Financial director’s report

David Rivkind, financial director

Organic growth in revenues, a return to profitability in the call centre operations and a net reduction in the share of losses from associates and joint ventures were all positive contributing factors to the growth in group core earnings.

This growth was augmented by an extraneous profit resulting from the dilution of the group’s equity holding in Blue Label Mexico. The sale of equity to Grupo Bimbo has created a strategic alliance between the two groups, with the objective of utilising Grupo Bimbo’s logistic capabilities and footprint to accelerate the rollout of point-ofsale devices in Mexico. The synergy between the two companies was the driving force behind the above transaction.

Trading losses in Africa Prepaid Services Nigeria (“APSN”) and the necessity for impairments of APSN following a commitment to dispose of the majority of assets and liabilities in May 2011, adversely impacted on profits. The decline in the financial performance of APSN was attributable to the failure by Multi-links to perform its obligations in terms of the distribution agreement and the consequent cancellation of that agreement arising from Multi-links’ repudiation of its obligations.

Further impairments to goodwill and related intangibles in SharedPhone International and Content Connect Africa, as well as the write-off of internally generated intangible assets in Blue Label One and Blue Label Distribution, also inhibited the growth in core earnings.

The net positive growth in core earnings equated to 15%. Headline earnings, however, declined by 4% after the net deduction relating to the extraneous income and impairments. After the extraction of the total negative contribution of Nigeria as a discontinued operation, the balance of the group contributed positive growth in core headline earnings of 13%.

The combination of strong trading results and positive cash flow generation supported the board’s approval of a dividend of 14 cents per share.

The underlying income statement has been divided into two parts, the first of which reflects the headline earnings of the continuing operations of the group, excluding the now discontinued Nigerian operation. By definition, these headline earnings also exclude extraneous income and expenditure.

Revenue

Revenue comprised sales of physical and virtual prepaid airtime, commissions on the distribution of prepaid electricity and compounded annuity revenue generated from starter packs.

Group revenue increased by 13% to R18 billion mainly through continued growth in South African distribution. Group revenue excludes the turnover of Oxigen Services India, Blue Label Mexico and Ukash, which are equity accounted associate companies.

Gross profit

Gross profit margins declined from 6.38% to 5.91%, gross profit increased by R51 million (5%).

EBITDA

EBITDA increased by 11% as a product of the increase in gross profit and an overall expense decline of 3%. This was achieved in spite of a reduction in other income of R4 million.

Net profit after tax before non-controlling interests of R379 million equated to a growth of 13%.

Share of profits/(losses) from associate

The R20 million turnaround from historical share of losses of R15 million to a share of profit of R5 million was attributable to Ukash to the extent of R17 million, with Oxigen Services India making up the balance.

Share of losses from joint ventures

The share of losses from joint ventures pertains mainly to Blue Label Mexico, previously accounted for as a subsidiary.

Headline Earnings

The growth in headline earnings of 16% from R317 million to R368 million reflects the financial performance of continuing operations excluding the trading performance of the discontinued Nigerian operation.

Computation of core earnings

Discontinued operation

This applies to Nigeria clearly showing an adverse turn-around from the group’s share of profit of R49 million to an R18 million share of loss. This excludes the impairment of its assets. These losses had a negative impact on the growth in headline earnings from continuing operations of 16%, resulting in a net decline in group headline earnings of 4%.

Gain on dilution

In terms of IFRS, we were required to fair value our retained interest in Mexico. In February 2011, 40% of the share capital of Blue Label Mexico was issued to Grupo Bimbo for a capital injection of US$20 million, equating to an enterprise value of $50 million. BLT accordingly diluted its shareholding of 70% to 40% with management retaining the balance of 20%.

Our remaining 40% is valued at $20 million equating to a gain on dilution of R146 million.

Profit on sale of subsidiary

In the comparative year, the profit on sale of subsidiary related to the disposal of Africa Prepaid Services Mozambique.

Impairments

The total impairments amounted to R64 million.

R15 million related to the available for sale financial asset in Africa Prepaid Services and R6 million to the write-off of Nigerian assets.

Other impairments to goodwill and intangibles in Nigeria, Sharedphone International, Content Connect Africa and Blue Label Distribution totalled R43 million.

Net profit attributable to equity holders of parent

The resultant attributable profit of R431 million, equated to basic earnings per share of 57.04 cents and an 18% growth.

Core earnings

After adding back the amortisation of intangible assets, the core earnings of R456 million equated to a growth of 15% and core earnings per share of 60.34 cents.

SEGMENTAL REPORT

South African distribution segment

Revenue

South African Distribution remained the major contributor to group revenue (99%).

Whilst there were piecemeal price increases from the networks during the financial year, the bulk of the growth in revenue was volume related and entirely organic. Commissions on the sale of prepaid electricity increased by 79% from R34 million to R61 million, equating to turnover generated on behalf of the utilities of R3.4 billion.

The growth in airtime revenue exceeded industry norms, with gains mainly attributable to an increase in market share from competitors.

The distribution mix of prepaid airtime per network was:

Gross profit

Although gross profit margins declined from 5.58% to 5.19%, the current melded margins have been consistent for the past 18 months, albeit that electricity commissions do not attract a cost of sale and in turn account for 0.22% for the comparative period and 0.34% of the current year’s gross profit margins.

Margins on prepaid airtime declined due to the negative impact on the implementation of RICA from the second half of the comparative period, the passing on of network price increases at cost price to the client base as well as the forfeiture of margins in return for higher revenue volumes.

EBITDA

The growth in EBITDA of 4% was achieved in spite of a decline in EBITDA margin from 4.41% to 4.00%. The decline in margin was due to the reduction in gross profit margins and an increase in certain group overheads.

INTERNATIONAL DISTRIBUTION SEGMENT

*Represents net profit after taxation and non-controlling interests.

In line with the commitment to dispose of the majority of assets and liabilities of Africa Prepaid Services Nigeria, IFRS requires its financial performance to be reflected as a discontinued operation. Consequently, revenue, gross profit and EBITDA exclude the Nigerian trading activities for both the current and comparative year.

The dilution from a 70% holding to a minority stake of 40% in Blue Label Mexico requires its trading performance for the period June 2010 to February 2011 to be reflected as a discontinued operation. Similarly, the results of Mexico are not reflected in revenue, gross profit and EBITDA, both in the current and comparative year.

As a result of the above, trading activities at EBITDA level only pertained to SharedPhone International, Africa Prepaid Services SA, Gold Label Investments, BLT USA and Blue Label Australasia.

Revenue

Current revenue related only to SharedPhone International. Its revenue declined from R39 million to R29 million due to a fall in the competitive edge which payphones traditionally had over mobile phones. This has emanated from the mobile networks offering cheaper entry-level handsets and lower denomination airtime vouchers to consumers. The decline in revenue has warranted an impairment to goodwill and intangible assets relating to SharedPhone to the extent of R8.4 million.

The balance of the decline in revenue of R120 million related to the cessation of trading activities in the DRC, Mozambique and USA that existed in the comparative period.

Gross profit

Gross profit generated by SharedPhone declined from R10 million to R8 million, albeit at an increase in margin from 25.18% to 27.52%. The balance of the decline in gross profit of R20 million related to the above entities that ceased trading during the course of the prior year.

EBITDA

SharedPhone EBITDA declined from R3.9 million to R1.8 million.

The balance of negative EBITDA of R10.4 million pertained to expenditure incurred by Africa Prepaid Services SA.

Discontinued operations

Discontinued operations include the financial results of APS Nigeria and Blue Label Mexico. Although the latter has not discontinued its operations per se, it is an IFRS requirement to categorise its results as a discontinued operation in line with the dilution to a minority stake.

– APS Nigeria

The cancellation of the distribution agreement with Multi-links impacted negatively on earnings culminating in a loss for the year of R41 million equating to a R90 million adverse movement on a comparative basis.

Impairments of assets and goodwill accounted for R23 million with the balance of R18 million attributable to trading losses. Arbitration proceedings have been instituted to claim compensation for losses suffered consequent upon cancellation of the distribution agreement.

– Blue Label Mexico

The comparative share of losses represented 70% ownership for the full year ended 31 May 2010. The current share of profits represents the gain of R150 million relating to the dilution of equity from 70% to 40%, less a non-distributable reserve release of R4 million and the group’s share of trading losses of R11 million to the date of dilution.

Share of (losses)/profits from associates and joint ventures

– Ukash (15.75% holding)

Of the R17 million turnaround from a share of losses of R8 million to a share of profits of R9 million, a recognition of a deferred tax asset accounted for R6.5 million. The balance was directly attributable to volume growth, increased values in voucher redemption and the expansion of its footprint.

An increase in voucher redemption volumes by 84% resulted in a revenue increase of 71%. Gross profit margins remained static at 49% and overhead growth was limited to 1%, all reported in their local currency.

– Oxigen Services India (37.22% holding)

Revenue increased by 24% at static gross margins of 2.25%. A decline in overheads of 8% resulted in a positive EBITDA growth of 198%, all reported in their local currency.

– Blue Label Mexico (40% holding)

The share of losses of R6.5 million were from 23 February 2011 to 31 May 2011, the period in which Blue Label Mexico became a joint venture as a result of the dilution.

Revenues for the year ended 31 May 2011 increased by 232% reported in their local currency. In spite of this revenue increase, the company continued to incur losses due to an increase in overheads commensurate with the gearing up of infrastructure to accommodate the rollout of point-of-sale devices to the Grupo Bimbo channel of distribution as well as catering for organic growth.

Core net profit

The increase in core net profit of R42 million was inclusive of the gain attributable to the dilution of equity in Blue Label Mexico. On eliminating this gain, core net profit would have declined by a net R104 million of which R90 million pertained to an adverse movement in APS Nigeria and R15 million to the impairment of an available-for-sale financial asset in APS SA.

MOBILE SEGMENT

In order to enhance the availability of management information on the group’s performance from the distribution of mobile applications, Blue Label established the mobile segment on 1 June 2010. These mobile applications were previously housed in Value Added Services and Technology. A separate management and reporting structure has been established for Mobile, and the segmental analysis restated accordingly. The companies embodying this segment are Cellfind, Content Connect Africa and Blue Label One.

The bulk of the decline in revenue was due to a cut back in marketing spend by the networks on mobile content downloads, being the main source of revenue generated by Content Connect Africa.

The decline in gross profit was limited to 6% due to melded margins increasing from 69.59% to 79.43%. The margin increase was attributable to growth in revenue from media sales and location based services generated by Blue Label One and Cellfind respectively. A decline in overheads, however, resulted in a growth in EBITDA.

The consistent underperformance of Content Connect Africa, has necessitated the impairment of goodwill and intangibles by R11.2 million. A further impairment of R5.7 million was applied to Blue Label One’s internally generated intangible assets, as its current revenues do not support the value of these assets.

Core net profit of R18 million contributed by Cellfind was largely offset by these impairments.

SOLUTIONS SEGMENT

The Value Added Services segment has been renamed Solutions, which houses the Datacel group. The only change to the reporting of this segment is the extraction of financial information relating to the newly formed Mobile segment. The comparatives have been adjusted to reflect the change in segmental reporting accordingly.

The decline in revenue was due to the closure of the CNS call centre activities which was operational for part of the comparative period and subsequently confined to an outsourced facility on behalf of third parties. The restructured Datacel group contributed a positive turnaround of R29 million to core net profit through a combination of call centre rationalisation and sustainable outbound sales of mobile services and applications.

TECHNOLOGY SEGMENT

Technology losses and the escalation thereon represented the costs of development and support of the group’s Information Technology infrastructure. Income generation was limited to services to third parties.

CORPORATE SEGMENT

Corporate expenditure was contained to neutral growth. STC of R9 million on the maiden dividend declared in August 2010 and additional depreciation on leasehold improvements, accounted for the increase in core net losses.

NET FINANCE INCOME

Finance costs

Finance costs totalled R116 million, of which R8 million related to interest paid on borrowed funds and R108 million to imputed IFRS interest adjustments relating to credit received from suppliers. On a comparative basis the imputed IFRS interest adjustment was R102 million. The increase of R6 million was directly IFRS related.

Finance income

Interest received on cash resources declined by R33 million from R83 million to R50 million due to a continued reduction in interest rates and the preference of settlement discounts and bulk inventory procurements when the opportunities availed themselves.

The imputed IFRS interest adjustments increased by R19 million as a result of extended credit afforded to selected customers.

DEPRECIATION, AMORTISATION AND IMPAIRMENT

The increase of R31 million related to the increase in impairments with depreciation on property, plant and equipment remaining static.

Core headline earnings

The table below, which has been prepared on a core headline earnings basis, excludes the impairments to intangible assets and goodwill as well as the extraneous profit on the Mexico dilution.

The decline in core headline earnings of 6% would have equated to an increase of 13%, on elimination of the discontinued Nigerian operation.

STATEMENT OF FINANCIAL POSITION

Total assets increased by R641 million to R5.1 billion.

Material increases related to the investment in joint ventures of R143 million, inventory by R452 million and cash resources by R171 million. The increase in investment in joint venture pertains to the fair value gain on the retained 40% shareholding in Blue Label Mexico

The increase in inventory was mainly attributable to stockpiling shortly prior to year end in anticipation of price increases.

The group remained highly liquid, maintaining its current asset ratio at 2:1.

The stock turn averaged 12 days net of the advanced purchases of approximately R470 million in May 2011.

Debtors collection period averaged 17 days and creditors payment terms averaged 41 days.

STATEMENT OF CASH FLOWS

The increase of cash on hand by R170 million accumulated cash resources to R2.2 billion at year end.

The cash flow generated by operations of R566 million represented a decline of R57 million on the comparative year, congruent with the decline in operating profit.

The purchase of a starter pack base for R83 million accounted for the majority of the acquisition of intangible assets of R113 million, with the balance being attributable to development costs and software.

Capital expenditure was confined to R74 million, representing a decline of R31 million.

The dividend payment of R91 million related to the maiden dividend declared in August 2010.

DIVIDEND NUMBER 2

On 23 August 2011, the board approved a dividend of 14 cents per ordinary share. The dividend in respect of ordinary shares for the year ended 31 May 2011 of R107 092 578, (STC: R10 709 258) has not been recognised in the financial statements, as it was declared after this date.

Appreciation

I would like to acknowledge the professional input of the finance team in the preparation of the financial results.

David Rivkind
Financial director