Financial Director’s report
 |
Dean Suntup
|
FINANCIAL REVIEW
Headline earnings per share increased by 21% to 82.26 cents, net of the Group’s share of losses of R85 million in Blue Label Mexico which equated to 12.82 cents per share. The remaining businesses within the Group contributed 95.08 cents to headline earnings per share.
The growth in earnings was primarily attributable to increases in revenue of 14%, gross profit of 22% and EBITDA of 37%. Gross profit margins increased from 6.96% to 7.46%. Organic growth was achieved through the expansion of the Group’s bouquet of offerings to its escalating multitude of distribution channels.
Core earnings, which increased by 30% to R597 million, represent the earnings of the Group after adjusting for the amortisation of intangible assets net of taxation and non-controlling interests as a consequence of purchase price allocations in terms of IFRS 3(R): Business Combinations. Core earnings reflect the underlying financial performance of the Group.
The statement of financial position remains robust and liquid, with accumulated equity increasing to R3.9 billion, net of accumulated dividends paid to date totalling R704 million. Net asset value equated to R5.79 per share.
GROUP INCOME STATEMENT
| 31 May 2015 R’000 |
31 May 2014 R’000 |
Growth R’000 |
% growth |
||||||
|---|---|---|---|---|---|---|---|---|---|
| Revenue | 22 044 222 | 19 401 666 | 2 642 556 | 14 | |||||
| Gross profit | 1 644 340 | 1 349 534 | 294 806 | 22 | |||||
| GP margins (%) | 7.46 | 6.96 | 0.50 | ||||||
| Other income | 99 972 | 26 692 | 73 280 | 275 | |||||
| Overheads | (664 147) | (588 233) | (75 914) | (13) | |||||
| EBITDA | 1 080 165 | 787 993 | 292 172 | 37 | |||||
| Depreciation and amortisation | (94 019) | (65 137) | (28 882) | (44) | |||||
| EBIT | 986 146 | 722 856 | 263 290 | 36 | |||||
| Finance costs | (233 165) | (166 876) | (66 289) | (40) | |||||
| Finance income | 173 047 | 156 250 | 16 797 | 11 | |||||
| Share of profit from associates | 12 497 | 8 448 | 4 049 | 48 | |||||
| Share of losses from joint ventures | (91 835) | (65 321) | (26 514) | (41) | |||||
| Net profit before taxation | 846 690 | 655 357 | 191 333 | 29 | |||||
| Taxation | (265 497) | (206 442) | (59 055) | (29) | |||||
| Net profit for the year | 581 193 | 448 915 | 132 278 | 29 | |||||
| Non-controlling interest | (3 576) | 1 315 | (4 891) | (372) | |||||
| Net profit attributable to equity holders of parent | 577 617 | 450 230 | 127 387 | 28 | |||||
| Core intangible adjustment | 18 961 | 10 372 | 8 589 | 83 | |||||
Core net profit |
596 578 | 460 602 | 135 976 | 30 | |||||
| Earnings per share (cents) | 86.86 | 67.88 | 18.98 | 28 | |||||
| Headlines earnings per share (cents) | 82.26 | 67.98 | 14.28 | 21 | |||||
| Core earnings per share (cents) | 89.71 | 69.44 | 20.27 | 29 |
REVENUE
Revenue increased by R2.6 billion to R22 billion, a growth of 14%. This growth was predominantly achieved through access to additional channels of distribution. This revenue does not include the turnover of international operations, as these associate and joint venture companies are equity accounted for only.
The vending of “PINless top-ups” continues to gain momentum. Only the gross profit earned thereon is accounted for in Group revenue as opposed to the gross sales generated from transactions of this nature. The gross sales increased by R966 million from R1.7 billion to R2.7 billion, equating to an effective increase of 17% as opposed to the 14% revenue growth reported.
GROSS PROFIT
Gross profit increased by R295 million (22%), congruent with the increase in revenue and margin increases.
The increase in gross profit margins from 6.96% to 7.46% was primarily achieved through the application of cash resources to bulk inventory purchases at favourable discounts, early settlement discounts, growth in the gross profit earned on “PINless top-ups”, compounding annuity income and an increase in commissions earned on the distribution of prepaid electricity.
OVERHEADS
Overheads comprising employee costs and operating expenses amounted to R664 million, equating to an increase of R76 million (13%). This increase was entirely attributable to employee costs, mainly due to a hybrid of the forfeiture of executive bonuses in the prior year, payroll attributable to the acquisitions of RMCS and Viamedia and annual increases.
EBITDA
EBITDA increased by R292 million to R1.08 billion, equating to a growth of 37%. Included in this growth was an amount of R37 million relating to the disposal of the Group’s interest in Ukash.
DEPRECIATION, AMORTISATION AND IMPAIRMENT CHARGES
Depreciation, amortisation and impairment charges increased by R29 million of which R16 million emanated from the acquisitions of RMCS and Viamedia. Of this amount, R13 million pertained to the purchase price allocation amortisation of intangibles.
FINANCE COSTS
Finance costs totalled R233 million, of which R68 million related to interest paid on borrowed funds and R165 million to imputed IFRS interest adjustments on credit received from suppliers. On a comparative basis, interest paid on borrowed funds amounted to R23 million and the imputed IFRS interest adjustment equated to R144 million. Interest paid on borrowed funds was attributable to the cost of financing bulk inventory purchase transactions and early settlement payments attracting discounts, for which facilities were utilised and repaid during the current year.
FINANCE INCOME
Finance income totalled R173 million, of which R31 million was attributable to interest received on cash resources and R142 million to imputed IFRS interest adjustments. On a comparative basis, interest received on cash resources amounted to R39 million and the imputed IFRS interest adjustment to R117 million. The decline in interest received on cash resources was attributable to the utilisation of funds on hand for the payment of dividends, acquisitions, bulk inventory purchase transactions and early settlement discounts.
SHARE OF PROFITS FROM ASSOCIATES
The predominant contributors to a net share of profits of R12.5 million were Ukash and Oxigen Services India.
SHARE OF LOSSES FROM JOINT VENTURE
The Group’s share of losses was mainly attributable to the losses incurred in Blue Label Mexico.
NON-CONTROLLING INTEREST
There was a turnaround from a non-controlling share of losses of R1.3 million in the prior year to a non- controlling share of profits of R3.6 million in the current year.
HEADLINE EARNINGS
After accounting for headline earnings adjustments of R31 million, which mainly pertained to the disposal of the Group’s interest in Ukash, headline earnings increased by 21% to R547 million.
This equated to headline earnings per share of 82.26 cents, net of the Group’s share of losses of R85 million in Blue Label Mexico which equated to 12.82 cents per share. The remaining businesses within the Group contributed 95.08 cents to headline earnings per share.
SEGMENTAL REPORT
| 2015 R’000 |
2014 R’000 |
Growth R’000 |
% growth |
||||||
|---|---|---|---|---|---|---|---|---|---|
| South African Distribution | |||||||||
| Revenue | 21 657 891 | 19 103 652 | 2 554 239 | 13 | |||||
| Gross profit | 1 444 730 | 1 180 376 | 264 354 | 22 | |||||
| EBITDA | 1 038 252 | 821 310 | 216 942 | 26 | |||||
| Core net profit | 684 756 | 558 996 | 125 760 | 22 | |||||
| Gross profit margin (%) | 6.67 | 6.18 | |||||||
| EBITDA margin (%) | 4.79 | 4.30 |
The increase in revenue by 13% was predominantly achieved through access to additional channels of distribution. Revenue generated on “PINless top-ups” increased by R966 million from R1.7 billion to R2.7 billion. As only the commission earned thereon is accounted for, the effective growth in Group revenue equated to 17%.
Net commissions earned on the distribution of prepaid electricity increased by R31 million to R165 million (23%) on revenue of R10.4 billion generated on behalf of an escalating base of utilities.
The gross profit increase of 22% was achieved after inclusion of imputed IFRS interest adjustments. On exclusion of these adjustments for both the current and the comparative year, gross profit increased by R279 million, equating to an effective growth of 24%. Similarly the impact on gross profit margins on exclusion of imputed IFRS interest adjustments equated to a growth from 5.97% to 6.54%.
The growth in EBITDA of 26% was inclusive of the effects of imputed IFRS interest adjustments. On exclusion of these adjustments, growth of R231 million was achieved, equating to a 29% growth, with EBITDA margins increasing from 4.10% to 4.67%.
Core net profit increased by R126 million to R685 million (22%).
| 2015 R’000 |
2014 R’000 |
Growth R’000 |
% growth |
||||||
|---|---|---|---|---|---|---|---|---|---|
| International Distribution | |||||||||
| EBITDA | 35 379 | (13 961) | 49 340 | 353 | |||||
| Share of (losses)/profits from associates and joint ventures | (81 269) | (56 249) | (25 020) | (44) | |||||
| – Ukash | 12 004 | 14 089 | (2 085) | (15) | |||||
| – Oxigen Services India | 2 619 | (3 259) | 5 878 | 180 | |||||
| – Blue Label Mexico | (88 508) | (60 844) | (27 664) | (45) | |||||
| – Other | (7 384) | (6 235) | (1 149) | (18) | |||||
| Core net loss | (54 646) | (59 987) | 5 341 | 9 | |||||
| – Equity holders of the parent | (46 958) | (47 862) | 904 | 2 | |||||
| – Non-controlling interests | (7 688) | (12 125) | 4 437 | 37 |
The Group disposed of its interest in Ukash at the end of March 2015. This profit on disposal increased EBITDA by R37 million. The balance of the growth was attributable to a decline in expenditure incurred by Africa Prepaid Services Nigeria (APSN). Legal fees declined from R20.9 million to R9.4 million. These costs will not perpetuate as litigation matters have been settled.
The share of net losses from associates and joint ventures comprised the following:
Ukash
The Group’s share of profits in Ukash, after the amortisation of intangible assets, declined by 15% from R14 million to R12 million. This decline was attributable to the Group having sold its interest in Ukash after 10 months of trading in the current financial year.
Oxigen Services India
There was a turnaround of the Group’s share of losses of R3.3 million in the comparative year to a share of profits equating to R2.6 million in the current year, after the amortisation of intangible assets. This positive turnaround was attributable to increases in revenue by 15% and gross profit by 21%, reported in their local currency.
The benefits of Oxigen Services India’s defined strategy of becoming India’s first non-banked mobile wallet that empowers the unbanked masses to instantly transfer and receive cash across the entire country continues to gain momentum. This has been primarily due to its focus on money transfer services without detracting from its traditional airtime sales.
Daily money transfer deposits have increased from USD2.3 million per day as at 31 May 2014 to USD3.3 million per day as at 31 May 2015, this increased exponentially through its connectivity with the National Payment Corporation of India.
Blue Label Mexico
In the comparative year, Blue Label Mexico incurred losses of R131 million. The Group’s share thereof equated to R61 million after the amortisation of intangible assets. In the current year, Blue Label Mexico’s losses increased to an equivalent of R186 million, of which the Group’s share equated to R89 million.
In spite of revenue increasing by 23%, the main reasons for further losses were attributable to continued margin compression and an increase in overhead costs. The increase in overheads was necessitated by the need for enhanced post-sale customer support as well as systems fortification.
| 2015 R’000 |
2014 R’000 |
Growth R’000 |
% growth |
||||||
|---|---|---|---|---|---|---|---|---|---|
| Mobile | |||||||||
| Revenue | 240 168 | 152 618 | 87 550 | 57 | |||||
| Gross profit | 136 773 | 109 756 | 27 017 | 25 | |||||
| EBITDA | 51 359 | 34 273 | 17 086 | 50 | |||||
| Core net profit | 28 559 | 24 904 | 3 655 | 15 |
This segment comprises Cellfind, Panacea Mobile, Blue Label Engage, Blue Label One, Simigenix and the recently acquired Viamedia.
Viamedia, which was acquired with effect from 1 September 2014, together with Blue Label One made positive contributions to growth in EBITDA and core net profit.
Their contributions to EBITDA growth were R46 million and R8 million respectively. Their combined contributions were offset by negative growth in EBITDA of R37 million in the balance of the companies comprising this segment.
Margin compression on bulk SMS distribution by Cellfind and Panacea was the main factor causing their negative contributions to growth.
At core net profit level, positive contributions to growth by Viamedia of R26 million and Blue Label One by R5.5 million were negated by net negative growth contributions of R27.8 million by the balance of the companies comprising this segment.
Blue Label Engage was disposed of in December 2014 and Blue Label One has been restructured into a more efficient operation through the closure of loss-making divisions.
| 2015 R’000 |
2014 R’000 |
Growth R’000 |
% growth |
||||||
|---|---|---|---|---|---|---|---|---|---|
| Solutions | |||||||||
| Revenue | 146 163 | 145 396 | 767 | 1 | |||||
| Gross profit | 62 837 | 59 402 | 3 435 | 6 | |||||
| EBITDA | 40 831 | 29 257 | 11 574 | 40 | |||||
| Core net profit | 23 975 | 12 547 | 11 428 | 91 |
The Solutions segment houses Blue Label Data Solutions (BLDS), Forensic Intelligence Data Solutions (FIDS), Datacision, Blue Label Call Centre, Datacel Direct, Velociti and CNS Call Centres.
BLDS contributed R32.8 million to EBITDA and the call centre operations R8 million. The latter contributed R3.4 million in the prior year.
Contributions of R19.2 million and R5.5 million to core net profit were generated by BLDS and the call centre operations respectively. In the comparative year, BLDS made a positive contribution of R13 million while the call centre operations contributed a nominal R0.3 million to core net profit.
The remaining companies contributed a negative R0.7 million to core net profit.
| 2015 R’000 |
2014 R’000 |
Growth R’000 |
% growth |
||||||
|---|---|---|---|---|---|---|---|---|---|
| Corporate | |||||||||
| EBITDA | (85 656) | (82 886) | (2 770) | (3) | |||||
| Core net loss | (93 754) | (87 983) | (5 771) | (7) |
The increases in negative EBITDA and core net loss were primarily attributable to bonuses granted to senior executives who did not receive bonuses in the prior year, partially offset by a once-off income receipt.
STATEMENT OF FINANCIAL POSITION
Total assets increased by R524 million to R7 billion, of which growth in non-current assets accounted for R242 million and current assets for R282 million.
The net increase in non-current assets was mainly attributable to a net growth in intangible assets and goodwill totalling R249 million, to capital expenditure net of depreciation of R9 million and to loans receivable of R11 million. These increases were offset by a net decline in investment in associates and joint ventures of
R50 million.
The net increase in intangible assets and goodwill mainly pertained to the acquisition of Viamedia, in which goodwill equated to R186 million and intangibles R63 million. A further R125 million was incurred for the purchase of software, development costs, starter pack bases and distribution channels. Amortisation of intangibles amounted to R122 million.
The net decline in investment in associates and joint ventures was predominantly due to the disposal of the Group’s interest in Ukash amounting to R94 million, a share of net losses of R79 million and a negative impact of R10 million in foreign currency translation reserves. These declines were offset by an additional R50 million capital contribution to Blue Label Mexico and a contingent purchase consideration of R30 million for the acquisition of an effective 37.5% shareholding in the Supa Pesa group. Movements in loans equated to a further R53 million, comprising loans granted of R13 million, interest capitalised of R14 million and unrealised foreign exchange gains of R26 million.
The net increase in current assets mainly comprised an increase in accounts receivable of R530 million and an increase in inventories of R127 million in line with bulk inventory purchases. Cash resources declined by R396 million congruent with the application of cash to fund the increase in assets and payment of dividends.
In spite of an increase in inventory of R127 million, the stock turn improved from 35 days reported at the interim reporting date to 26 days at year-end. The discount afforded on bulk inventory purchases justified the quantum of inventory held.
The debtor’s collection period increased from 44 days reported at the interim reporting date to 46 days at year-end.
The net profit attributable to equity holders of R578 million, less a dividend of R182 million, resulted in retained earnings accumulating to R2.6 billion.
Trade and other payables increased by R105 million with credit terms averaging 53 days.
STATEMENT OF CASH FLOWS
Cash flows from operating activities amounted to R132 million net of the funding of additional working capital requirements of R657 million.
Cash flows applied to investing activities amounted to R329 million. Of this amount R50 million related to the additional investment in Blue Label Mexico,
R13 million to loans to associates, R157 million to the acquisition of Viamedia, R125 million to the purchase of intangible loans granted, R53 million to capital expenditure and R20 million to the settlement of contingent purchase considerations for RMCS and Panacea Mobile. The above funds applied to investing activities were partially offset by proceeds received of R95 million on the disposal of Ukash.
After applying R19 million to the acquisition of treasury shares and a dividend payment of R187 million to shareholders and non-controlling interests, the balance of cash on hand amounted to R788 million.
Although cash on hand declined by R402 million, inventory of R1.4 billion is a highly liquid commodity.
FORFEITABLE SHARE SCHEME
Forfeitable shares totalling 2 937 836 (2014: 2 782 541) were issued to qualifying employees. During the period 419 998 (2014: 1 074 880) shares were forfeited and 3 819 409 (2014: 3 629 922) shares vested.
DIVIDEND NUMBER 6
The Group’s current dividend policy is to declare an annual dividend. On 18 August 2015, the board approved a gross ordinary dividend (number 6) of 31 cents per ordinary share (26.35 cents per ordinary share net of dividend withholding tax) for the year ended 31 May 2015. This dividend of R209 097 803, inclusive of withholding tax, equates to a 2.62 cover on headline earnings. The dividend for the year ended 31 May 2015 has not been recognised in the financial statements as it was declared after this date.
LITIGATION UPDATE
The arbitration proceedings between APSN and the former subsidiary of Telkom SA SOC Limited (Telkom), Multi-Links Telecommunications Limited (Multi-Links) have been settled.
The litigation action in the High Court of South Africa between Telkom and Multi-Links, on the one hand, and Blue Label, Africa Prepaid Services, APSN and certain individuals, on the other, has been settled.
In terms of the settlement agreement all claims and counterclaims have been withdrawn and all of the parties have agreed that they will have no further claims against one another arising out of the disputes forming the subject of both the arbitration proceedings and the action, including any claims for costs.
APPRECIATION
I wish to express my gratitude to the Group’s finance team for their professional input and dedication.
Dean Suntup
Financial Director
23 October 2015