NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS l NOTE 2.1

2. Group composition
2.1 Investments in and loans to associates and joint ventures

Company Associate
Oxigen Services India
Private Limited
  Joint venture
Blue Label Mexico S.A. de
C.V.
  Joint venture
2DFine Group1
 
Principal activity Airtime and payment
solution provider
  Distributor of terminals to
vend e-tokens of value
  Investment holding
company
 
Country of incorporation India   Mexico   Mauritius  
  2016 
R’000 
  2015 
R’000 
  2016 
R’000 
  2015 
R’000 
  2016 
R’000 
  2015 
R’000 
 
Cost and share of reserves at the beginning of the year  61 543     58 317     267 568     318 508     (23 806)    (13 483)   
Acquisition of associates and joint ventures  167 762     —     42 654     50 033     —     —    
Share of (losses)/profits from associates and joint ventures  2 307     2 621     (63 293)    (88 508)    (10 245)    (7 574)   
Share of results after tax  (27 106)    4 095     (61 219)    (86 389)    (10 245)    (7 574)   
Amortisation of intangible assets  (786)    (2 047)    (2 881)    (2 943)    —     —    
Deferred tax on intangible assets amortisation  220     573     807     824     —     —    
Dilution of associate2  29 979     —     —     —     —     —    
Foreign currency translation reserve  71 150     1 445     7 926     (12 465)    (8 235)    (2 749)   
Equity compensation benefit  750     548     —     —     —     —    
Dividends received  —     (1 388)    —     —     —     —    
Disposal of associate/joint venture included in other income  —     —     —     —     —     —    
Cost and share of reserves at the end of the year  303 512     61 543     254 855     267 568     (42 286)    (23 806)   
Loans at the beginning of the year  29 552     25 069     —     1 054     163 634     127 372    
Loans granted to associates and joint ventures  —     —     —     48 979     20 454     15 027    
Loans repaid by associates and joint ventures  —     —     —     —     —     —    
Loan granted to joint venture capitalised  —     —     —     (50 033)    —     —    
Unrealised foreign exchange profit on loans to associates and joint ventures  8 807     4 483     —     —     50 804     21 235    
Loans at the end of the year  38 359     29 552     —     —     234 892     163 634    
Closing net book value  341 871     91 095     254 855     267 568     192 606     139 828    

Company Joint venture
SupaPesa Africa
Limited
  Other associates   Other joint ventures   Total  
Principal activity Content provider              
Country of incorporation Mauritius              
  2016
R’000
  2015
R’000
  2016 
R’000 
  2015 
R’000 
  2016 
R’000 
  2015 
R’000 
  2016 
R’000 
  2015 
R’000 
 
Cost and share of reserves at the beginning of the year  33 908     —     7 709     80 079     564     1 193     347 486     444 614    
Acquisition of associates and joint ventures  —     29 951     59 9493     7 086     —     100     270 365     87 170    
Share of (losses)/profits from associates and joint ventures  348     2 658     (3 606)    12 194     2 719     (729)    (71 770)    (79 338)   
Share of results after tax  348     2 658     (3 606)    12 194     2 719     (729)    (99 109)    (75 745)   
Amortisation of intangible assets  —     —     —     —     —     —     (3 667)    (4 990)   
Deferred tax on intangible assets amortisation  —     —     —     —     —     —     1 027     1 397    
Dilution of associate2  —     —     —     —     —     —     29 979     —    
Foreign currency translation reserve  10 208     1 299     495     1 973     —     —     81 544     (10 497)   
Equity compensation benefit  —     —     —     —     —     —     750     548    
Dividends received  —     —     —     —     —     —     —     (1 388)   
Disposal of associate/joint venture included in other income  —     —     —     (93 623)    (4)    —     (4)    (93 623)   
Cost and share of reserves at the end of the year  44 464     33 908     64 547     7 709     3 279     564     628 371     347 486    
Loans at the beginning of the year  —     —     —     —     7 900     —     201 086     153 495    
Loans granted to associates and joint ventures  —     —     —     —     1 638     7 900     22 092     71 906    
Loans repaid by associates and joint ventures  —     —     —     —     (593)    —     (593)    —    
Loan granted to joint venture capitalised  —     —     —     —     —     —     —     (50 033)   
Unrealised foreign exchange profit on loans to associates and joint ventures  —     —     —     —     —     —     59 611     25 718    
Loans at the end of the year  —     —     —     —     8 945     7 900     282 196     201 086    
Closing net book value  44 464     33 908     64 547     7 709     12 224     8 464     910 567     548 572    
1 2DFine Group consists of 2DFine Holdings Mauritius and 2DFine Investments Mauritius.
2 This dilution relates to the 2DFine Group’s shareholding in Oxigen Services India Private Limited decreasing from 37.22% to 34.42%. (The Group’s effective share decreased from 18.1% to 17.21%). Refer to the Financial Director's report.
3 This represents an equity loan granted to Lornanox Proprietary Limited. These loans are repayable from surplus reserves at the discretion of the board.

Company Associate
Oxigen Services India Private
Limited
  Joint venture
Blue Label Mexico S.A. de C.V.
  Joint venture
2DFine Group1
  Joint venture
SupaPesa Africa
Proprietary Limited
 
Principal activity Airtime and payment solution
provider
  Distributor of terminals
to vend e-tokens of value
  Investment holding
company
  Content provider  
Country of incorporation India   Mexico   Mauritius   Mauritius  
  2016 
R’000 
  2015 
R’000 
  2016 
R’000 
  2015 
R’000 
  2016 
R’000 
  2015 
R’000 
  2016 
R’000 
  2015 
R’000 
 
Statement of financial position                                
Non-current assets  339 096     129 691     171 701     214 368     154 706     118 463     10 654     8 207    
Current assets  451 256     226 721     193 490     150 609     59     45     8 645     6 906    
Cash and cash equivalents  168 248     119 757     88 498     46 320           4 702     —    
Other current assets  283 008     106 964     104 992     104 289     57     44     3 943     6 906    
   790 352     356 412     365 191     364 977     154 765     118 508     19 299     15 113    
Total equity  224 477     75 737     228 233     261 721     (84 570)    (47 611)    7 889     5 380    
Non-current liabilities  10 864     36 687     7 464     8 483     —     —     9 855     8 207    
Current liabilities  555 011     243 988     129 494     94 773     239 335     166 119     1 555     1 526    
Trade and other payables  368 146     180 044     129 090     93 564     897     191     1 311     1 154    
Other current liabilities  186 865     63 944     404     1 209     238 438     165 928     244     372    
   790 352     356 412     365 191     364 977     154 765     118 508     19 299     15 113    
Effective percentage held  58.18     55.83     47.56     46.64     50     50     37.5     37.5    
Net assets  224 477     75 737     228 233     261 721     (84 570)    (47 611)    7 889     5 380    
Company net assets  207 571     59 252     209 039     239 959     (84 570)    (47 611)    7 889     5 380    
Carrying value of purchase price allocations net of deferred taxation  16 906     16 485     19 194     21 762     —     —     —     —    
Interest in associate and joint ventures  123 6642     36 1482     108 548     122 067     (42 286)    (23 806)    3 9445     2 6905    
Goodwill  179 848     25 395     146 307     145 502     —     —     40 520     31 215    
Balance at the end of the year  303 512     61 543     254 855     267 569     (42 286)    (23 806)    44 464     33 905    
Statement of comprehensive income                                                 
Revenue  6 391 207     4 858 126     4 016 614     3 526 451     —     —     13 052     8 110    
Operating profit before depreciation, amortisation and impairment charges  5 061     25 219     (70 042)    (124 452)    (645)    (907)    1 583     5 900    
Depreciation and amortisation  (34 037)    (16 030)    (67 425)    (68 275)    —     —     —     —    
Finance costs  (22 284)    (10 132)    —     —     (19 844)    (14 240)    (865)    (420)   
Finance income  5 491     4 679     1 927     1 719     —     —     —     —    
Net profit/(loss) before taxation  (45 769)    3 736     (135 540)    (191 008)    (20 489)    (15 147)    718     5 480    
Taxation  (2 292)    957     1 109     (2 671)    —     —     (22)    (164)   
Net profit/(loss) after taxation  (48 061)    4 693     (134 431)    (193 679)    (20 489)    (15 147)    696     5 316    
Other comprehensive income/(loss) 25 932     (2 484)    16 370     (14 765)    (16 470)    (5 499)    1 811     64    
Total comprehensive income/(loss) (22 129)    2 209     (118 061)    (208 444)    (36 959)    (20 646)    2 507     5 380    
Effective percentage held  58.18     55.83     47.56     46.64     50     50     37.55     37.55    
Share of total comprehensive income  (16 940)3    1 233     (55 696)4    (92 749)4     (18 479)    (10 323)    1 254     2 690    
We have aligned prior year disclosure in line with current year.
1 2DFine Group consists of 2DFine Holdings Mauritius and 2DFine Investments Mauritius.
2 The purchase price allocation arose when the 2DFine Group purchased its holding into OSI in June 2011. The Group therefore only accounts for its effective share of the carrying value of the purchase price allocations. The effective share is 17.21% (2015: 18.61%).
3 During the year BLT increased its effective holding by 2.35% to 58.18% in OSI.
4 During the year BLT increased its holding by 0.92% to 47.56% in BLM. In the prior year BLT increased its shareholding by 1.07% to 46.64% in BLM.
5 Viamedia Proprietary Limited (75% owned by the Group) holds 50% of SupaPesa Africa Proprietary Limited. Therefore the Group equity accounts for 50% of net assets.

The Group’s interests in its other associates, which are unlisted, are as follows:

  Country of
incorporation
Non-
current
assets
R’000
Current
assets
R’000
Non-
current
liabilities
R’000
Current
liabilities
R’000
Revenues
R’000
Net 
profit/ 
(loss) 
R’000 
Total 
comprehensive 
profit/ 
(loss) 
R’000 
Effective
percentage
interest
held
%
Carrying
value of
investment
R’000
2016                    
Lornanox Proprietary Limited South Africa 40 464 111 732 97 626 149 044 (11 389) (11 389) 40 61 394
Mpower Softcomm Private Limited India 20 958 15 819 3 170 11 632 49 160 6 711  6 711  21.6 3 153
2015                    
Lornanox Proprietary Limited South Africa 6 000 —  —  40 6 000
Mpower Softcomm Private Limited India 17 700 7 288 282 12 801 23 262 1 323  2 227  21.6 1 709
Forensic Intelligence Data Solutions Proprietary Limited South Africa 1 328 3 063 2 011 2 641 11 908  11 908  20.25

The Group’s interests in its other joint ventures, which are unlisted, are as follows:

  Country of
incorporation
Non-
current
assets
R’000
Current
assets
R’000
Non-
current
liabilities
R’000
Current
liabilities
R’000
Revenues
R’000
Net 
profit/ 
(loss) 
R’000 
Total 
comprehensive 
profit/ 
(loss) 
R’000 
Effective
percentage
interest
held
%
Carrying
value of
investment
R’000
2016                    
Supa Pesa South Africa Proprietary Limited South Africa 148 4 618 7 308 404 973 4 530  4 530  37.5 9 750
Banosign Proprietary Limited South Africa 118 5 356 1 638 4 600 2 414 (764) (764) 50.1 1 254
Datacision Proprietary Limited South Africa 15 654 37 3 784 10 858 1 520  1 520  40.5 1 220
2015                    
Supa Pesa South Africa Proprietary Limited South Africa 142 1 186 8 429 378 2 180 37.5 8 000
Datacision Proprietary Limited South Africa * 14 513 2 4 199 22 454 3 174  3 174  40.5 464
* Less than R1 000.

Loans to associates and joint ventures

  Interest
rate
  2016
R’000
  2015
R’000
 
Oxigen Services India Private Limited LIBOR + 1.50%   38 359   29 552  
2DFine Holdings Mauritius* 10%   234 892   163 634  
Supa Pesa South Africa Proprietary Limited 11%   7 307   7 900  
Banosign Proprietary Limited 0%   1 638    
      282 196   201 086  
* Refer to note 8 for details on the surety relating to this loan.

The loans are neither past due nor impaired with a low risk of default.

The loans to associates and joint ventures are repayable on demand.

The Group considers its maximum exposure in respect of these loans, without taking into account any collateral and financial guarantees, to be as follows:

  2016
R’000
  2015
R’000
 
Group 1   7 900  
Group 2 282 196   193 186  
Group 3    
  282 196   201 086  

The Group has subordinated a portion of its loan to 2DFine Holdings Mauritius Limited in favour of other creditors, to the value of R41 million.

The rating groups for counterparties are categorised as follows:
Group 1 – New customers/related parties (less than six months).
Group 2 – Existing customers/related parties (more than six months) with no defaults in the past.
Group 3 – Existing customers/related parties (more than six months) with some defaults in the past.

Impairment of associates and joint ventures
There was no impairment of investment in associates and joint ventures. This was tested by comparing the recoverable amount against the carrying value of the investment in associates and joint ventures.

The recoverable amount is the higher of fair value less cost of disposal and the value-in-use. These value-in-use calculations use cash flow projections based on financial budgets approved by the Board of Directors for the forthcoming year and forecasts for up to five years which are based on assumptions of the business, industry and economic growth. Cash flows beyond this period are extrapolated using terminal growth rates, which do not exceed the expected long-term economic growth rate.

The key assumptions used for the value-in-use calculations are as follows:

  2016   2015  
  Growth
rate
%
  Discount
rate
%
  Growth
rate
%
  Discount
rate
%
 
Oxigen Services India Private Limited 5.0   35.00   5.0   21.00  
SupaPesa Africa Limited 4.0   17.74   4.0   17.38  
Blue Label Mexico S.A.de C.V. 3.5   16.44   3.5   18.46  

The discount rates used are post-tax and reflect specific risks relating to the relevant associates and joint ventures. The growth rate is used to extrapolate cash flows beyond the budget period. The growth rates were consistent with publicly available information relating to long-term average growth rates for each of the markets in which the companies operate.

The inputs used when calculating the value-in-use would need to be increased/(decreased) by the following amounts before any impairment would need to be recognised:

  2016  
  Growth
rate
%
  Discount
rate
%
 
SupaPesa Africa Limited (3)   2  

For Oxigen Services India Private Limited and Blue Label Mexico S.A. de C.V., if one or more of the inputs were changed to a reasonable possible alternative, there would be no impairments that would have to be recognised.

In considering the impairment of the Group’s investment in Oxigen Services India Private Limited (OSI), the Group has evaluated the company’s historical performance and future strategy. OSI currently has 127 000 touch points operational in its offline division, with the Group’s share of profits from this division increasing by R21.4 million in the current year. In India there has been a shift in demand for online wallets. Accordingly a strategic decision was made to enter this market. Through the extensive marketing OSI has undertaken, the number of wallet subscribers acquired as well as the volume of transactions performed will continue to increase. This growth is evidenced by the fact that the wallet subscriber base has increased from 5.4 million to 22.6 million in the current financial year. Daily money transfer deposits have grown from USD3.3 million per day as at 31 May 2015 to USD4.0 million per day as at 31 July 2016, increasing exponentially through its connectivity with the National Payment Corporation of India. Accordingly, the Group’s share of losses generated by the online division increased by R31.5 million in the current year.

In assessing the Group’s investment into the 2DFine Group, the factors relating to OSI above were taken into account as this is 2DFine Group’s main investment.

Based on these factors, as well as the impairment testing performed the Group has concluded that no impairment is indicated.

The Group has concluded that no impairment of its investment in Blue Label Mexico S.A. de C.V. (BLM) is required. The losses in BLM are primarily due to BLM becoming a multi-carrier distributor as opposed to historically being confined to one network. This has created a more competitive environment amongst the networks to the benefit of BLM. The introduction of the distribution of starter packs that generate monthly compounded annuity income is expected to gain momentum which will result in further declines in losses going forward.

Shares in associates and joint ventures acquired during the current year

      Date acquired   Effective
percentage
 
Banosign Proprietary Limited Joint venture   01-Apr-16   50.1  
Oxigen Services India Private Limited Associate   01-Mar-16   2.35  
Blue Label Mexico S.A. de C.V. Joint venture   01-Sep-15   0.92  

The Group’s effective shareholding in OSI prior to March 2016 was 55.83%. Of this shareholding, 37.22% was held by Gold Label Investments (GLI), a wholly owned subsidiary of the Group and 18.61% indirectly through the Group’s 50% shareholding in 2DFine Holdings Mauritius. In March 2016, a rights issue was offered by OSI for USD10.5 million. The Group exercised its rights for the entire amount through GLI congruent with 2DFine Holdings Mauritius waiving its rights. The effect of this is that GLI’s shareholding has increased from 37.22% to 40.97% and its indirect shareholding of 18.61% has been diluted to 17.21%. The latter has in turn resulted in a gain of R30 million on dilution, being the Group’s share of the increased net asset value emanating from the rights issue. The Group’s effective shareholding in OSI therefore increased by 2.35% to 58.18%. The amount paid for this was R159.4 million, the difference of R8.3 million relates to foreign exchange differences.

In September 2015 BLT increased its holding by 0.92% to 47.56% in BLM for an amount of R42.5 million.

Shares in associates disposed of during the current year

      Date
disposed
  Effective
percentage
 
Forensic Intelligence Data Solutions Proprietary Limited Associate   01-Dec-15   20.25  

The Group disposed of Forensic Intelligence Data Solutions Proprietary Limited for a nominal value.

Blue Label Telecoms Limited has guaranteed 45% of the amount owed by BLM to Radiomovil Dipsa S.A. de C.V. (trading as Telcel). At year-end there is no balance due to them by BLM.

There are no other contingent liabilities relating to the Group’s interest in joint ventures.

For details on related-party transactions, refer to note 8.


NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS l NOTE 2.1