Multichoice

The condensed consolidated interim financial statements are prepared in accordance with International Financial Reporting Standard, (IAS) 34 Interim Financial Reporting, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by the Financial Reporting Standards Council and the requirements of the Companies Act of South Africa. The accounting policies applied in the preparation of these condensed consolidated interim financial statements are in terms of International Financial Reporting Standards (IFRS) and are consistent with those applied in the previous consolidated annual financial statements, other than for the adoption of IFRS 16 as described below.

The condensed consolidated interim financial statements are presented on the going concern basis.

The condensed consolidated interim financial statements are presented in South African rand (R), which is the group's presentation currency, rounded to the nearest million. The closing US dollar exchange rate at 30 September 2019 of 15.14:1 (31 March 2019: 14.50:1) has been utilised for the consolidation of our RoA and Technology segments which have a US dollar presentation currency.

The condensed consolidated interim financial statements do not include all the notes of the type normally included in a set of consolidated annual financial statements. Accordingly, this report is to be read in conjunction with the consolidated annual financial statements for the year ended 31 March 2019.

The group has adopted all new and amended accounting pronouncements issued by the International Accounting Standards Board that are effective for financial years commencing 1 April 2019. None of the new or amended accounting pronouncements that are effective for the financial year commencing 1 April 2019 had a material impact on the group.

Trading profit excludes the amortisation of intangible assets (other than software), but includes the finance cost on transponder lease liabilities and excludes impairment of assets, equity settled share-based payment expenses and other gains/losses.

New standards adopted as at 1 April 2019:

IFRS 16 Leases

The group has adopted IFRS 16 retrospectively from 1 April 2019 but has not restated comparatives for the 2018 reporting period, as permitted under the standard's transitional provisions. The impact arising from the new leasing rules are therefore recognised in the statement of financial position on 1 April 2019. The impact of adopting the new standard is not material to the group. The group has elected the practical expedient not to reassess the definition of leases. Instead, for contracts entered into before the transition date the group relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement Contains a Lease (IFRIC 4).

Leasing activities

The group primarily leases transponders, office buildings, IT equipment and vehicles. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. Lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes, except for the related transponder assets. Payments associated with short-term leases and leases of low value assets are recognised on a straight-line basis as an expense in profit or loss and represent no change from the previous reporting period's accounting treatment. Short-term leases have a term of 12 months or less. Low-value assets comprise leases with a value below R75 000 per annum.

For leases previously classified as finance leases, the group recognised the carrying amount of the lease asset and lease liability as the carrying amount of the right-of-use asset and the lease liability at the date of initial application. The most significant impact of this was the group's transponder leases, which resulted in a category transfer within property, plant and equipment of R15.7bn as at 1 April 2019.

Operating lease commitments disclosed as at 31 March 2019 amounted to R1.3bn. On adoption of IFRS 16 Leases, these existing operating lease commitments, excluding short-term and low-value commitments of R560m (R451m as at 30 September 2019), have now been recognised as right-of-use assets and obligations to make lease payments in the condensed consolidated statement of financial position. The group has recorded the corresponding lease liability, measured at the present value of the lease payments payable over the lease term, discounted at an average incremental borrowing rate of 8%. This has resulted in an increase in current and long-term liabilities, and a corresponding increase in non-current assets of R728m as at 1 April 2019 (R664m as at 30 September 2019).

There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application.

The right-of-use assets are subsequently measured at cost less any accumulated depreciation and impairment losses and adjusted for certain remeasurements of the lease liability. The right-of-use assets are depreciated over the shorter of the assets' useful lives and the lease term on a straight-line basis. The lease payments previously disclosed as operating expenses, under the right-of-use model, are now disclosed as depreciation and interest expense.

These condensed consolidated interim financial statements for the period ended 30 September 2019 have been reviewed by PricewaterhouseCoopers Inc., who expressed an unmodified conclusion thereon.

The following table shows unsatisfied performance obligations resulting from long-term technology contracts as at 30 September 2019 and 31 March 2019.

Management expects that 41% of the transaction price allocated to the unsatisfied contracts as of 30 September 2019 will be recognised as revenue during FY21 (R94m) and 31% (R72m) will be recognised as revenue in the FY22 reporting period. The remaining 28% (R62m) will be recognised as revenue in FY22 and thereafter. The amount disclosed above does not include variable consideration which is constrained.

Management expects that 35% of the transaction price allocated to the unsatisfied contracts as of 31 March 2019 will be recognised as revenue during FY20 (R123m) and 31% (R109m) will be recognised as revenue in the FY21 reporting period. The remaining 34% (R118m) will be recognised as revenue in FY22 and thereafter. The amount disclosed above does not include variable consideration which is constrained.

All other technology contracts are for periods of one year or less or are billed based on time incurred.

A significant portion of the group’s operations are exposed to foreign exchange risk. The table below presents the net loss from our foreign exchange exposure and incorporates effects of qualifying forward exchange contracts that hedge this risk.

In addition to the items already detailed, profit before taxation has been determined after taking into account, inter alia, the following:

Commitments relate to amounts for which the group has contracted, but that have not yet been recognised as obligations in the condensed consolidated statement of financial position.

The group operates a number of businesses in jurisdictions where taxes may be payable on certain transactions or payments. The group continues to seek relevant advice and works with its advisers to identify and quantify such tax exposures. Our current assessment of possible withholding and other tax exposures, including interest and potential penalties, amounts to approximately R2.0bn (31 March 2019: R1.8bn). No provision has been made as at 30 September 2019 for these possible exposures.

The group’s activities expose it to a variety of financial risks such as market risk (including currency risk, fair-value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk.

The fair values of the group’s financial instruments that are measured at fair value are categorised as follows:

Currency depreciation features relate to clauses in content acquisition agreements that provide the group with protection in the event of significant depreciation of the purchasing entity's functional currency relative to the currency of the content acquisition agreement. The fair value of currency depreciation features is measured through the use of discounted cash flow techniques. Key inputs used in measuring fair value include the terms and benchmark rates contained in content acquisition agreements and spot exchange rates prevailing at the relevant measurement dates.

There have been no significant related party transactions and balances in the current period.

The group remains fully committed to broad-based black economic empowerment and transformation. In line with prior commitments, an offer was made to Phuthuma Nathi (PN) shareholders on 25 September 2019, to exchange up to 20% of their PN shares for shares in MCG. The offer closed on 28 October 2019 and has resulted in 3.7m shares being issued to PN shareholders, while MCG acquired 3.8m shares in PN in return. Following the conclusion of this share swap, our overall interest in MultiChoice South Africa increased from 75.0% to 76.4%.

Subsequent to 30 September 2019, under the group's general authority to repurchase shares, 1.1m treasury shares were repurchased for a total value of R125m.

To the shareholders of MultiChoice Group Limited

We have reviewed the condensed consolidated interim financial statements of MultiChoice Group Limited, contained in the accompanying interim report in financial statements, which comprise the condensed consolidated statement of financial position as at 30 September 2019 and the related condensed consolidated income statement, condensed consolidated statements of comprehensive income, changes in equity and cash flows for the six-month period then ended, and selected explanatory notes.

Directors' responsibility for the interim financial statements

The directors are responsible for the preparation and fair presentation of these interim financial statements in accordance with International Financial Reporting Standard, (IAS) 34 Interim Financial Reporting, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by the Financial Reporting Standards Council and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of interim financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's responsibility

Our responsibility is to express a conclusion on these interim financial statements. We conducted our review in accordance with International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. ISRE 2410 requires us to conclude whether anything has come to our attention that causes us to believe that the interim financial statements are not prepared in all material respects in accordance with the applicable financial reporting framework. This standard also requires us to comply with relevant ethical requirements.

A review of interim financial statements in accordance with ISRE 2410 is a limited assurance engagement. We perform procedures, primarily consisting of making inquiries of management and others within the entity, as appropriate, and applying analytical procedures, and evaluate the evidence obtained.

The procedures performed in a review are substantially less than and differ in nature from those performed in an audit conducted in accordance with International Standards on Auditing. Accordingly, we do not express an audit opinion on these interim financial statements.

Other matter

We have not reviewed future financial performance and expectations expressed by the directors included in the commentary in the accompanying interim financial statements and accordingly do not express a conclusion thereon.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed consolidated interim financial statements of MultiChoice Group Limited for the six months ended 30 September 2019 are not prepared, in all material respects, in accordance with the International Financial Reporting Standard, (IAS) 34 Interim Financial Reporting, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by the Financial Reporting Standards Council and the requirements of the Companies Act of South Africa.

PricewaterhouseCoopers Inc.
Director: Brett Stephen Humphreys
Registered auditor
Johannesburg
11 November 2019

The group has presented certain revenue, cost and trading profit metrics in constant currency, excluding the effects of changes in the composition of the group (non-IFRS performance measures) in the following tables. The non-IFRS performance measures are the responsibility of the board of directors and is presented for illustrative purposes. Pro forma information presented on a non-IFRS basis has been extracted from the group's management accounts, the quality of which the board is satisfied with.

Shareholders are advised that, due to the pro forma nature of the non-IFRS performance measures and the fact that it has been extracted from the group's management accounts, it may not fairly present the group's financial position, changes in equity, results of operations or cash flows.

The non-IFRS performance measures have been prepared to illustrate the impact of changes in foreign exchange rates and changes in the composition of the group on its results for the period ended 30 September 2019. The following methodology was applied in calculating the non-IFRS performance measures:

1. Foreign exchange/constant currency adjustments have been calculated by adjusting the current period's results to the prior period's average foreign exchange rates, determined as the average of the monthly exchange rates for that period. The constant currency results, arrived at using the methodology outlined above are compared to the prior period's actual IFRS results. The relevant average exchange rates (relative to the South African rand) used for the group's most significant functional currencies, were US dollar (HY20: 14.61; HY19: 13.50); Nigerian naira (HY20: 24.76; HY19: 26.88); Angolan kwanza (HY20: 23.60; HY19: 19.04); Kenyan shilling (HY20: 7.04; HY19: 7.49) and Zambian kwacha (HY20: 0.89; HY19: 0.78).
2. Adjustments made for changes in the composition of the group mergers and acquisitions (M&A) relate to acquisitions and disposals of subsidiaries. For mergers, the group composition adjustments include a portion of the prior year results of the entity with which the merger took place. There were no significant changes in the composition of the group during the respective reporting periods.

An assurance report issued in respect of the non-IFRS performance measures, by the group's external auditor, is available at the registered office of the company.

The adjustments to the amounts reported in terms of IFRS that have been made in arriving at the non-IFRS performance measures are presented in the tables below:

11.1 Key performance indicators

11.2 Group financials including segmental analysis

11.2.1 Segmental results

11.2.2 Revenue and costs by nature

11.3 Reconciliation of headline earnings to core headline earnings

Core headline earnings excludes non-recurring and non-operating items – we believe this is a useful measure of the group's sustainable operating performance. However, core headline earnings is not a defined term under IFRS and may not be comparable with similarly titled measures reported by other companies.

11.4 Reconciliation of cash generated from operating activities to free cash flow