Financial Director’s report

“The statement of financial position remains robust and liquid, reflecting accumulated equity of R2.91 billion.”
		David Rivkind, Financial Director

FINANCIAL REVIEW

Growth in revenue by 4% to R18.7 billion supported by a gross profit margin increase from 5.91% to 6.45% and a once-off income receipt of R79.4 million contributed towards a growth in EBITDA by R158 million (26%).

The disclosure of information regarding the above once-off income receipt is restricted by a confidentiality agreement.

Headline earnings per share increased by 40% from 46.20 cents to 64.65 cents. On exclusion of the above once-off income receipt, growth in headline earnings per share would have equated to 19%.

The SA distribution segment remains the predominant contributor to group profitability. Prepaid airtime volumes continued to increase and commissions on the sale of prepaid electricity escalated by 39%. Compounded annuity revenue from starter pack bases added momentum to profitability.

On the international front, Oxigen Services India (OSI) has become a profitable entity as a result of the addition of financial service offerings to its bouquet of products.

Ukash has continued to make positive contributions to group profitability. While Blue Label Mexico’s (BLM) footprint expansion initiatives have accelerated at a vast rate through the Grupo Bimbo distribution network, the costs of gearing up infrastructure in support of the roll-out of point of sale devices resulted in BLM incurring additional losses in the past year.

Cash flows generated from operating activities amounted to R528 million. Following the repurchase of Microsoft’s 12% interest in the group for R392 million, as well as a dividend payment of R107 million and investing activities of R277 million, cash on hand at year end amounted to R1.98 billion.

The statement of financial position remains robust and liquid, reflecting accumulated equity of R2.91 billion.

Group income statement

The income statement has been divided into two parts, the first of which reflects the headline earnings of the continuing operations of the group and the second of which computes the core earnings of the group.

Revenue

Revenue is represented by the contributions of the South African operations, in that revenues generated by the international operations are equity accounted for only. The main contribution to revenue emanated from the sale of prepaid physical and virtual airtime and annuity revenue from starter packs, all generated through the South African distribution segment.

Gross profit

The increase in gross profit by R140 million was attributable to the higher margins achieved on revenue growth in all local trading segments and increases in commissions earned from the sale of prepaid electricity on behalf of the utilities.

Other income

Of the other income of R97 million, R79.4 million was attributable to a once-off income receipt. The disclosure of information regarding this receipt is restricted by a confidentiality agreement. Forex gains and sundry other income made up the balance of R18 million.

EBITDA

On exclusion of the once-off income of R79.4 million the EBITDA growth would have equated to R78.6 million (13%).

Depreciation and amortisation

Depreciation declined by R4 million and amortisation of intangible assets in terms of purchase price allocations declined by R14 million.

Finance costs

Finance costs totalled R181 million, of which R3 million related to interest paid on borrowed funds and R178 million to imputed IFRS interest adjustments on credit received from suppliers. On a comparative basis, interest paid on borrowed funds was R8 million and the imputed IFRS interest adjustment was R108 million.

Finance income

Finance income totalled R171 million, of which R60 million was interest received on cash resources and R111 million pertained to IFRS adjustments. On a comparative basis interest received on cash resources amounted to R50 million and the imputed IFRS interest adjustment R96 million.

Share of profits from associates

The share of profits of R6.8 million represented the group’s share of earnings of Ukash and OSI.

Share of losses from joint ventures

The share of losses of R27 million mainly represented the group’s 40% share of BLM’s losses.

Headline earnings

The growth in headline earnings of 26% to R463 million reflects the financial performance of continuing operations and does not include the discontinued Nigerian entity.

Discontinued operation

The loss incurred of R5.5 million related to expenditure incurred in the winding down of APSN.

Net headline earnings adjustments

The comparative year included a gain on dilution of R146 million pertaining to the valuation placed on BLM on the acquisition of 40% of the company for $20 million by Grupo Bimbo in February 2011.

Losses on disposal of group companies related to Sharedphone International (R3 million) and Blue Label Procurement (R3 million).

Further goodwill of R5 million relating to Content Connect Africa was impaired. Point of sale devices were impaired to the extent of R9 million.

Net profit attributable to equity holders of parent

The resultant attributable profit of R438 million equated to basic earnings per share of 61.87 cents at a growth of 8%.

Core earnings

After adding back the amortisation of intangible assets raised through business combinations net of tax and non-controlling interest, the core earnings of R456 million equated to core earnings per share of 64.37 cents at a growth of 7%.

SEGMENTAL REPORT SOUTH AFRICAN DISTRIBUTION

Prepaid airtime and annuity revenue generated from starter packs continued to be the major contributors to the increase in revenue of 3%. Commissions earned on the distribution of prepaid electricity amounted to R85 million (2011: R61 million) equating to revenue generated on behalf of utilities of R5.5 billion (2011: R3.4 billion). The group acts as an agent in the distribution of prepaid electricity. Gross profit inclusive of IFRS adjustments increased by R123 million (13%), supported by margin increases from 5.19% to 5.69%. Commissions on prepaid electricity accounted for 0.11% of this margin increase. On exclusion of IFRS adjustments, margins increased from 5.09% to 5.28%.

The growth in EBITDA of 13% was inclusive of the effects of IFRS adjustments. On exclusion of these adjustments in both the comparative and current years, a more representative growth of R33 million was achieved, equating to a 5% increase.

INTERNATIONAL DISTRIBUTION

* Represents net (loss)/profit after taxation and non-controlling interests.

The decrease in revenue in the international segment was due to the disposal of SharedPhone International (SPI). The decline in EBITDA was due to this disposal of SPI as well as an increase in legal fees expended on the ongoing litigation relating to APSN. Forex gains of R7.6 million, limited this decline to R7.2 million.

The group’s objective in the international segment is to partner with local management in the countries in which it operates. These partnerships result in its international operations being equity accounted for. The group’s current active international operations, namely, Ukash, OSI and BLM are disclosed accordingly under share of losses from associates and joint ventures.

DISCONTINUED OPERATIONS

Africa Prepaid Services Nigeria

In line with a commitment made in May 2011 for the disposal of the assets and liabilities of APSN, the financial performance thereof for both the years ended 31 May 2011 and 31 May 2012 are required to be reflected as a discontinued operation. The Multi-links contract was cancelled in November 2010. The share of losses of R5.5 million incurred in the current year was attributable to the expenditure relating to the winding down of the operation. The comparative year’s losses of R41 million comprised impairments of assets and goodwill amounting to R23 million, and the balance of R18 million being attributable to trading losses.

Blue Label Mexico

In February 2011, Grupo Bimbo acquired 40% of BLM by subscribing for new shares. Blue Label’s 70% shareholding was diluted to 40% as a result of this transaction, with BLM’s management retaining 20%. Accordingly, the group’s share of trading losses of R11,3 million for the period June 2010 to February 2011 was reflected as a discontinued operation. Thereafter, the group’s share of losses is reflected as “share of losses from associates and joint ventures”.

The group’s remaining 40% shareholding was required to be revalued based on the equity value payable by Grupo Bimbo for its 40% shareholding. This resulted in a net fair value gain of R146 million in the comparative year.

Share of losses from associates and joint ventures

Ukash

The comparative share of profits of R8.8 million included a deferred tax credit adjustment of R6.5 million, with trading profits net of amortisation of intangible assets amounting to R2.3 million. In the current year, prior to a deferred tax debit adjustment of R2.8 million, the share of profits earned on a pure trading basis, net of the amortisation of intangible assets, amounted to R5 million. This represented an increase of R2.7 million (117%). This was achieved through growth in revenue of 57% with a gross profit margin increase from 49% to 53%, all reported in their local currency.

Oxigen Services India

Blue Label’s share of profits equated to R4.6 million, compared to prior year share of losses of R5.2 million. This was mainly due to the addition of banking services to its prepaid airtime platform. These results were achieved through a 52% increase in revenue at gross profit margins of 2.95% (2011: 2.25%). EBITDA increased by 778%, all reported in their local currency.

Blue Label Mexico

The comparative share of losses of R6.5 million was for the period March 2011 to May 2011, during which period Blue Label’s equity holding in BLM was reduced from 70% to 40%. The current year’s share of losses of R25 million was for the full 12-month period. BLM’s total losses increased from R32 million to R60 million. The increase in losses was largely due to costs incurred in the process of gearing up for an extensive roll out of point of sale devices through the Grupo Bimbo distribution network.

MOBILE

This segment comprises Cellfind, Blue Label One and Content Connect Africa. The growth in EBITDA of R78 million was inclusive of the once-off income receipt of R79.4 million.

A net decline at depreciation level and the movement in taxation relating to the once-off income receipt accounted for the growth in its contribution to core net profit.

SOLUTIONS

The Solutions segment houses the Datacel group which operates call centres and provides data and lead generation services. Improvements in the call centre operations and the constant growth in data accumulation continued to manifest themselves in growth at all levels.

TECHNOLOGY

Technology losses are representative of the costs of development and support of the group’s information technology infrastructure. Income generation was limited to services to third parties.

CORPORATE

The increase in core net losses of the corporate segment was mainly attributable to the cost of executive bonuses. No executive bonuses were paid in the prior year.

STATEMENT OF FINANCIAL POSITION

The decline in current assets was mainly attributable to the application of funds for an increase in investment in OSI of R74 million, additional working capital provided to BLM of R26 million and the acquisition of starter pack bases for R121 million (included in intangible assets).

The acquisition of Microsoft’s 12% shareholding in the group for R392 million and the purchase of treasury shares for R16 million accounted for the decline in share capital, share premium and treasury shares.

Inventory declined by R473 million, returning to its optimal level of 11 days. The affording of additional credit to selected clients resulted in debtors collections increasing from 17 to 26 days. Creditor payment terms averaged 37 days.

STATEMENT OF CASH FLOWS

Cash flow of R528 million generated from operating activities was applied to investing activities to the extent of R277 million. This comprised the funding of an additional investment of R74 million in OSI, the provision of working capital of R26 million to BLM and the acquisition of starter pack bases for R121 million.

A further R520 million was applied to financing activities to facilitate the purchase of Microsoft’s 12% shareholding in the group for R392 million, treasury shares R16 million and a dividend payment of R107 million.

The resultant accumulated cash resources of the group declined by R251 million to R1.98 billion.

FORFEITABLE SHARE SCHEME

Forfeitable shares totalling 4 828 644 (2011: 6 829 416) were issued to qualifying employees. During the year 1 067 905 (2011: 1 316 366) shares were forfeited and 311 637 (2011: 909 823) shares vested during the current period.

DIVIDEND NO 3

The group’s current dividend policy is to declare an annual dividend. A gross dividend of 23 cents per ordinary share (19.55 cents per ordinary share net of dividend withholding tax) was declared on 20 August 2012.The dividend, inclusive of withholding tax, equates to a 2.95 cover on headline earnings. The total declaration of R155 137 080 for the year ended 31 May 2012 has not been recognised in the financial statements as it was made after this date.

FINANCIAL ASSISTANCE

Pursuant to the resolution passed by shareholders on 22 November 2011, the company has provided financial assistance to the following group companies:

	Security and subordination of loan account in favour of Investec Bank Limited for TPC’s facility of R850 million.
	Loans to Gold Label Investments Proprietary Limited amounting to $4,9 million and R1,5 million.
	Loan facility in support of APS amounting to R10 million.
	Loans to BLM totalling $7,25 million.
	Loan to BLI amounting to R10 000.
	Loan to Matrix Investments No 4. Proprietary Limited amounting to R13 623.

APPRECIATION

I would once again like to express my appreciation to the finance team for their professional input in the preparation of the financial results.

David Rivkind
Financial Director