Chairman’s report

Larry Nestadt, chairman

The group returned a credible financial performance for the year ended 31 May 2011. Revenue increased by 13% to R18 billion, contributing to an EBITDA increase of 5% to R598 million.

In February 2011, in a strategic initiative, 40% of Blue Label Mexico was acquired by Grupo Bimbo by way of a fresh issue of shares for $20 million equating to an enterprise value of $50 million. This had the effect of diluting Blue Label’s shareholding from 70% to 40%, resulting in a fair value gain of R146 million. This gain was offset by impairments to assets totalling R64 million in Africa Prepaid Services Nigeria (APSN), Africa Prepaid Services SA, Sharedphone International, Blue Label Distribution, Content Connect Africa and Blue Label One. The resultant net extraneous income of R82 million contributed to growth in core earnings of 15%. However, on reversal of the extraneous contributions, headline earnings declined by 4%. The primary cause of the decline in headline earnings was directly attributable to the deterioration in the financial performance of APSN, due to the failure by Multi-Links to perform its obligations in terms of the distribution agreement and consequent cancellation thereof resulting from its repudiation of such obligations.

Blue Label’s strategy of distributing electronic tokens of value in emerging markets, continues to deliver growth through bases, principally in South Africa, India, Mexico and the United Kingdom. In June 2011, Blue Label took the strategic decision to refocus its investments and resources in these four regions, capitalising on the opportunity to increase its effective shareholding in Oxigen Services India to over 50% subsequent to year end.

From modest beginnings just over 10 years ago as a physical voucher distribution Telco, the journey continues as the company evolves into a virtual distributor of goods and services, using telephony infrastructure as the enabler.

The convergence of Emerging Worlds and Generation C

Since mobile banking first appeared in the Philippines in 2001, mobile network operators across the world are increasingly becoming retail bankers to the emerging world^#. Unbanked and underbanked populations now have access to basic banking services.

By contrast, we note the Rise of Generation C* – those born after 1990; they are connected, communicating, content-centric, computerised, community oriented and always clicking. By 2020 Generation C will comprise some 40% of the total population in the US, Europe and BRICS countries, constituting the single largest bloc of consumers. They are the first generation whose lives are defined and enabled by the Internet, mobile devices and social networking.

Blue Label converges these two worlds, the underbanked and Generation C, using its proprietary technology, the AEON distribution platform, and thereby becomes a ‘lifestyle enabler’.

Generation C increasingly depends on information and communication. The intelligence needed to manage this information load is now moving into the online cloud, as Generation C converges its digital life using cloud storage systems. Blue Label’s products and service offerings align well to these developments: an unaffiliated distributor of goods and services in an open loop.

Group performance

In assessing performance over the past year, it is pleasing that the group’s strategy of diversification by product and geography, has contributed to its resilience. Core earnings of R456 million equated to 15% growth. Headline earnings per share, however, declined by 4% to 46.20 cents, after eliminating the extraneous profit relating to the fair value gain in Blue Label Mexico, offset by impairments to assets.

The group’s strong cash-generating capability and healthy cash reserves encouraged management to negotiate early settlement discounts and bulk stock purchases in order to maximise returns on cash, given the present low interest rate environment. The group’s Treasury management has been both disciplined and focused on optimising favourable market opportunities. Cash generated from operations was R566 million and cash resources totalled R2.2 billion at year end.

Dividend

On 23 August 2011, the board approved dividend no. 2 of 14 cents per share in respect of the year ended 31 May 2011. Dividend policy is to consider paying an annual dividend after taking into account cash flow requirements for working capital, capital expenditure, share buy-backs and acquisitions, while maintaining a dividend cover of three to four times on headline earnings per share. This equates to a pay-out ratio of 25% to 33.3% of headline earnings.

Corporate governance

The board has acknowledged that King III requires more onerous governance than its predecessor code and is committed to ensuring application, as appropriate, over time. Last year I referred to an assessment to be conducted on Blue Label’s adherence and readiness to adopt King III. I can now report that the recommendations, including a corporate roadmap, have been accepted and implementation across the group is well underway.

From sustainability to integrated reporting

This is our first Integrated Report based on the recommendations of King III. Blue Label welcomes the King III shift from financial and sustainability to integrated reporting and recognises that the journey may take a number of years, as we co-ordinate and implement operational, environmental, social and governance best practices across the group. Each is an evolving field. We welcome your feedback on this report – any comments can be e-mailed to Elizna Viljoen, Group Company Secretary, at investors@ blts.co.za

As the new Companies Act provides for the distribution of a summarised report to shareholders, this is likely to be our last printed integrated annual report to be circulated. In line with the Act and the JSE Listings Requirements we are looking at more cost effective and environmentally friendly ways of producing future summarised reports.

In December 2010 Blue Label was admitted for the first time to the JSE’s Socially Responsible Investment Index. We are justifiably proud of this achievement.

We continue to develop and progress transformation and broad-based black economic empowerment (B-BBEE) in respect of our South African businesses. The enterprise development programme, coupled with a corporate social investment initiative spearheaded by the Chairman’s Fund, helps uplift the less fortunate in the areas in which Blue Label operates. In the year ended 31 May 2011, the Fund contributed R3.5 million mainly for youth and sport development as well as health awareness.

As a technology driven business, the development, retention and succession planning of skilled and talented people remains a priority. Given the high-tech nature of the business, enhanced attention is placed on IT governance, disaster recovery and business continuity, as IT failure poses a major risk in terms of sustainable development.

In financial sustainability terms, our investment proposition remains our mantra: growing our market share both organically and through acquisitions, diversifying our product and service offerings, maintaining our strong cash-generating capability and focusing on the growth of our footprint in the countries in which we operate. Given that airtime contributes the bulk of total group profit, the board has identified the numerous long-term contracts with the Telco networks and other service providers, as important to the business’s sustainability and has ensured that these contracts are in place. Substantiating Blue Label’s sustainability, is the fact that its business model has stood the test of time: it was just over ten years ago that the Levy brothers conceptualised and brought to market the distribution of electronic tokens of value – then called “virtual airtime”.

Directorate

At the annual general meeting on 12 October 2010, Microsoft’s nominee to the board, Peter Mansour withdrew his eligibility for re-election as a director and as a result Mteto Nyati was nominated by Microsoft and joined the board in his place. However, on 5 October 2011, he tendered his resignation. On 30 August 2011, Ms Pani Tyalimpi tendered her resignation from the board.

Prospects

The diversity of product and service offerings, combined with the group’s ability to drive growth, both organically and through acquisitions, together with our significant distribution footprint, positions Blue Label well to deliver anticipated growth.

Proposed share repurchase

On 6 October 2011, we announced a proposed specific repurchase of Blue Label shares from Microsoft Corporation. For more details, please see the circular to shareholders accompanying this Integrated Annual Report.

Appreciation

My sincere thanks to my fellow directors for their diligent service over the past year and the value they continue to bring to us. On behalf of the board, I thank joint CEOs, Mark Levy and Brett Levy, their executive and each member of the Blue Label group for their commitment over the past year.

Larry Nestadt
Chairman