Financial Director's report

David Rivkind


Financial review

The comparative year included a once-off income receipt of R79.4 million. On exclusion of this income, headline earnings per share increased by 17% to 64.17 cents. This growth was achieved through an increase in gross profit margins from 6.45% to 6.70% on revenue of R19 billion, overhead escalation contained at 3% and the effect of the reduction in issued shares resulting from the repurchase of Microsoft’s 12% shareholding in December 2011.

The growth in earnings, with the South African distribution segment being the main contributor thereto, was achieved in spite of compounding losses in Mexico and a decline in the performance in the call centre operation.

Commissions earned on the distribution of prepaid electricity and compounding annuity revenue generated from starter packs continued to grow exponentially.

The Group capitalised on its accumulated cash resources by utilising funds to take advantage of bulk inventory purchase opportunities at favourable discount rates. This resulted in an increase in inventory holding and a commensurate decline in cash resources.

Capital and reserves accumulated to R3.2 billion, further solidifying the foundation of Group resources. The net asset value at year-end equated to R4.81 per share (2012: R4.32 per share).

Group income statement

Headline earnings before the comparative once-off other income receipt represents the true trading performance of the Group. Therefore the income statement below has been prepared on this basis.

      31 May 2013
  31 May 2012
  % growth  
Revenue     18 984 210   18 715 390   268 820   1  
Gross profit     1 271 245   1 207 922   63 323   5  
GP margins     6.70%   6.45%   0.25%      
Other income     12 313   17 307   (4 994)   (29)  
Overheads     (573 116)   (548 813)   (24 303)   (4)  
EBITDA     710 442   676 416   34 026   5  
Depreciation and amortisation     (64 543)   (73 883)   9 340   13  
EBIT     645 899   602 533   43 366   7  
Finance costs     (167 096)   (181 081)   13 985   8  
Finance income     173 260   170 995   2 265   1  
Net profit before taxation     652 063   592 447   59 616   10  
Taxation     (197 137)   (186 456)   (10 681)   (6)  
Net profit after tax     454 926   405 991   48 935   12  
Non-controlling interest     16 906   8 807   8 099   92  
Share of profit from associates     6 726   6 844   (118)   (2)  
Share of losses from joint ventures     (54 052)   (26 679)   (27 373)   (103)  
Headline earnings from continuing operations     424 506   394 963   29 543   7  
Discontinued operation – APS Nigeria       (5 492)   5 492   100  
Headline earnings before comparative once-off other income     424 506   389 471   35 035   9  
Once-off other income, net of tax       68 284   (68 284)   (100)  
Headline earnings     424 506   457 755   (33 249)   (7)  
Headline earnings adjustments     335   (19 650)   19 985   102  
Net profit attributable to equity holders of parent     424 841   438 105   (13 264)   (3)  
Core intangible adjustment     12 675   17 693   (5 018)   (28)  
Core net profit     437 516   455 798   (18 282)   (4)  
Earnings per share (cents)     64.22   61.87       4  
Headline earnings per share (cents)     64.17   64.65       (1)  
Core earnings per share (cents)     66.13   64.37       3  
Headline earnings per share excluding comparative once-off other income (cents)     64.17   55.01       17  


The revenue increase by 1% to R19 billion does not include the turnover of Oxigen Services India, Blue Label Mexico and Ukash, as these international associate and joint venture companies are equity accounted for.

The vending of “pinless top ups” was introduced as an alternative mechanism for the distribution of prepaid airtime during the comparative year. Only the gross profit earned thereon is included in Group revenue as opposed to the gross revenue generated from transactions of this nature. These sales increased from R177 million to R997 million, equating to an effective growth in total Group revenue by 6% on imputing this gross revenue.

Gross profit

Gross profit increased by R63 million after accounting for IFRS adjustments. On exclusion of these accounting adjustments, gross profit increased by R123 million. The increase in gross profit was attributable to growth in commissions on prepaid electricity and the effects of compounding annuity revenue from starter packs and starter pack bases.

Similarly, the increase in gross profit margins from 6.45% to 6.70%, inclusive of IFRS adjustments, equated to a growth from 6.04% to 6.60% on exclusion of these adjustments. The adjustments take into account the interest element on both credit afforded to customers and credit obtained from suppliers. Exclusion thereof demonstrates the true performance from a pure trading perspective.


Overheads comprising employee costs and operating expenses totalled R573 million, representing an increase of R24 million (4%) on the comparative year.


The EBITDA increased by 5% to R710 million inclusive of an increase in legal fees by R16 million expended on the Mutli-Links litigation.

Depreciation and amortisation

Depreciation and amortisation declined by R9.3 million. This was primarily attributable to the reduction in the amortisation of intangible assets in terms of purchase price allocations by R6.9 million in line with the expiration of useful tenure. Depreciation of the remainder of the assets decreased by R2.4 million.


Finance costs

Finance costs totalled R167 million, of which R24 million related to interest paid on borrowed funds and R143 million to imputed IFRS interest adjustments on credit received from suppliers. On a comparative basis, interest paid on borrowed funds was R3 million and the imputed IFRS interest adjustment equated to R178 million. The increase in interest paid on borrowed funds was attributable to bulk inventory purchase transactions of which facilities were utilised and repaid during the year.

Finance income

Finance income totalled R173 million, of which R45 million related to interest received on cash resources and R128 million pertaining to IFRS adjustments. On a comparative basis interest received on cash resources amounted to R60 million and the imputed IFRS interest adjustment R111 million. The decline in interest received on cash resources was in line with the utilisation of funds on hand for bulk inventory purchase transactions and partly due to a reduction in interest rates by 0.5% from July 2012.

Non-controlling interest

The non-controlling interest was mainly attributable to the minority’s share of losses in Africa Prepaid Services Nigeria.

Share of profit from associates

The share of profits of R6.8 million represented the Group’s share of earnings of Ukash and Oxigen Services India.

Share of losses from joint ventures

The share of losses of R54 million were mainly representative of the Group’s 45% share of Blue Label Mexico’s losses.

Discontinued operation

The discontinued operation refers to Africa Prepaid Services Nigeria. Although trading operations have ceased, the losses of R5.5 million in the prior year emanated from expenditure incurred on the winding down of this operation.

Headline earnings before comparative once-off income

Headline earnings of R425 million equated to a 9% increase on exclusion of the once off income receipt in the comparative year.

Net headline earnings adjustments

In the comparative year, the net headline earnings adjustments pertained to the loss on disposal of Group companies and impairments, which resulted in a negative adjustment to headline earnings by R20 million.

Headline earnings per share

Headline earnings per share increased by 17% to 64.17 cents on exclusion of the once-off comparative receipt.


  % growth  
Revenue     18 712 080   18 439 688   272 392   1  
Gross profit     1 121 747   1 059 785   61 962   6  
EBITDA     796 439   737 488   58 951   8  
Core net profit     570 766   513 130   57 636   11  
Gross profit margin     5.99%   5.75%          
EBITDA margin     4.26%   4.00%          

In the comparative year, the technology segment was reported on separately. As the bulk of its function and services are interdependent in the distribution of airtime, electricity and starter packs, it is more prudent to house its expenditure in the South African distribution segment. Accordingly, the technology segment has been included in the South African distribution segment and the comparative segmental results in this regard have been restated in accordance with IFRS 8 “Operating Segments”.

Prepaid airtime, annuity revenue generated from starter packs and commissions earned on the distribution of prepaid electricity, accounted for a 1% increase in revenue. This excluded the growth of R820 million in sales of pin-less top ups, the gross profit thereon only being accounted for as revenue. Growth in revenue effectively equated to 6%.

Commissions earned on the distribution of prepaid electricity increased by R28 million (33%) to R113 million on revenue generated on behalf of utility suppliers of R7.2 billion (2012: R5.5 billion). The Group acts as an agent in the distribution of prepaid electricity.

Gross profit increased by R62 million (6%), supported by margin increases from 5.75% to 5.99%. On exclusion of IFRS adjustments and in turn reflecting the true trading performance of this segment, gross profit increased by R122 million on margin growth from 5.33% to 5.90%. Of this growth of 0.57%, commissions on prepaid electricity accounted for 0.14%.

The growth in EBITDA of 8% 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 R119 million (18%) was achieved.


  % growth  
Revenue       17 429   (17 429)   (100)  
Gross profit       2 574   (2 574)   (100)  
EBITDA     (31 000)   (15 901)   (15 099)   (95)  
Discontinued operations                    
– Africa Prepaid Services Nigeria       (5 493)   5 493   100  
Share of losses from associates and joint ventures     (49 036)   (19 182)   (29 854)   (156)  
– Ukash     7 291   2 228   5 063   227  
– Oxigen Services India     (565)   4 616   (5 181)   (112)  
– Blue Label Mexico     (51 124)   (24 873)   (26 251)   (106)  
– Other     (4 638)   (1 153)   (3 485)   (302)  
Core net loss from continuing operations     (73 294)   (36 563)   (36 731)   (100)  
– Equity holders of the parent     (50 685)   (20 943)   (29 742)   (142)  
– Non-controlling interests     (22 609)   (15 620)   6 989   45  
Core net loss from discontinued operations       (15 455)   15 455   100  
– Equity holders of the parent       (5 493)   5 493   100  
– Non-controlling interests       (9 962)   9 962   100  

Historically revenue and gross profit was generated by SharedPhone International, which was disposed of in January 2012.

Negative EBITDA of R31 million was predominantly related to the costs incurred on the ongoing litigation pertaining to Africa Prepaid Services Nigeria (APSN).

The losses in the comparative year from discontinued operations pertained to the winding down of APSN.

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, Oxigen Services India and Blue Label Mexico are disclosed accordingly under share of losses from associates and joint ventures.

Share of these net losses comprised the following:


The Group’s share of profits in Ukash, after the amortisation of intangible assets, increased by 227% to R7.3 million. These results were achieved through organic growth in revenue by 32%, an increase in gross profit by 39% and EBITDA growth of 66%, all reported in its local currency.

Oxigen Services India

Oxigen Services India’s revenue increased by R470 million (18%) to R3 billion and gross profit increased by R10 million, both reported on in South African rand.

Operating expenses increased by R7.7 million (16%), resulting in a decline in EBITDA by R2.4 million to R11.7 million. The increase in operating expenses was largely due to the necessity to recruit 200 field sales executives, who were hired and trained during the current year in order to enable the company to reach the expansive rural and urban areas in the Indian market place. Further expenditure was incurred on the costs of the migration of PSTN to GPRS, affording wireless portable devices the capability of catering for more products at lower operating costs per terminal, as well as on the migration of the entire OSI platform to the new “Oxisecure” platform. The implementation of the Mobicash wallet with the State Bank of India to facilitate money transfers and the launching of an interbank mobile payment system together with the National Payment Corporation of India to enable money transfers by the unbanked, utilising the “Oxicash” Wallet, also necessitated additional operating expenses.

After accounting for depreciation of R10 million, NPAT declined from R4.9 million to R1.3 million. The Group’s share of profits of R0.7 million equated to a decline on the prior year by R2.2 million. Amortisation of intangibles amounting to R1.3 million resulted in a net share of losses of R0.6 million. In the comparative year, the Group’s share of profit, after the amortisation of intangibles, amounted to R4.6 million inclusive of a consolidation adjustment of R2.9 million. This adjustment had no impact on the trading performance of Oxigen Services India during that year.

Blue Label Mexico

In the comparative year, Blue Label Mexico (BLM) incurred losses of R60 million after the amortisation of intangible assets, of which the Group’s 40% share equated to R24.9 million. In spite of revenue growth of 103% in the current year, losses in BLM escalated to R113 million, of which the Group’s share equated to R51.1 million.

The increase in losses was attributable to margin compression and a significant increase in overheads. Furthermore, the Group increased its shareholding from 40% to 45% during the course of the financial year and in turn the Group assumed an additional 5% share of these losses.

The decline in gross profit margins was attributable to a reduction in discounts afforded by Telcel, Mexico’s predominant network operator, which controls approximately 70% of the Mexican market. Telcel, however, would reinstate the previous margins afforded to BLM, plus additional discounts, on the proviso that BLM would contractually agree to become an exclusive distributor on their behalf. Accordingly, a contract was concluded between BLM and Telcel on 1 April 2013 giving effect to this new arrangement.

The increase in overheads was congruent with BLM’s strategy to gear-up as a national distributor. This process also required the procurement of additional point-of-sale devices in anticipation of a national roll out. This in turn had a negative impact on depreciation by 58% in local currency, which equated to 78% on conversion to rand.

Although the above initiatives proved costly, during the current year, BLM is now positioned to roll out nationally, offering more favourable discounts, with a solid foundation in place to support national distribution.


  % growth  
Revenue     151 420   87 244   64 176   74  
Gross profit     95 134   66 059   29 075   44  
EBITDA     37 055   97 359   (60 304)   (62)  
Core net profit/(loss)     24 787   73 962   (49 175)   (66)  

This segment comprises Cellfind, Blue Label One, Content Connect Africa, Blue Label Engage and Panacea Mobile. Content Connect Africa was disposed of in September 2012 and Panacea Mobile and Blue Label Engage were acquired during the current year.

The growth in revenue by 74% to R151 million was mainly attributable to the introduction of bulk SMS facilitation by Cellfind and Panacea Mobile. This resulted in the commensurate growth in gross profit by 44% to R95 million.

EBITDA for the comparative year included the once-off income receipt of R79.4 million. On exclusion of this receipt, EBITDA increased by R19 million (106%) to R37 million. On the same basis core net profit increased by R19 million after taxation thereon.


  % growth  
Revenue     120 710   171 029   (50 319)   (29)  
Gross profit     54 364   79 505   (25 141)   (32)  
EBITDA     24 703   38 927   (14 224)   (37)  
Core net profit     13 190   21 324   (8 134)   (38)  

The Solutions segment houses Blue Label Data Solutions (BLDS), Velociti and CNS Call Centre.

BLDS, which markets data and analytical products and services increased its revenue by R10 million (19%) and gross profit by R4 million (12%), resulting in a contribution of R19 million towards Group core net profit. This positive contribution was negated by core net losses of R8 million incurred by Velociti.

Velociti’s losses were incurred as a result of a significant decline in outbound campaigns. It is the intention to increase the volume of inbound activity in order to compensate for outbound declines.


  % growth  
EBITDA     (113 575)   (107 391)   (6 184)   (6)  
Core net loss     (120 542)   (126 183)   5 641   4  

The increase in negative EBITDA was attributable to a loan impairment of R6.3 million. The decline in core net loss was mainly due to the change in legislation applicable to secondary tax on companies (STC). No STC was payable on the dividends declared in the current year, whereas STC on dividends declared in the comparative year amounted to R11 million.

Statement of financial position

Total assets increased by R785 million, of which R347 million was attributable to growth in non-current assets and R438 million in current assets.

The movement of intangible assets and goodwill by R200 million related to acquisitions to the extent of R33 million, the cost of annuity driven starter pack and post paid bases totalling R264 million, less disposals and amortisation of R18 million and R79 million respectively.

The increase in investment in associates and joint ventures totalling R167 million was due to further investment into Blue Label Mexico of R110 million, the impact of foreign currency translation reserves of R80 million, set off by net losses of R47 million incurred by these companies.

The movement in current assets by R438 million was mainly due to an increase in inventories by R1.3 billion which was attributable to bulk purchase transactions, causing a decline in cash resources by R1 billion. Although the stock turn consequently increased from an historical average of 11 days to 38 days, the discount afforded thereon justified the excess in inventory holding.

Accounts receivable increased by R152 million, maintaining the debtors collection period at 27 days.

The net profit of R425 million less a dividend of R155 million and a movement of R88 million in foreign exchange translation reserves were the main contributors to the growth in capital and reserves.

Trade and other payables increased by R462 million with average creditors days increasing from 37 days to 46 days.

Statement of cash flows

Cash flows of R432 million were generated from operating activities before accounting for the movement in inventory and accounts payable directly attributable to bulk purchasing transactions. There was a negative generation of cash flow of R440 million after accounting for the bulk purchase transactions.

A further R406 million was applied to investing activities, of which R110 million related to an additional investment in BLM, R264 million to the acquisition of the annuity bases, R26 million to capital expenditure and R3 million to acquisitions.

After the payment of dividends of R159 million to shareholders and non-controlling interest and the acquisition of treasury shares for R17 million, the cash on hand at year-end amounted to R941 million.

Forfeitable share scheme

Forfeitable shares totalling 3 496 103 (2012: 4 828 644) were issued to qualifying employees. During the year 1 285 962 (2012: 1 067 904) shares were forfeited and
2 700 513 (2012: 311 637) shares vested.

Dividend No 4

The Group’s current dividend policy is to declare an annual dividend. On 18 August 2013, the Board approved and declared a gross ordinary dividend (number 4) of 25 cents per ordinary share (21.25 cents per ordinary share net of dividend withholding tax) for the year ended 31 May 2013. This dividend of R168 627 261, inclusive of withholding tax, equates to a 2.52 cover on headline earnings. The dividend for the year ended 31 May 2013 has not been recognised in the financial statements as it was declared after this date.

Litigation update

Further to the litigation update as disclosed in note 36 to the Group annual financial statements, subsequent events post this disclosure with regard to the Multi-Links litigation took place.

On 6 September 2013 Telkom and MLT obtained an order from the High Court which has the effect of preventing the arbitrators from determining whether the agreement is valid and enforceable. ASPN has decided not to appeal against the order and has agreed to submit itself to the jurisdiction of the High Court for the purposes of defending the allegations made against it, Blue Label and the other defendants and for the purpose of proceeding with its claim against MLT for payment of the sum of US$457 million arising out of MLT’s wrongful repudiation of the agreement.

Blue Label and the other defendants in the action vehemently deny the allegation made against them by Telkom and MLT and are of the view that the agreement will be found to be valid and enforceable.


I once again wish to express my appreciation to the Group’s finance teams for their professional input in the preparation of the financial results.

David Rivkind
Financial Director


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