Commentary

INTRODUCTION

Against the background of the global economic crisis, the group achieved EBITDA of R368 million, equating to 24% growth year on year. This again endorses the group’s ability to achieve compounded growth in spite of volatile economic conditions.

Revenue enhancement, margin improvement and the containment of overheads were the contributors to this growth.

A decline in interest rates had a negative impact on interest received on the substantial cash resources that the group has accumulated.

This together with impairments on goodwill and intangibles and the reversal of an element of deferred tax assets resulted in a decline in core earnings per share of 9%.

BASIS OF PREPARATION

The condensed consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), IAS 34 – Interim Financial Reporting, the listing requirements of the JSE Limited and the South African Companies Act 61 of 1973, as amended.

The condensed consolidated financial statements are prepared in accordance with the going concern principle, under the historical cost basis, as modified by the revaluation of certain assets and liabilities where required or elected in terms of IFRS. The accounting policies and methods of computation are consistent with those used in the comparative financial information for the six months ended 30 November 2008.

Financial overview

Revenues of R8,4 billion equated to an increase of R828 million (11%)
Gross profit margin improved from 6,92% to 7,40%
EBITDA increased to R368 million up 24% from R295 million
EBITDA margin improved from 3,90% to 4,38%
Losses in Associate Company, Oxigen Services India, declined by 68%
Decrease in core earnings per share from 28,18 cents to 25,59 cents.

Core earnings

In spite of accumulating an additional R203 million cash off an opening base of R1,7 billion, the gradual decline in interest rates to August 2009 impacted negatively on net finance income, which declined by R53 million. This, together with the impairment of software and goodwill and the reversal of certain deferred tax assets, resulted in a decline in core earnings per share from 28,18 cents to 25,59 cents.

The underlying report has been prepared on a segmental basis in order to provide shareholders with an enhanced insight into the contributions to profitability by the various operational divisions of the group.

REVENUE

	R’000			% of Total Contribution
	2009	2008
Segments	Reviewed	Reviewed	% Growth	2009	2008
South African distribution	7 591 164	7 088 140	7	90,3	93,6
International distribution	674 866	282 944	139	8,0	3,7
Value added services	122 490	192 074	(36)	1,5	2,6
Technology	13 440	10 300	31	0,2	0,1
Total	8 401 960	7 573 458	11	100	100

South African distribution

This segment is the major contributor to group revenue, covering mainly the distribution of prepaid airtime and electricity on a national basis. Significant growth in commission earned on the distribution of prepaid electricity (360%), was achieved through the establishment of additional distribution contracts with a wider spectrum of municipalities.

International distribution

International distribution encompasses the group’s operations in Mozambique, Democratic Republic of Congo, Nigeria, Australia, Mexico, India, United Kingdom and Europe.

Revenue, which increased by 139%, was entirely attributable to Africa Prepaid Services Nigeria (APSN) and does not include the turnover of associated companies, namely, Oxigen Services India and Ukash (UK and Europe).

The group’s interests in Mozambique were disposed of in November 2009.

The comparative revenue does not include any contribution by APSN in that operations only commenced in May 2009.

Value added services

The telemarketing of cellular and financial services products and inbound customer care and technical support, are provided by various call centres operated by the group. Contribution to group revenue declined by R23 million as a result of material adverse market conditions. This in turn necessitated the impairment of goodwill of R11,1 million pertaining to CNS Call Centre.

The comparative revenue includes R47 million pertaining to e-Voucha, a subsidiary company that was sold prior to the commencement of the financial period under review.

Growth in revenue generated by location based services and aggregation of mobile content was neutral.

Technology

The technology division is an in house technical support and product development enhancement operation. Its revenue relates to services and sales to third parties.

EBITDA

EBITDA of R368 million represented growth of R72 million (24%) on the comparative period.

The underlying segmental analysis separates contributions from trading operations and technical and corporate support.

	R’000
	2009	2008
Segments	Reviewed	Reviewed	% growth
South African distribution	361 746	296 965	22
International distribution	63 349	18 823	237
Value added services	18 641	47 176	(61)
Total trading operations	443 736	362 964	22
EBITDA Margin (%)	5,29	4,80	0,49
Technology	(35 561)	(22 114)
Corporate	(40 346)	(45 254)
Total support	(75 907)	(67 368)	13
Net Total	367 829	295 596	24
EBITDA Margin (%)	4,38	3,90	0,47

South African distribution

The growth in EBITDA of R65 million (22%) was achieved through revenue growth of 7%, an increase in gross profit margins by 0,55% and the containment of overheads.

International distribution

The growth of R45 million included a profit of R29 million on the sale of APS Mozambique. On elimination of this extraneous profit, the growth in EBITDA equated to 82%.

Value added services

The decline in revenue of the call centres, reduced margins and costs of rationalisation, were the major contributing factors to the negative growth in value added services of R29 million (61%).

Technology and Corporate

The growth in EBITDA of R81 million (22%) generated by trading operations, was underpined by skilled technological, administrative and managerial support. These services were provided at increased costs of R8 million.

NET FINANCE INCOME

Finance income of R64 million was attributable to interest earned by the South African distribution segment of the group. Of this amount, R20 million related to imputed interest receivable on debtor balances in terms of IFRS requirements and R44 million earned on liquid working capital.

Finance income earned in the comparative period was R104 million, of which R14 million applied to imputed interest receivable on debtor balances in terms of IFRS requirements.

The effective decline in finance income, net of the above IFRS adjustments, was therefore R46 million from the comparative period. This decline was primarily due to the reduction in interest rates, totalling 500 basis points.

This resulted in a net negative growth of R40 million (39%).

Of the finance expense of R63 million, R60 million related to imputed interest payable on creditor balances in terms of IFRS requirements.

In comparison with the relative period, the increase in finance expense of R13 million (26%) was predominantly due to a positive movement in IFRS adjustments of R12,2 million.

SHARE OF LOSSES FROM ASSOCIATES AND JOINT VENTURES

		R’000
	%	2009	2008
Associate Company	Holding	Reviewed	Reviewed
Oxigen Services India Pvt Ltd	37,22	(4 595)	(14 285)
Smart Voucher Limited (Ukash)	17,25	(7 542)	(195)
Other	50	240	398
Total		(11 897)	(14 082)

Oxigen Services India

Oxigen Services India Pvt Ltd continues to incur losses albeit at a lesser rate, when comparing the group’s share of historical losses of R14,2 million to current losses of R4,6 million. This reduction in losses of 68% was derived through growth in revenue by R130 million (21%) coupled with a reduction in overhead of 46%.

Smart Voucher Limited t/a Ukash

The group’s share of associated company losses of R7,5 million included its share of the amortisation of the intangible assets. Comparatives related to two months only as Ukash was acquired in October 2008.

In addition, the reversal of a deferred tax asset of R3,7 million, impacted further on Ukash’s negative contribution to core earnings.

CORE NET PROFIT

	R’000
	2009	2008	%
Segments	Unaudited	Unaudited	Growth
South African distribution	288 231	260 858	11
International distribution	1 371	(5 766)	124
Value added services	(2 638)	31 787	(108)
Total operations	286 964	286 879	—

Technology	(47 246)	(24 036)	(97)
Corporate	(45 510)	(46 917)	3,0
Total support	(92 756)	(70 953)	(31)

Core earnings	194 208	215 926	(11)
Core earnings per share (cents)	25,59	28,18	(9)
Headline earnings per share (cents)	23,38	26,06	(10)

After deducting the profit on the sale of APS Mozambique (R19 million net of taxation and minorities interest) and accounting for the adjustment of impairments of R18 million, headline earnings per share equated to 23,38 cents.

DIVIDENDS

In line with the group’s stated dividend policy, no dividend has been declared.

BALANCE SHEET

Assets

Total assets increased to R4,2 billion up R369 million (10%).

Non-current assets

The net decrease in non current assets by R91 million was attributable to:

–	Capital expenditure net of disposals and depreciation on property, plant and equipment of R24 million. This was mainly applied to the acquisition of point of sale devices in both the South African and International distribution segments;
–	The reversal of deferred tax assets of R4 million;
–	A decrease in intangible assets, comprising goodwill and intangibles of R62 million, net of acquisitions, disposals, impairments and amortisation;
–	A net decrease in financial assets at amortised cost of R35 million. This relates to starter packs which have been sold but not yet activated; and
–	A decrease in Investments in associates of R14 million.

Current assets

Current assets increased by R460 million. This was mainly attributable to the increase in cash and cash equivalents by R203 million, trade and other receivables by R239 million and the current portion of unactivated starter packs by R21 million. The stock turn averaged 3,44 times per month and debtors collections were 24 days.

CAPITAL AND RESERVES

Capital and reserves increased by R179 million, of which net profit for the period accounted for R177 million.

The purchase of treasury shares in terms of the group’s staff share incentive scheme, increase in share based payment reserve, positive movements in minority interests and foreign exchange translation movements, accounted for the balance of the net increase in capital and reserves.

LIABILITIES

The net increase in total liabilities of R191 million, related to an increase in accounts payable by R183 million and taxation owing by R33 million less the reduction of interest bearing debt of R18 million and deferred taxation of R7 million. The trade creditor payment terms equated to 40 days.

CASH FLOW

Operating profit and continuing focus on working capital management generated cash of R337 million. This was enhanced by a further R41 million from net interest received on liquid working capital offset by taxation paid of R62 million, equating to cash flows from operating activities of R316 million.

Funds applied to investing and financing activities as well as negative translation differences on foreign exchange transactions resulted in net cash flow generated by the group for the period under review totalling R203 million.

Total cash on hand as at the 30 November 2009 accumulated to R1,96 billion.

PROSPECTS

Revenue from South African distribution segment is expected to continue to increase organically in line with the growth in the customer base and the introduction of additional e-tokens of value.

Africa Prepaid Services Nigeria, which commenced operations in May 2009, is expected to grow organically in line with the widening of the distribution network that has been established.

Blue Label Mexico continues to expand its footprint by growing the roll out of point of sale devices to new customers.

The improvement in the performance of Oxigen Services India is expected to continue.

The group will continue to consider any strategic acquisitions to complement the group’s business model. Vertical integration and critical mass will be key criteria in order to ensure value creation to shareholders.

POST BALANCE SHEET EVENT

Subsequent to the period under review, Africa Prepaid Services, a subsidiary of BLT, concluded an agreement to dispose of its 80% interest in Africa Prepaid Services DRC. In addition The Prepaid Company concluded an agreement to acquire a starter pack base for the amount of R59 million.

REVIEW OPINION

The results for the period ended 30 November 2009 have been reviewed by the company’s auditors, PricewaterhouseCoopers Inc. and the unmodified review report is available for inspection at the company’s registered office.

APPRECIATION

The board of Blue Label Telecoms would like to thank its suppliers, customers, business partners and staff for their ongoing support and loyalty.

For and on behalf of the Board

LM Nestadt Chairman	BM Levy and MS Levy Joint Chief Executive Officers	DB Rivkind Chief Financial Officer

23 February 2010

Directors:

LM Nestadt (Chairman)*, BM Levy, MS Levy, K Ellerine*, GD Harlow*, NN Lazarus sc*, JS Mthimunye*, MV Pamensky, DB Rivkind, LM Tyalimpi*, P Mansour*# (*Non-Executive) (#American)

Company Secretary: E Viljoen