Investments in and loans to associates and joint ventures
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| Six months ended 30 November 2016 Unaudited R’000 |
Six months ended 30 November 2015 Unaudited R’000 |
Year ended 31 May 2016 Audited R’000 |
||||
|---|---|---|---|---|---|---|
| Equity-accounted associates and joint ventures | 196 449 | 383 940 | 628 371 | |||
| Venture capital associate | 412 800 | – | – | |||
| Loans to associates and joint ventures | 334 226 | 284 814 | 282 196 | |||
| 943 475 | 668 754 | 910 567 |
The Group, through its wholly-owned subsidiary, Gold Label Investments, holds an effective 58.18% interest in Oxigen. This investment has historically been accounted for as an investment in an associate applying the equity method up to 30 November 2016.
The investment in Oxigen was initially of a long-term nature as it was expected to emulate the business model of the South African distribution operations. However, its profile has changed from that of the traditional Group business to one of generating growth in the market value of the investment with a view to unlocking the Group’s share thereof. With the advent of its change in focus to financial services through wallet subscription, it is no longer strategically aligned with the other business units of the Group and is unlikely to generate profitability in the short to medium term. However, the market value of the company is expected to increase exponentially in conjunction with its growth in wallet subscribers. This in turn creates the potential to unlock the investment value in the future and the Group is pursuing this new strategy with respect to its investment in Oxigen.
Accordingly, Oxigen is now viewed as a venture capital investment, which in accordance with IAS 28 – Investment in Associates and Joint Ventures has been accounted for at fair value as at 30 November 2016. The differential between the carrying value of the investment and its fair value is reflected as a gain on associate measured at fair value in the condensed Group statement of comprehensive income.
The fair value is determined by an independent third party using the discounted cash flow model which takes into account the current and projected performance of Oxigen. These calculations use cash flow projections based on financial budgets approved by the board of directors for the forthcoming year and forecasts for ten 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 discount rate and terminal growth rate used in calculating the fair value are 23% and 5% respectively.
The following table illustrates the sensitivity analysis to the fair value of the investment in Oxigen should there be any movements to the material unobservable inputs.
| Unobservable inputs | Change to inputs % |
Movement in fair value R’000 |
||
| Discount rate | +0.5 | (50 812) | ||
| -0.5 | 53 906 | |||
| Terminal growth rate | +1 | 38 674 | ||
| -1 | (34 509) | |||
| Customer acquisition and engagement spend | +1 | 40 745 | ||
| -1 | (39 459) | |||
| Capital expenditure | +1 | 48 717 | ||
| -1 | (47 408) |