Annual and transition report of foreign private issuers pursuant to Section 13 or 15(d)

Financial Risk Management

v3.19.2
Financial Risk Management
12 Months Ended
Jan. 31, 2019
Disclosure of Financial Risk Management [Abstract]  
Financial Risk Management

27 Financial Risk Management

 

The Group is exposed to a variety of financial risks through its use of financial instruments.

 

The Group’s overall risk management plan seeks to minimise potential adverse effects due to the unpredictability of financial markets.

 

The most significant financial risks to which the Group is exposed to are described below:

 

Specific risks

 

  Liquidity risk
  Credit risk
  Market risk - currency risk, interest rate risk and price risk

 

Financial instruments used

 

The principal categories of financial instruments used by the Group are:

 

  Trade receivables
  Cash at bank
  Bank overdraft
  Trade and other payables
  Floating rate bank loans
  Forward currency contracts
  Shareholders loan

 

Objectives, policies and processes

 

The Board of Directors have overall responsibility for the establishment of the Group’s financial risk management framework. This includes the development of policies covering specific areas such as foreign exchange risk, interest rate risk, credit risk and the use of derivatives.

 

Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities.

 

The day-to-day risk management is carried out by the Group’s finance function under policies and objectives which have been approved by the Board of Directors.

  

Objectives, policies and processes

 

Mitigation strategies for specific risks faced are described below:

 

Liquidity risk

 

Liquidity risk arises from the Group’s management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due.

 

The Group’s policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities as and when they fall due.

 

The Group manages its liquidity needs by carefully monitoring scheduled debt servicing payments for long-term financial liabilities as well as cash-outflows due in day-to-day business.

 

The timing of cash flows presented in the table to settle financial liabilities reflects the earliest contractual settlement dates and does not reflect management’s expectations that banking facilities will be rolled forward. The amounts disclosed in the table are the undiscounted contracted cash flows and therefore the balances in the table may not equal the balances in the consolidated balance sheets due to the effect of discounting.

 

The Group’s liabilities have contractual maturities which are summarised below:

 

    Non-derivatives Borrowings 
NZ$000’s
    Non-derivatives Trade payables 
NZ$000’s
    Non-derivatives Total 
NZ$000’s
    Derivatives Gross future cash settlement on forward currency contracts - inflow 
NZ$000’s
    Derivatives
Gross future cash settlement on forward currency contracts - (outflow) 
NZ$000’s
    Derivatives Total 
NZ$000’s
 
Not later than 1 month                                    
31 January 2019     1,329       23,580       24,908       18,325       (19,212 )     (887 )
31 January 2018     26,482       21,143       47,625       13,577       (13,950 )     (373 )
31 January 2017     56,333       19,221       75,554       2,078       (2,250 )     (172 )
                                                 
1 to 3 months                                                
31 January 2019     184       -       184       9,610       (10,061 )     (451 )
31 January 2018     148       -       148       13,837       (14,453 )     (616 )
31 January 2017     129       -       129       9,900       (11,326 )     (1,426 )
                                                 
3 months to 1 year                                                
31 January 2019     20,184       -       20,184       4,976       (5,121 )     (145 )
31 January 2018     27,247       -       27,247       20,895       (21,993 )     (1,098 )
31 January 2017     18,631       -       18,631       37,855       (40,445 )     (2,590 )
                                                 
1 to 5 years                                                
31 January 2019     -       -       -       -       -       -  
31 January 2018     -       -       -       -       -       -  
31 January 2017     323       -       323       -       -       -  

  

    Non-derivatives Borrowings 
NZ$000’s
    Non-derivatives Trade payables 
NZ$000’s
    Non-derivatives Total 
NZ$000’s
    Derivatives Gross future cash settlement on forward currency contracts - inflow 
NZ$000’s
    Derivatives
Gross future cash settlement on forward currency contracts - (outflow) 
NZ$000’s
    Derivatives Total 
NZ$000’s
 
Total                                    
31 January 2019     21,697       23,580       45,277       32,912       (34,395 )     (1,483 )
31 January 2018     53,877       21,143       75,020       48,309       (50,396 )     (2,087 )
31 January 2017     75,416       19,221       94,637       49,833       (54,021 )     (4,188 )

 

Credit risk

 

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the Group.

 

Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposure to wholesale and retail customers, including outstanding receivables and committed transactions.

 

Trade receivables and contract assets

 

Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable.

 

The Group has adopted a policy of only dealing with creditworthy counterparties as a means of mitigating the risk of financial loss from defaults. The utilisation of credit limits by customers is regularly monitored by line management. Customers who subsequently fail to meet their credit terms are required to make purchases on a prepayment basis until creditworthiness can be re-established.

    

Management considers that all the financial assets that are not impaired for each of the reporting dates under review are of good credit quality, including those that are past due.

 

The Group has no significant concentration of credit risk with respect to any single counterparty or group of counterparties.

 

The credit risk for liquid funds and other short-term financial assets is considered negligible, since the counterparties are reputable banks with high quality external credit ratings.

 

On a geographical basis, the Group has significant credit risk exposures in New Zealand, Australia, United States and United Kingdom given the substantial operations in those regions.

 

The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings if available or historical information about counterparty default rate.

 

    31 January 2019 
NZ$000’s
    31 January 2018 
NZ$000’s
    31 January 2017 
NZ$000’s
 
Trade receivables
Counterparty without external credit ratings
                       
New customer less than 6 months     42       12       187  
Existing customers (more than 6 months with default in past)     7,747       9,970       26,312  
Total     7,789       9,982       26,499  

 

    31 January 2019 
NZ$000’s
    31 January 2018 
NZ$000’s
    31 January 2017 
NZ$000’s
 
Credit ratings                        
AA-     1,915       10,591       2,655  
A+     -       94       (11 )
Total     1,915       10,685       2,644  

 

The Group has no significant concentration of credit risk with respect to any single counterparty or group of counterparties.

    

On a geographical basis, the Group has significant credit risk exposures in New Zealand and Australia, United States and United Kingdom given the substantial operations in those regions.

 

Market risk

 

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices.

 

(i) Foreign exchange risk

 

Exposure to foreign exchange risk may result in the fair value or future cash flows of a financial instrument fluctuating due to movement in foreign exchange rates of currencies in which the Group holds financial instruments which are other than the functional currency of the Group.

 

Exposures to currency exchange rates arise from the Group’s overseas sales and purchases, which are primarily denominated in currencies other than the functional currency, in particular USD.

  

Foreign currency denominated financial assets and liabilities, translated into New Zealand Dollars at the closing rate, are as follows:

 

    AUD 
NZ$000’s
    USD 
NZ$000’s
    GBP 
NZ$000’s
    EUR 
NZ$000’s
    HKD 
NZ$000’s
    Total 
NZ$000’s
 
31 January 2019                                    
Nominal amounts                                                
Trade receivables     51       42       -       285       -       378  
Trade payables     1       9,035       8       61       7       9,112  
Cash and cash equivalents     623       149       38       8       11       829  
                                                 
31 January 2018                                                
Nominal amounts                                                
Trade receivables     328       199       -       1,376       -       1,903  
Trade payables     781       11,209       74       29       53       12,146  
Cash and cash equivalents     1,660       7,190       77       92       165       9,184  
                                                 
31 January 2017                                                
Trade receivables     424       211       -       1,509       -       2,144  
Trade payables     315       8,557       131       32       16       9,051  
Cash and cash equivalents     926       401       131       388       28       1,874  

 

The following table illustrates the sensitivity of the net result for the year and equity in regards to the Group’s financial assets and financial liabilities and the US dollar - New Zealand Dollar, Australian Dollar - New Zealand Dollar, GB Pound - New Zealand Dollar, Euro - New Zealand Dollar, and Hong Kong Dollar - New Zealand Dollar exchange rates. There have been no changes in the assumptions calculating this sensitivity from prior years.

 

It assumes a 10% change of the New Zealand Dollar / Australian Dollar exchange rate for the year ended 31 January 2019 (31 January 2018: 10%, 31 January 2017: 10%). A 10% change is considered for the New Zealand Dollar / US Dollar exchange rate (31 January 2018: 10%, 31 January 2017: 10%). A 10% change is considered for the New Zealand Dollar / GB Pound exchange rate (31 January 2018: 10%, 31 January 2017: 10%). A 10% change is considered for the New Zealand Dollar / Euro exchange rate (31 January 2018: 10%, 31 January 2017: 10%). All of these percentages have been determined based on the average market volatility in exchange rates in the previous 12 months.

 

The year end rate is 0.9513 AUD, 0.6903 USD, 0.5265 GBP, 0.6008 EUR and 5.4138 HKD.

 

The sensitivity analysis is based on the foreign currency financial instruments held at the reporting date and also takes into account forward exchange contracts that offset effects from changes in currency exchange rates.

  

If the New Zealand Dollar had strengthened and weakened against the Australian Dollar, US Dollar, GB Pound, Euro and HK Dollar by 10% (31 January 2018: 10%, 31 January 2017: 10%) and 10% (31 January 2018: 10%, 31 January 2017: 10%) respectively then this would have had the following impact:

 

    NZ$000’s  
    +10%     -10%  
USD                
Net results/Equity (31 January 2019)     (954 )     954  
Net results/Equity (31 January 2018)     (1,509 )     1,509  
Net results/Equity (31 January 2017)     (1,196 )     1,196  
                 
AUD                
Net results/Equity (31 January 2019)     (5 )     5  
Net results/Equity (31 January 2018)     (805 )     805  
Net results/Equity (31 January 2017)     86       (86 )
                 
GBP                
Net results/Equity (31 January 2019)     (1 )     1  
Net results/Equity (31 January 2018)     (175 )     175  
Net results/Equity (31 January 2017)     34       (34 )
                 
EUR                
Net results/Equity (31 January 2019)     (32 )     32  
Net results/Equity (31 January 2018)     (136 )     136  
Net results/Equity (31 January 2017)     186       (186 )
                 
HKD                
Net results/Equity (31 January 2019)     (1 )     1  
Net results/Equity (31 January 2018)     (14 )     14  
Net results/Equity (31 January 2017)     1       (1 )

 

Exposures to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of the Group’s exposure to foreign currency risk.

 

Forward exchange contracts

 

The Group has open forward exchange contracts at the end of the reporting period relating to highly probable forecast transactions and recognised financial assets and financial liabilities. These contracts commit the Group to buy specified amounts of foreign currencies in the future at specified exchange rates. The Group has a policy of requiring that forward exchange contracts be entered into where future commitments are entered into requiring settlement at a time in excess of 1 month but less than 1 year, to a value of approximately 75% total foreign exchange exposure. Contracts are taken out with terms that reflect the underlying settlement terms of the commitment to the maximum extent possible so that hedge ineffectiveness is minimised.

 

The following table summarises the notional amount of the Group’s commitments in relation to forward exchange contracts.

 

    Notional Amounts     Average Exchange Rate  
    31 January 2019 
NZ$000’s
    31 January 2018 
NZ$000’s
    31 January 2017 
NZ$000’s
    31 January 2019 
$
    31 January 2018 
$
    31 January 2017 
$
 
Buy USD / sell NZD                                                
Settlement                                                
Less than 6 months     34,395       48,149       47,292       0.6620       0.7061       0.6687  
6 months to 1 year     -       -       3,479       -       -       0.7186  

 

    NZ$000’s     NZ$000’s     NZ$000’s     $     $     $  
Buy AUD / sell NZD                                    
Settlement                                    
Less than 6 months                  -       2,247       2,250                    -       0.8900       0.8890  

 

    NZ$000’s     NZ$000’s     NZ$000’s     $     $     $  
Buy GBP / sell NZD                                    
Settlement                                    
Less than 6 months                        -                          -       1,000                         -                           -       0.5784  

 

(ii) Interest rate risk

 

The Group is exposed to interest rate risk as funds are borrowed at floating and fixed rates. Borrowings issued at fixed rates expose the Group to fair value interest rate risk.

 

The Group’s policy is to minimise interest rate cash flow risk exposures on long-term financing. Longer-term borrowings are therefore usually at fixed rates. At the reporting date, the Group is exposed to changes in market interest rates through its bank borrowings, which are subject to variable interest rates.

 

    31 January 2018 
NZ$000’s
    31 January 2017 
NZ$000’s
    31 January 2017 
NZ$000’s
 
Floating rate instruments                        
Bank overdrafts     -       -       -  
Working capital financing bank facility     -       22,489       31,710  
Convertible notes     78       1,740       16,474  
Borrowings     20,000       16,000       16,000  
      20,078       40,229       64,184  

 

The following table illustrates the sensitivity of the net result for the year and equity to a reasonably possible change in interest rates of +1.00%/-1.00% (2018: +1.00%/-1.00%, 2017: +1.00%/-1.00%), with effect from the beginning of the year. These changes are considered to be reasonably possible based on observation of current market conditions and economist reports.

 

The calculations are based on the financial instruments held at each reporting date. All other variables are held constant.

 

    NZ$000’s  
    1.00%     -1.00%  
    NZ$000’s     NZ$000’s  
Net results/Equity (31 January 2019)     200       (200 )
Net results/Equity (31 January 2018)     402       (402 )
Net results/Equity (31 January 2017)     642       (642 )