Financial risks

NOVABASE’s activities expose it to a variety of financial risks, namely, Foreign exchange risk, Interest rate risk (cash flows and fair value), Credit risk, Liquidity risk and Capital management risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance.

During 2020, considering the COVID-19’s pandemic situation and its impact on the markets, NOVABASE reassessed the inherent risks, however tried to avoid excessively procyclical assumptions given very limited availability of reasonable and supportable forward-looking information on the impact of COVID-19 pandemic. In its reassessment, NOVABASE concluded that the current financial risk management policies already incorporate sufficiently conservative scenarios and therefore are adequate to the NOVABASE’s profile, not being necessary reformulate them. However, due to the context of great uncertainty of its global impacts, NOVABASE continues permanently monitoring the risks, seeking to anticipate and manage possible impacts not currently contemplated.

More information on each of the financial risks that NOVABASE is exposed to, listed below, including control mechanisms, assessment of “COVID” and “Brexit” expected impacts and sensitivity analysis, can be found in the “Financial Risk Management Policy” note included in the Accounts, an integral part of this Consolidated Report and Accounts, and for which reading is advised.

(a) Foreign exchange risk

NOVABASE is exposed to foreign exchange risk, mainly arising from U.S. Dollar, since some subsidiaries perform transactions in this currency, but also arising from Kwanza and British Pound.

The finance department is responsible for monitoring the evolution of exchange rates of the currencies referred above, seeking to mitigate the impact of their fluctuations in consolidated results. Whenever expectations of changes in exchange rates justify it, the Group uses derivative financial instruments to hedge those exposures.

(b) Interest rate risk (cash flows and fair value)

Interest rate risk reflects the possibility of fluctuations in future interest charges in loans obtained, as a result of changes in market interest rate levels.

The Group’s financial liabilities are indexed to short-term reference interest rates, revised in periods shorter than one year plus duly negotiated risk spreads. Hence, changes in interest rates can impact NOVABASE’s results.

NOVABASE’s exposure to interest rates arises from financial assets and liabilities contracted with a fixed and/or floating rate. In the first case, the Group faces a risk of fair value variation in these assets or liabilities, since every change in market rates involves an opportunity cost. In the second case, such change has a direct impact on interest amount, consequently causing cash variations.

Exposure to interest rate risk is monitored continuously by the finance department. The purpose of managing interest rate risk is to reduce the volatility of interest expenses.

(c) Credit risk

NOVABASE’s credit risk is managed, simultaneously, on a business units level, for the outstanding amounts of trade and other receivables, and on a Group basis, for financial instruments. Credit risk arises from cash and cash equivalents, derivative financial instruments, and credit exposures to customers, including outstanding receivables and committed transactions. For banks and financial institutions, only credible and well-rated counterparties are accepted. Credit risk management of trade and other receivables is based in credit limit ranges, taking into account the financial position of the customer and past experience.

(d) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash or liquid financial instruments, the availability of financing sources through an adequate amount of committed credit facilities and the possibility to close out market positions.

Management monitors rolling forecasts of NOVABASE’s liquidity reserve (which comprises undrawn committed borrowing facilities and cash and cash equivalents) on the basis of expected cash flows, taking into account the analysis of the remaining contractual maturity of the financial liabilities and the expected date of financial assets inflows. Additionally, the maturity concentration of borrowings and liabilities of NOVABASE are regularly monitored.

(e) Capital management risk

NOVABASE’s objectives when managing capital, which is a broader concept than the equity disclosed on the face of the consolidated statement of financial position, are:

  1. To safeguard the Group’s ability to continue as a going concern and hence to provide returns for shareholders and benefits for other stakeholders;
  2. To maintain a solid capital structure to support the development of its business;
  3. To maintain an optimal capital structure to reduce the cost of capital.

Management monitors the Return on Capital (1) ratio, which measures NOVABASE’s ability to generate cashflows in relation to the capital invested in its business.

Emerging risks

In addition to the financial risks inherent to its activity, NOVABASE is also exposed to operational and business risks, which can be materialised into threats and opportunities, and proactively develops adequate mitigation strategies. From those, we highlight:

(a) Cyber-risks

The growing sophistication and integration of technologies increased the companies exposure to several cyber-risks (such as large-scale cyber attacks, violation and destruction of data, etc.), with possible financial, operational and reputational losses. With the COVID-19 pandemic, and consequent generalisation of homeworking in society, exposure to this risk increased considerably.

From the point of view of information security, NOVABASE has been reinforcing risk mitigation measures, accompanied directly by the Chief Information Security Officer, a responsibility within Executive Committee assigned during 2019, namely by strengthening technological security controls and, furthermore, focusing on training on good homeworking practices and cybercrime awareness.

(b) Talent Retention risk

NOVABASE’s ability to successfully implement the strategy outlined depends on its ability to attract and retain top talent for each position.

The increased demand for high-quality talent, especially in the Portuguese market where NOVABASE recruits the majority of its employees, may be reflected in a potential rise in labour costs and the consequent difficulty in retaining talent. Additionally, the novel coronavirus crisis changed the rules of recruiting and hiring, as well as forced a new world of work, demanding new solutions and raising new questions: the remote recruitment, onboarding and training talent virtually, the resizing of relationships between employee and employer by opening up possibilities such as remote work, and the ability to attract talent in times of uncertainty and crisis.

NOVABASE’s human resources policies are aligned with these objectives, having been adjusted to the new reality. This area was awarded in 2020, for the 2nd consecutive year, with the “Innovation in People Management” prize, attributed by Human Resources Portugal magazine.

(c) Delivery risk

NOVABASE’s policies to address delivery risk include, among others, the following:

  • Analysis of each significant commercial proposal in order to reduce possible overselling, considering the available internal capacity;
  • Permanent scrutiny of the quality of the team to be allocated to the projects;
  • Maintenance of permanent training programmes in technologies (namely in New-Generation information technologies) and project management methodologies.

The Nearshore Agile delivery model that NOVABASE refined in recent years has proven to be resilient in this time of social distancing, which could encourage more conservative customers to embrace it even faster.

(d) Strategic and contextual risks

NOVABASE is not immune to the contingencies of the markets in which it operates, still facing the so-called “strategic and contextual risks”. The exposure to this risk increased significantly on account of the novel coronavirus pandemic, due to its unprecedented social and economic impacts worldwide and the high level of uncertainty on the real dimension of the future impacts.

NOVABASE seeks to manage and mitigate this risk through practices of recurring discussion, at the level of the various management chains, on the risks that impact on society / business unit. These discussions address areas of investment / divestment, strategic bets and pending risks at all times, and where the risk appetite at the level of the organisation and its evolution is also discussed.

(1) Determined by the formula: Operating Profit ÷ Total Equity.