Chairman's report

"Blue Label continues developing a rich ecosystem, enhanced by recent landmark acquisitions which expand both its supply chain and distribution footprint."

 Larry Nestadt

 

Dear stakeholders

The Group continues delivering on its strategy of distributing secure fintech products and services to the main consumer market in emerging communities in South Africa, India and Mexico. This year marked a significant enhancement in Blue Label's business model as it embraced a number of vertical integration opportunities in its ecosystem.

Blue Label's participation in the recapitalisation of Cell C in which it acquired a 45% shareholding, as well as its two-stage acquisition of the entire share capital of 3G Mobile, will expand both the Group's supply chain and distribution footprint. In July 2017, 200 million unissued shares were placed under the control of directors for the purposes of funding an element of these transactions.

Acquisitions are considered according to a number of criteria, including synergies, earnings accretion, additions to the product line, enhancement of the distribution network or geography and which benefit the Group strategically.

Organic growth primarily contributed to core headline earnings in the South African Distribution Segment increasing by 19% to R893 million. The Group's share of losses in Blue Label Mexico narrowed 42% to R37 million, as distribution of additional products and services continued to gain traction. In recognising fundamental changes to India's fintech sector during the year, the Board has reviewed its strategy regarding our stake in Oxigen Services India. As a result thereof, the investment therein is accounted for as a venture capital investment.

Group headline earnings per share increased by 18% to 117.98 cents, predominantly achieved through increases in revenue to R26.3 billion, gross profit by 19% to R2.2 billion and EBITDA by 7% to R1.3 billion. Earnings per share increased by 14% to 117.92 cents.

Capital and reserves accumulated to R5 billion, net of accumulated dividends paid totalling R1.16 billion. The net asset value per share increased by 11% to R7.32.

In August 2017, the Board declared a dividend of 40 cents per share, equating to a 2.25 times cover on headline earnings.

The Group's flagship CSI project, Boys & Girls Club of South Africa at Protea Glen, enhanced its after-school and extramural offerings. Over 500 pupils attend the club on a daily basis and future plans include the roll out of a further eight clubs in disadvantaged areas over the next three years. The Social, Ethics and Transformation Committee supported CSI expenditure of R8.5 million during the year for projects focusing on youth development through education, sport and entrepreneurship.

Looking ahead:

  • As Blue Label is one of the primary distribution channels for Cell C's products and services, its acquisition therein provides a compelling value proposition to realise synergies in product distribution. Blue Label will benefit from improving operational and financial performance from the combined platform. In turn, Cell C's new sustainable capital structure enables it to deliver on its strategic objectives to improve financial returns from increased network utilisation, the upgrading of network infrastructure and the expansion of LTE coverage.
  • 3G Mobile is one of Africa's largest suppliers, distributors and financiers of tier 1 and tier 2 mobile handsets to major retailers and cellular network providers. Its wholly owned subsidiary, Comm Equipment Company, provides financing to Cell C for the mobile handset component of postpaid and hybrid contracts, with the capability of extending such services to other networks and channels. 3G Mobile provides the ideal platform for combining Blue Label's low cost and certified pre-owned mobile handset divisions into a consolidated group, well positioned for distribution to the burgeoning low cost smartphone market.
  • Blue Label Mexico is expected to provide a positive contribution to Group profitability, given its consistent growth at sustainable improved gross profit margins and compounding annuity revenue generated from starter pack sales.
  • "Big Data" consolidates and aggregates transactions across the divisions within the Group, which creates the opportunity to up-sell and cross-sell the various bouquets of products and services that Blue Label has to offer through its distribution channels, by intelligently understanding consumer behaviour.
  • Value-added services, including the provision of short-term finance for emergency airtime recharge required by consumers, are current initiatives with high growth possibilities.

The Blue Label entrepreneurial culture came to the fore this year in completing two significant acquisitions with a combined price tag of R7.4 billion, as well as a sound financial performance in a difficult trading environment.

I acknowledge and thank my fellow Directors, the management team led by Brett Levy and Mark Levy, the senior management team, all employees and other stakeholders for their considerable efforts over the past year, contributing to the success of the Group.

In achieving another milestone, Blue Label marked its 10th anniversary of listing on the JSE on 14 November 2017.

Larry Nestadt

Chairman

23 November 2017