Directors Report

FINANCIAL HIGHLIGHTS OF THE PEREGRINE GROUP

The Directors present their report which forms part of the financial statements for the year ended 31 March 2018. The financial statements set out fully the financial position, results of operations and cash flows for the Company and the Group for the financial year ended 31 March 2018. The financial statements have been prepared under the supervision of RE Katz CA(SA), the Group Chief Executive Officer, who at the time of preparation of the 2018 financial results also acted as the Chief Financial Officer.

The 12 months ended 31 March 2018 was a reasonable year for markets despite the significant political uncertainty during the period, both locally and internationally. Whilst geopolitical headlines did not seem to dramatically disrupt global equity markets, locally the Group felt the impact of volatility in local equity markets and the strengthening of the Rand against the US Dollar and GB Pound. Whilst the election of Mr Ramaphosa was a welcome outcome for the country, the impact of “Ramaphoria” has not yet translated into an economic resurgence, as was evident in the contraction in GDP in the first quarter of 2018. Within the context of this environment, the Group performed well and delivered solid results.

Consistent with the prior year, the Board believes that, in addition to providing the IFRS disclosed earnings (which do not accurately reflect the economic results due to the accounting treatment relating to share based payments and employee benefits), normalised earnings are a more appropriate measure of performance. Normalised earnings are synonymous with the segmental information provided to the Chief Operating Decision Makers. The reconciliation of segmental attributable profit to IFRS attributable profit has been set out in Annexure D.

The Group’s segmental headline earnings increased by 7% to R534 million ( Segment statement of comprehensive income ). The strengthening of the Rand against the British Pound and the US Dollar in the financial year under review had a meaningful yet negative impact on the Group’s translated earnings. Adjusting for the impact of this strengthening, segmental headline earnings at an attributable operating level would have grown by approximately 13%. The main operating businesses in the Group, namely Citadel, Stenham, Peregrine Capital, Peregrine Securities and Java Capital, delivered an increase in segmental earnings of 7% to R470 million. Across the operating businesses of the Group, annuity segmental earnings grew by 6% to R362 million and accounted for 77% (2017: 78%) of the aggregate segmental earnings of the operating businesses.

Included in the results for the last time are earnings from proprietary investments which increased by 11% to R65 million. As previously communicated to investors, in order to remove the unpredictable and volatile returns associated with these investments, the decision was made to unbundle these investments effective 2 October 2017.

The Group continues to implement its strategy of reinforcing its offering as a highly cash generative, low capital intensive, high return on equity business.

On an IFRS basis, basic earnings attributable to ordinary shareholders amounted to R504 million (2017: R490 million) with basic earnings per ordinary share amounting to 238.5 cents per share (2017: 236.9 cents per share). Headline earnings increased by 6% to R504 million (2017: R476 million) with headline earnings per ordinary share increasing by 4% to 238.5 cents per share (2017: 230.0 cents per share). The reason for the difference between the 6% and 4% is a lower weighted average number of treasury shares, which carry participating rights, in the current year.

Other salient IFRS financial indicators for the year ended 31 March 2018 are:

Operating revenue increased by 8% to R2.5 billion (2017: R2.3 billion);

Investment and other income of R63 million (2017: R162 million) decreased by 61%;

Share of profits from equity accounted investees increased by 31% to R131 million (2017: R100 million);

Total operating expenses of R1.9 billion (2017: R1.8 billion) were 7% higher than the previous year;

Net interest received amounted to R93 million (2017: R43 million). Interest received was 33% higher at R141 million (2017: R106 million). Interest paid amounted to R48 million (2017: R63 million);

Profit attributable to equity holders in the Company amounted to R513 million (2017: R502 million), after deducting amortisation of intangible assets of R23 million (2017: R22 million), share-based payment charge of R53 million (2017: R21 million), taxation of R163 million (2017: R131 million) and non-controlling interests of R171 million (2017: R201 million); and

Headline earnings increased by 6% to R504 million (2017: R476 million, after adjusting for gains of R14 million, of which R12 million related to the gain on disposal of 49.99% interest in Caveo Fund Solutions Proprietary Limited and R2 million to the disposal of Stenham Trust customer relationships to a newly formed joint venture, Bellerive Stenham Trust Limited.)

Share capital

Authorised shares

As at 31 March 2018 the authorised share capital of the Company comprised 500 000 000 (2017: 500 000 000) ordinary shares of 0.1 cent each.

Issued shares

As at 31 March 2018 the issued share capital of the Company comprised 226 065 696 (2017: 226 065 696) ordinary shares of 0.1 cent each.

The Group held 14 714 819 treasury shares (2017: 15 610 504) at year-end with a book value of R129 million (2017: R144 million). Of these, 2 039 325 are held by the Group’s staff share trusts and the balance of 12 675 494 by three of the Group’s subsidiaries. In addition, 3 880 505 (2017: 5 126 190) shares of the 14 714 819 (2017: 15 610 504) treasury shares carry participating rights. During the current financial year, 350 000 shares were repurchased in order to cover future commitments to the Peregrine Holdings Executive Directors in terms of the long term executive remuneration scheme, 5 126 190 shares were sold on behalf of the participants in the Citadel 2015 deferred remuneration scheme, 3 417 590 shares were acquired and 462 915 shares were obtained in an off-market swap transaction on behalf of the participants in the Citadel 2017 deferred remuneration scheme.

Unissued shares

The authorised, but unissued, shares were placed under the control of the Directors at the last annual general meeting. In terms of this authority and subject to the provisions of the Companies Act and the JSE Listings Requirements, the Directors may not issue in any one financial year, more than 5% of the Company’s issued ordinary share capital less the aggregate number of shares, if any, held by the Company and its subsidiaries (but specifically excluding any share trusts) from time to time, as treasury shares.

Shareholders will be requested to renew this authority at the forthcoming annual general meeting.

Authority for the repurchase of shares

The conditions relating to the repurchase by the Company of its own shares are governed by the Company’s Memorandum of Incorporation which provides , inter alia , that any decision by the Company to acquire its own shares must satisfy the JSE Listings Requirements and the requirements of the Companies Act and, accordingly, for as long as it is required in terms of the JSE Listings Requirements, the acquisition shall be approved by a special resolution of the shareholders, whether in respect of a particular repurchase or generally approved by shareholders.

Shareholders will be requested to renew the authority to repurchase shares at the forthcoming annual general meeting, which authority shall not extend beyond the date of the next annual general meeting or 15 months from the date on which the special resolution authorising such repurchase was passed, whichever is the earlier date. The approval limits the repurchase, in any one financial year, to 20% (or 10% where the purchase is effected by a subsidiary) of the issued share capital of the Company on the date on which the special resolution authorising such repurchase was passed.

Dividend

An ordinary cash dividend of 170 cents per share (2017: 155 cents per share) declared by the Directors for the year ended 31 March 2018, will be paid on 6 August 2018.

Non-reportable segments and other reconciling items

Certain of the Group's proprietary hedge fund investments (in the current year that of the seed investment under the auspices of the Natural Selection Hedge Fund platform driven by Peregrine Securities) are required to be consolidated due to the fact that the Group has effective control both in terms of kick-out rights coupled with direct and indirect holdings being within the indicative range outlined within IFRS 10 and as a result some categories of assets and liabilities on the IFRS Statement of Financial Position are affected. There has been no impact on equity, or profit or loss in the current reporting period. The reconciliation between IFRS and Segment Statement of Financial Position is provided in Annexure E to the financial statements. As part of the restructure and unbundling, the Group’s proprietary investments into hedge funds, except for the seed investment into a hedge fund managed under the auspices of the Natural Selection Hedge Fund platform driven by Peregrine Securities, were de-consolidated with effect from 2 October 2017.

The other reconciling items between the segment statements of comprehensive income and IFRS statements of comprehensive income relate primarily to the difference in classification of Citadel's long term deferred remuneration schemes (notes 29.2.1 and 29.2.2) for IFRS purposes and that applied for purposes of providing information to the Chief Operating Decision Makers.

Acquisitions and disposals

  1. Peregrine Treasury Solutions Proprietary Limited, a wholly-owned subsidiary of Citadel Holdings Proprietary Limited, acquired the entire issued share capital of Impex Treasury Solutions Proprietary Limited with effect from 1 April 2017 for a total cash consideration of R20 million.       .
  2. Peregrine’s shareholding in Stenham Limited increased from 88.81% to 100% following two tranches of share buy backs and cancellations during the year.
  3. There were no other significant disposals during the current year, besides the Group restructure and unbundling referred to in the section below.

Group restructure and unbundling

During the year under review, the Board resolved to restructure the Group by transferring all surplus non-operating net assets held within the Group (i.e. excess cash, investment in hedge funds and other proprietary investments), to Sandown Capital, then a wholly owned subsidiary of Peregrine, with effect from 2 October 2017.

Having obtained the necessary regulatory approvals, the restructure and subsequent unbundling resulted in Sandown Capital being separately listed on the JSE on Wednesday, 29 November 2017 with the shares in Sandown Capital being unbundled to Peregrine shareholders on Monday, 4 December 2017.

A circular setting out details of the unbundling and the pre-listing statement of Sandown Capital were sent to Peregrine shareholders on Tuesday, 14 November 2017, with further information, including the ratio apportionment of expenditure and market value in respect of the unbundling, being disseminated to shareholders in terms of a SENS announcement published on 30 November 2017.

Directorate and secretary

The name and address of the Company Secretary are set out on the index page.

At the annual general meeting held on 7 September 2017, in terms of the Company’s memorandum of incorporation, LN Harris and SI Stein retired from office. Both, being eligible for re-election, were re-elected to office.

Jonathan Hertz, the previous Group Chief Executive Officer (“CEO”), stepped down on 31 July 2017 and, with effect from 1 August 2017, Robert Katz was appointed as the interim CEO, which appointment was made permanent with effect from 15 November 2017.

Peregrine shareholders were notified, in terms of a SENS announcement published on 19 April 2018, that Claire Coward has been appointed as the Chief Financial Officer (“CFO”) of the Group and an executive Director of Peregrine with effect from 1 June 2018 (until which date Robert Katz had continued to act as the CFO).

In accordance with the intention stated in the results announcement dated 12 June 2018 to propose board changes before the upcoming annual general meeting (“AGM”), Boitumelo (“Tumi”) Tlhabanelo has been appointed as an independent non-executive director with effect from 1 August 2018. As part of the ongoing desire to optimise the composition of the board and its subcommittees, a decision will be taken in due course regarding the subcommittees on which Tumi will serve. 

The appointments of Claire and Tumi as directors are subject to shareholder approval at the AGM.

In terms of the Company’s memorandum of incorporation, SA Melnick and P Goetsch will retire at the forthcoming AGM. Both of them, being eligible, will offer themselves for re-election.

Directors’ shareholding

On 31 March 2018, the Directors held in aggregate 21 183 886 Peregrine shares (2017: 23 906 665), representing 9.4% (2017: 10.6%) of the issued share capital of the Company. The following direct and indirect beneficial interests of the Directors in the Company are set out below:

2018

2017

 

Name

Direct
beneficial

Indirect
beneficial

Total

% of issued
share
capital

Direct
beneficial

Indirect
beneficial

Total

% of issued
share
capital

SA Melnick 1

9 834 851

4 419 118

14 253 969

6.4

881

15 131 318

15 132 199

6.7

RE Katz 2

 40 000

1 135 459

1 175 459

0.5

 -

1 000 008

1 000 008

0.5

M Yachad

80 264

2 004 169

2 084 433

0.9

80 264

1 974 169

2 054 433

0.9

J Hertz 3

-

-

-

-

550 000

1 500 000

2 050 000

0.9

LN Harris

601 195

-

601 195

0.3

601 195

-

601 195

0.3

P Goetsch

-

2 965 830

2 965 830

1.3

-

2 965 830

2 965 830

1.3

BC Beaver

-

48 000

48 000

0.0

-

48 000

48 000

0.0

S Stein

55 000

-

55 000

0.0

55 000

-

55 000

0.0

S Sithole

-

-

-

-

-

-

-

-

Total

10 611 310

10 572 576

21 183 886

9.4

1 287 340

22 619 325

23 906 665

10.6

1 L Melnick, an associate of SA Melnick, holds 728 032 Peregrine Holdings Limited shares. SA Melnick has no beneficial interest, directly or indirectly, in these shares.
2 R Katz was appointed as the interim CEO with effect from 1 August 2017, which appointment was made permanent with effect from 15 November 2017.
3 J Hertz, the previous Group CEO, stepped down on 31 July 2017.

As at year-end, the Directors had no non-beneficial shareholdings, direct or indirect, in the Company.

Save as set out above, no other changes have occurred in any of the Directors’ shareholdings between the end of the financial year and the date of this report.

Directors’ remuneration and transactions with other Group entities are detailed in notes 4 and 39.3 respectively to the financial statements.

Subsidiaries

Details of the Company’s principal subsidiaries are set out in Annexure A . The aggregate profit after taxation attributable to Group companies amounted to R516 812 350 (2017: R518 026 398). The aggregate losses after taxation attributable to Group companies amounted to R11 343 111 (2017: R23 769 971). The profits and losses include the Group’s share of profits from equity accounted investees, which are accounted for in the results of the Company’s underlying subsidiaries.

All companies within the Peregrine Group are incorporated within the Republic of South Africa, with the exception of Citadel Offshore Holdings Limited, Peregrine Guernsey Limited, Peregrine International Wealthcare Limited, Peregrine International Holdings Limited and Peresec International Limited which are incorporated in Guernsey, Peregrine Direct Limited, which is incorporated in the British Virgin Isles, and Stenham Limited and its subsidiaries, which are incorporated in the British Virgin Isles, the UK and in Guernsey.

Special resolutions

At its annual general meeting on 7 September 2017, the Company passed the following special resolutions:

authorising the payment to the non-executive Directors of annual fees for services as Directors with effect from the date of the annual general meeting;

authorising the Company to provide financial assistance as contemplated in sections 44 and 45 of the Companies Act; and

authorising the Company to acquire shares issued by it and to enable its subsidiary companies to acquire shares in its share capital.

The only other special resolutions passed by the Company and/or its subsidiaries were those relating to the provision of financial assistance and minor changes to certain Memoranda of Incorporation.

Independent Auditors

Deloitte & Touche will continue in office in accordance with the Companies Act subject to the approval of the shareholders at the upcoming AGM.

Long term remuneration schemes

There are various long-term deferred remuneration schemes (“LTI”) in place throughout the Group. The classification as an employee benefit or a share-based payment depends on what benefit ultimately vests with the participants. If the benefit is linked-to or based-on Peregrine shares, the arrangement will be treated as a share-based payment. In other cases, the arrangement will be treated as a long term employee benefit.

There is currently an LTI in place in Citadel Holdings Proprietary Limited (“Citadel”) whereby employees who qualify are entitled to a deferred portion of each year’s bonus pool with amounts payable over an applicable vesting period if the employees are still in the employment of the Group. The Directors of Citadel will determine the investment composition of the scheme and each participant will be allocated a portion of these assets.

Peregrine Holdings implemented a long term executive remuneration incentive scheme (“LTI plan”) in the 2016 financial year to replace a share-based purchase scheme that was in effect prior to then. The benefit promised to the qualifying employees (“Peregrine Holdings Executive Directors”) is an agreed amount calculated in the year in which the profits are earned, based on the agreed formula (“LTI award”). Of the LTI award, 25% will vest at the end of years 2 and 3, with the remaining 50% portion at the end of year 4, with the single exception being applicable to the 2016 financial year, where 25% of the LTI vested as at the 31 March 2016 financial year and thereafter 25% each year at the end of the 2017, 2018 and 2019 financial years respectively (with payment to be made in June of such years). Should a PHL Executive Director resign before the June vesting dates, they would not be entitled to receive any payment. In accordance with comments received from shareholders, the unvested LTI awards relating to years ended 2016 and 2017 as well as the LTI awards for the year ended 31 March 2018 and thereafter will be equity settled (with the award values being converted to a quantum of shares and such quantum of shares being purchased by the Company to meet such obligations). Dividends declared on the LTIs awarded will accrue to the PHL Executive Directors and earn interest at the prevailing market related interest rates.

The other major operating subsidiaries in the Group operate profit participation schemes, which include long-term incentive awards.

Borrowing limitations

In terms of the memorandum of incorporation, the borrowing powers of the Directors are unlimited and the Directors may exercise all powers of the Company to borrow money, as they consider appropriate.

Events subsequent to reporting date

Other than as set out below, the Directors are not aware of any other significant matters or circumstances, arising subsequent to the end of the reporting period, which significantly affect the financial position of the Peregrine Group or the results of its operations.

At its board meeting held on 12 June 2018, the Board received, and accepted, a non-binding proposal to acquire the Group's 65% shareholding in its Peregrine Securities business for a consideration which values the Group's stake in the Peregrine Securities business at R910 million. The proposed transaction is subject to the execution of formal written agreements and regulatory approvals, with an effective date of 1 October 2018.