 893 192 588  
Foreign currency translation     164 550     41 308 21 102  
Disposals     (5 769)     (1 489) (21 496)  
Depreciation     (90 605)     (87 149) (181 414)  
Impairment     (289 477)     (68 592)  
Closing balance     1 166 729     1 465 164 1 339 789  

Impairment

An impairment of R289.5 million was recognised during the period under review relating to the GBK cash-generating unit (August 2017: nil and February 2018: R68.6 million). Refer to note 5 for further details on the impairment.

Sensitivity

For the period under review, an increase/(decrease) of 1% in the discount rate would result in an increase/(decrease) in the impairment charge of R100.9 million/(R132.9 million). An increase/(decrease) in the like-for-like growth rate of 1% in the forecast profits will result in a decrease/(increase) in the impairment charge of R270.3 million/(R174.1 million).

5. Intangible assets

      Unaudited
six months
ended
31 August
2018
R000
    Unaudited
six months
ended
31 August
2017
R000
Audited
year
ended
28 February
2018
R000
 
Intangible assets                
Opening balance     2 547 845     2 818 755 2 818 755  
Additions     8 784     31 245 38 531  
Foreign currency translation     280 934     12 152 21 920  
Disposals     (2 389)     (9 240) (5 963)  
Amortisation     (14 008)     (8 775) (21 398)  
Impairment     (584 448)     (304 000)  
Closing balance     2 236 718     2 844 137 2 547 845  

Impairment

In line with the year ended 28 February 2018, the GBK business continued to be assessed as a cash-generating unit for the period under review. The goodwill and brand name asset which arose on the acquisition of the business were allocated to this cash-generating unit’s carrying amount for the purpose of its impairment assessment.

The recoverable amount of the cash-generating unit was determined on the basis of fair value less cost to sell, which amounted to R1.45 billion. The fair value used in determining the recoverable amount of the cash-generating unit is based on an income approach valuation method including a present value discounting technique using level 3 inputs. Key assumptions used in the valuation includes the probability that the cash-generating unit will achieve the set profit forecasts which includes like-for-like growth rates and the discount rate.

Like-for-like growth rates have been based on past performance adjusted for current and expected economic conditions. The discount rate is determined based on current market rates and observable input, adjusted for risk associated with the business.

The future profits were forecast over a period of 10 years applying like-for-like sales growth rates which start at 0% increasing to 3% over the 10-year period, including a negative growth of 10.5% forecasted for the current year (February 2018: 0% to 3% over the 10-year period). A long-term growth rate of 2.2% (February 2018: 2.2%) per annum was set for the years subsequent to the forecast.

A discount rate of 7.9% (February 2018: 8.0%) was applied.

A total impairment of R873.9 million was determined based on the inputs above for the period under review. The impairment was allocated to goodwill (R47.0 million), the brand name asset (R537.4 million) and Property, plant and equipment (R289.5 million). The carrying amount of the goodwill and brand name asset was nil (August 2017: R347.8 million and February 2018: R39.8 million) and R1.08 billion (August 2017: R1.37 billion and February 2018: R1.37 billion) respectively. For further details regarding the performance of GBK, refer to the commentary in this document.

Sensitivity

For the period under review, an increase/(decrease) of 1% in the discount rate would result in an increase/(decrease) in the impairment charge of R187.3 million/(R246.7 million). An increase/(decrease) in the like-for-like growth rate of 1% in the forecast profits will result in a decrease/(increase) in the impairment charge of R501.9 million/(R323.2 million).

Changes in key assumptions as well as the actual cash flows achieved compared to those forecast can result in further impairments in the GBK business. The model is reliant on some level of economic recovery post-Brexit.

6. Provisions

      Unaudited
six months
ended
31 August
2018
R000
    Unaudited
six months
ended
31 August
2017
R000
Audited
year
ended
28 February
2018
R000
 
Provisions                
Opening balance     32 851      
Amounts raised during the period         32 851  
Amounts utilised     (5 512)      
Foreign currency translation     5 125      
Closing balance     32 464     32 851  
The provisions relate to property-related expenses at GBK restaurant level.                

7. Revenue

      Unaudited
six months
ended
31 August
2018
R000
    Unaudited
six months
ended
31 August
2017
R000
Audited
year
ended
28 February
2018
R000
 
Revenue*                
Sale of goods     2 253 880     2 101 201 4 327 642  
Services rendered and franchise revenue^     1 329 735     1 299 994 2 695 453  
      3 583 615     3 401 195 7 023 095  
* February 2018 disclosure has been restated to re ect Brands, International and Corporate in services rendered and franchise revenue to enhance disclosure. This is unaudited.
^ Includes revenue from Design HQ.
               

8. Basic and headline (loss)/earnings per share

    Note       Unaudited
six months
ended
31 August
2018
R000
    Unaudited
six months
ended
31 August
2017
R000
Audited
year
ended
28 February
2018
R000
 
  Basic and headline (loss)/earnings per share                    
8.1 Basic (loss)/earnings per share                    
  (Loss)/profit attributable to equity holders of Famous Brands Limited         (572 099)     170 986 21 618  
  Basic (loss)/earnings         (572 099)     170 986 21 618  
  Diluted basic (loss)/earnings         (572 099)     170 986 21 618  
  Basic (loss)/earnings per share (cents)                    
  Basic         (572)     171 22  
  Diluted         (570)     171 22  
8.2 Headline earnings per share                    
  Basic (loss)/earnings 8.1       (572 099)     170 986 21 618  
  Adjustments                    
  Profit on disposal of property, plant and equipment         (76)     (1 212) (1 232)  
     Gross         (106)     (1683) (1 711)  
     Tax         30     471 479  
  Impairment         759 709     372 592  
     Gross         873 925     372 592  
     Tax         (114 216)      
  Headline earnings         187 534     169 774 392 978  
  Diluted headline earnings         187 534     169 774 392 978  
  Headline earnings per share (cents)                    
  Basic         188     170 393  
  Diluted         187     169 392  

 

9. Non-operational items

      Unaudited
six months
ended
31 August
2018
R000
    Unaudited
six months
ended
31 August
2017
R000
Audited
year
ended
28 February
2018
R000
 
Non-operational items                
Impairment     873 925     372 592  
      873 925     372 592  

10. Related-party transactions

The Group entered into various sale and purchase transactions with related parties, in the ordinary course of business, on an arm’s length basis. The nature of related-party transactions is consistent with those reported previously.

11. Financial instruments

Accounting classifications and fair value

The table below sets out the Group’s classifications of each class of financial assets and liabilities, as well as a comparison to their fair values. The different fair value levels are described below:

Level 1: quoted prices (adjusted) in active markets for identical assets or liabilities that the Group can access at the measurement date.

Level 2: inputs, other than quoted prices included within level 1, that are observable for the asset or liability, either directly or indirectly.

Level 3: unobservable inputs for the asset or liability.

  Level       Unaudited
six months
ended
31 August
2018
Carrying
amount
R000
Unaudited
six months
ended
31 August
2018
Fair
value
R000
    Unaudited
six months
ended
31 August
2017
Carrying
amount
R000
Unaudited
six months
ended
31 August
2017
Fair
value
R000
Audited
year
ended
28 February
2018
Carrying
amount
R000
Audited
year
ended
28 February
2018
Fair
value
R000
 
Financial assets                          
Measured at amortised cost*                          
Trade and other receivables         760 133 760 133     687 577 687 577 568 514 568 514  
Cash and cash equivalents         924 674 924 674     492 994 492 994 716 988 716 988  
Fair value through profit or loss:                          
Derivative financial instruments (foreign currency options) 2       2 212 2 212      
          1 687 019 1 687 019     1 180 571 1 180 571 1 285 502 1 285 502  
Financial liabilities                          
Measured at amortised cost:                          
Trade and other payables         832 155 832 155     760 164 760 164 599 941 599 941  
Shareholders for dividends         3 215 3 215     2 221 2 221 2 221 2 221  
Lease liabilities         8 027 8 027     6 218 6 218 7 446 7 446  
Non-controlling shareholder loans         7 500 7 500     22 253 22 253 7 500 7 500  
Borrowings         2 765 100 2 765 100     2 900 565 2 900 565 2 780 560 2 780 560  
Bank overdraft             15 238 15 238 193 193  
Fair value through profit or loss:                          
Derivative financial instruments (put options over non-controlling interests) 3       179 420 179 420     223 135 223 135 176 186 176 186  
Fair value through other comprehensive income:                          
Derivative financial instruments (foreign currency swaps and foreign exchange contracts) 2       103 103     1 028 1 028  
Derivative financial instruments (interest-rate swaps) 2       4 240 4 240     21 533 21 533 14 711 14 711  
          3 799 760 3 799 760     3 951 327 3 951 327 3 589 786 3 589 786  

* Previously classified and audited as loans and receivables for the year ended 28 February 2018.

Level 3 sensitivity information

The fair values of the level 3 financial liabilities of R179.4 million (2017: R223.1 million) were determined by applying an income approach valuation method including a present value discount technique. The fair value measurement includes inputs that are not observable in the market. Key assumptions used in the valuation of these instruments include the probability of achieving set profit targets and the discount rates. An increase/(decrease) of 1% in the discount rate would result in a decrease/(increase) of R3.1 million/(2017: R6.2 million). An increase/(decrease) of 10% in the profit targets would result in an increase/(decrease) of R7.4 million/(2017: R6.0 million).

Movements in level 3 financial instruments carried at fair value

The following table illustrates the movements during the year of level 3 financial instruments carried at fair value:

      Unaudited
six months
ended
31 August
2018
Carrying
amount
R000
Unaudited
six months
ended
31 August
2018
Fair
value
R000
    Unaudited
six months
ended
31 August
2017
Carrying
amount
R000
Unaudited
six months
ended
31 August
2017
Fair
value
R000
Audited
year
ended
28 February
2018
Carrying
amount
R000
Audited
year
ended
28 February
2018
Fair
value
R000
 
Put options over non-controlling interests:                      
Carrying value at the beginning of the period     176 186 176 186     211 239 211 239 211 239 211 239  
Unwinding of discount     3 234 3 234     11 896 11 896 13 481 13 481  
Derecognition in equity         (42 716) (42 716)  
Remeasurements         (5 818) (5 818)  
Carrying value at the end of the period     179 420 179 420     223 135 223 135 176 186 176 186  

12. Business combinations

      Unaudited
six months
ended
31 August
2018
R000
    Unaudited
six months
ended
31 August
2017
R000
Audited
year
ended
28 February
2018
R000
 
Business combinations                
Summary of cash outflow on acquisition of subsidiaries                
Chilango (Pty) Ltd (Salsa Mexican Grill)*         1 295 2 589  
Total cash outflow on acquisition of subsidiaries         1 295 2 589  

* Cash outflow relates to contingent consideration recognised for Salsa Mexican Grill.

13. UK business segmental results

The table below sets out the performance of the UK business segment in GBP and ZAR respectively:

          Unaudited
six months
ended
31 August
2018
    Unaudited
six months
ended
31 August
2017
%
change
Audited
year
ended
28 February
2018
 
GBP                      
Revenue GBP000       43 324     45 360 (4.5) 92 064  
   GBK         40 001     42 435 (5.7) 86 583  
   Wimpy         3 323     2 925 13.6 5 481  
Operating (loss)/profit GBP000       (2 135)     (357) (498.0) (2 689)  
   GBK         (2 628)     (872) (201.4) (3 718)  
   Wimpy         493     515 (4.3) 1 029  
Operating (loss)/profit margin %       (4.9)     (0.8)   (2.9)  
   GBK         (6.6)     (2.1)   (4.3)  
   Wimpy         14.9     17.6   18.8  
ZAR                      
Revenue R000       749 055     760 536 (1.5) 1 580 947  
   GBK         691 608     711 933 (2.9) 1 476 544  
   Wimpy         57 447     48 603 18.2 104 403  
Operating (loss)/profit R000       (36 853)     (6 333) (481.9) (44 671)  
   GBK         (45 384)     (14 687) (209.0) (59 977)  
   Wimpy         8 531     8 354 2.1 15 306  
Operating (loss)/profit margin %       (4.9)     (0.8)   (2.8)  
   GBK         (6.6)     (2.1)   (4.1)  
   Wimpy         14.9     17.2   14.9  

14. Borrowings

  Currency Maturity
date
Nature
Interest rate
Margin % Rate
      Unaudited
six months
ended
31 August
2018
%
    Audited
year
ended
28 February
2017
%
Audited
year
ended
28 February
2018
%
Borrowings                          
Unsecured                          
Long-term borrowings                          
Short-term borrowings                          
                           
Interest is paid quarterly in arrears.                  
The company has unlimited borrowing powers in terms of its Memorandum of Incorporation.                
Terms of repayment                          
Syndicated facility:         3-month                
3-year bullet ZAR Sept 19 variable 2.35 JIBAR       6.96     7.35 7.16
Syndicated facility:         3-month                
4-year bullet ZAR Sept 20 variable 2.55 JIBAR       6.96     7.35 7.16
Syndicated facility:         3-month                
5-year amortising ZAR Sept 21 variable 2.45 JIBAR       6.96     7.35 7.16
                           
Syndicated facility:         3-month                
revolving credit* GBP Oct 19 variable 2.15 LIBOR       0.67     0.33 0.52
Syndicated facility:         1-month                
revolving credit* GBP Oct 19 variable 2.15 LIBOR       0.72       0.49
Transaction costs capitalised                          
Interest accrued                          
                           
* Relates to the GBP30 million facility referred to below.                
Maturity analysis – capital                          
Payable within one year                          
Payable between two and five years                          
                           

  Currency Maturity
date
Nature
Interest rate
Margin % Rate
      Unaudited
six months
ended
31 August
2018
R000
    Unaudited
six months
ended
31 August
2017
R000
Audited
year
ended
28 February
2018
R000
Borrowings                          
Unsecured                          
Long-term borrowings                 2 533 354     2 663 473 2 513 489
Short-term borrowings                 231 746     237 092 267 071
                  2 765 100     2 900 565 2 780 560
Interest is paid quarterly in arrears.                          
The company has unlimited borrowing powers in terms of its Memorandum of Incorporation.              
Terms of repayment                          
Syndicated facility:                          
3-year bullet                 720 000     720 000 720 000
Syndicated facility:                          
4-year bullet                 720 000     720 000 720 000
Syndicated facility:                          
5-year amortising                 746 667     960 000 853 333
                  2 188 667     2 400 000 2 293 333
Syndicated facility:                          
revolving credit*                 496 483     503 316 422 799
Syndicated facility:                          
revolving credit*                 76 382     65 046
Transaction costs capitalised                 (30 213)     (43 315) (37 727)
Interest accrued                 35 781     40 564 37 109
                  2 765 100     2 900 565 2 780 560
* Relates to the GBP30 million facility referred to below.                
Maturity analysis – capital                          
Payable within one year                 231 746     237 092 267 071
Payable between two and five years                 2 533 354     2 663 473 2 513 489
                  2 765 100     2 900 565 2 780 560

Sensitivity analysis

A change of 1% in interest rates at the reporting date would have increased/(decreased) profit or loss by R13.8 million/ (R15.0 million).

Interest risk management

The Group utilises interest rate swap contracts to hedge its exposure to the variability of cash flows arising from unfavourable movements in interest rates.

Facilities

Total ZAR facility in place: ZAR80 million. Unutilised portion at period end: ZAR80 million.

Total GBP facility in place: GBP30 million. Unutilised portion at period end: GBPnil.

Guarantees

Famous Brands Limited, Famous Brands Management Company (Pty) Ltd, Mugg and Bean Franchising (Pty) Ltd, Venus Solutions Limited, Famous Brands UK Limited, GBK Franchises Limited, Lamberts Bay Foods Limited, Famous Brands Logistics Company (Pty) Ltd, GBK Restaurants Limited, Gourmet Burger Kitchen Limited and GBK Retail Limited have guaranteed in terms of the Syndicated loan agreement:

  • Punctual performance by the Group of amounts due in the syndication agreement.
  • Immediate payment of amounts due which the Group has not paid.
  • To indemnify the finance parties against any cost, loss or liability it incurs as a result of the Group not paying amounts that are due.

Borrowing restrictions

There are certain restrictions on the financial activities of other covenant subsidiaries within the Group, who are not obligors, such as restrictions on the ability to raise additional financing.

Underwriting and participation fees

The unamortised portion of underwriting and participation fees paid have been recognised in the above long-term borrowings balance. The amortised portion is included within finance costs.

15. Capital management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, to provide sustainable returns for shareholders, benefits for other stakeholders and to maintain, over time, an optimal structure to reduce the cost of capital.

The capital structure of the Group consists of cash and cash equivalents, borrowings (note 14) and equity as disclosed in the statement of financial position. There are no externally imposed capital requirements.

Financial covenants

The Group's borrowings (refer to note 14) are subject to the following financial covenants, which the Group is in compliance with:

      31 August
2018
    31 August
2017
28 February
2018
 
Debt to EBITDA*     <2.75     <3.00 <3.00  
Interest cover     >3.50     >3.25 >3.25  
Free cash flow to debt service     >1.20     >1.20 >1.20  

* EBITDA excludes non-operational items.

Gearing

The Group's gearing ratio is set out below:

      Unaudited
six months
ended
31 August
2018
R000
    Unaudited
six months
ended
31 August
2017
R000
Audited
year
ended
28 February
2018
R000
 
Borrowings     2 765 100     2 900 565 2 780 560  
Bank overdrafts         15 238 193  
Cash and cash equivalents     (924 674)     (492 994) (716 988)  
Net debt     1 840 426     2 422 809 2 063 765  
Equity     1 374 893     1 667 244 1 632 027  
Gearing ratio**     133.9%     145.3% 126.4%  

** Calculated as net debt divided by equity.

16. Subsequent events

GBK: strategic decision

Shareholders are referred to the cautionary announcements issued on SENS on 17 August, 28 September and 24 October 2018.

In light of GBK’s continued underperformance in the current macroeconomic environment in the UK and deteriorating financial position, the Board of GBK has initiated a CVA process with the assistance of Grant Thornton. This decision follows extensive investigation into the options available to improve GBK’S financial stability.

CVA Process

The CVA is a process which is unique to the UK and employed increasingly in the food services and other industries given the rising percentage of distressed businesses in the current adverse trading conditions.

The CVA is designed to promote the long-term financial viability and sustainability of an operation. In this regard, the goal will be to reach binding agreements or compromise with GBK’s unsecured creditors, with a view to restructuring the business’s leased property portfolio in line with current market valuations. This could potentially enable GBK to exit underperforming sites and achieve rental reductions on others, thereby improving the health and profitability of the portfolio and general financial performance of the business.

Support of 75% is required from the unsecured creditors to proceed with the CVA.

Whilst this process evolves, shareholders will be updated when appropriate.

Coega Concentrate Tomato Paste Plant

The past growing season proved to be an extremely challenging one, with drought playing a significant role in the outcome. Despite the best efforts by the plant’s management team and growers, production was substantially off the targeted volumes for viable operation of the plant and highlighted again the necessity for expertise in, and support to primary farming and growing operations, to ensure consistently high volumes of supply. The plant made an operating loss of R17.8 million for the review period; in this light, and in anticipation of further losses, operations at the factory were ceased with effect from 5 June 2018. Management is pleased to advise shareholders that subsequent to the review period, a prospective buyer for the business has been identified and negotiations regarding the sale are in progress.