Financial Director's report
"Group earnings continued to increase organically primarily attributable to South Africa Distribution increasing its contribution to Group core headline earnings by 19%."
A strong underlying performance |
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Financial review
Although Blue Label Mexico (BLM) incurred losses, its losses continued to decline, with the Group's share thereof reducing by 42%, from R63 million to R37 million.
The continuous shift in consumer buying patterns from traditional purchasing of airtime to that of "PINless top-ups" resulted in limited growth in Group revenue. Only the gross profit earned thereon is accounted for in Group revenue as opposed to the gross amount generated from transactions of this nature. On imputing such amounts, the effective growth would have equated to 7%.
Gross profit increased by R343 million (19%) to R2.2 billion congruent with an increase in margins from 6.98% to 8.26%.
After accounting for a negative turnaround in foreign exchange movements of R125.7 million, a net negative movement of R37.9 million relating to a release of a contingent portion of deferred purchase considerations and an increase in overheads of R90 million, the resultant EBITDA increased by R91 million (7%) to R1.33 billion.
The investments in Oxigen Services India, Oxigen Online Services India, collectively (Oxigen Services India), and 2DFine Holdings Mauritius (2DFine) were historically accounted for as investments in associates and joint venture, applying the equity method up until 30 November 2016.
From that date these entities are accounted for as venture capital investments, which, in accordance with IAS 28 - Investments in Associates and Joint Ventures, have been accounted for at fair value. The differential between the carrying value of the investments and their fair value is reflected as a gain on associates and joint venture measured at fair value.
A fair value gain of R160 million and the Group's share of losses for the year under review of R125 million, equated to a net positive contribution of R35 million to Group earnings. On exclusion of this positive contribution, headline earnings would have amounted to R752 million and core headline earnings to R766 million, equating to 112.74 cents and 114.85 cents per share respectively.
Capital and reserves accumulated to R5 billion, net of accumulated dividends paid to date totalling R1.16 billion, further strengthening the Group's balance sheet. The net asset value increased by 11% to R7.32 per share.
Group income statement
| May 2017 R'000 |
May 2016 R'000 |
Growth R'000 |
Growth % |
||||||
|---|---|---|---|---|---|---|---|---|---|
| Revenue | 26 311 875 | 26 204 722 | 107 153 | 0% | |||||
| Gross profit | 2 172 582 | 1 829 694 | 342 888 | 19% | |||||
| GP margins (%) | 8.26% | 6.98% | 1.28% | ||||||
| Other income | 16 814 | 126 294 | (109 480) | (87%) | |||||
| Overheads | (858 073) | (715 429) | (142 644) | (20%) | |||||
| EBITDA | 1 331 323 | 1 240 559 | 90 764 | 7% | |||||
| Depreciation, amortisation and impairment | (112 851) | (98 183) | (14 668) | (15%) | |||||
| EBIT | 1 218 472 | 1 142 376 | 76 096 | 7% | |||||
| Finance costs | (303 027) | (214 110) | (88 917) | (42%) | |||||
| Finance income | 242 194 | 193 899 | 48 295 | 25% | |||||
| Gain on associates and joint venture measured at fair value | 160 200 | – | 160 200 | ||||||
| Share of losses from associates and joint ventures | (164 941) | (71 770) | (93 171) | (130%) | |||||
| Net profit before taxation | 1 152 898 | 1 050 395 | 102 503 | 10% | |||||
| Taxation | (332 037) | (318 783) | (13 254) | (4%) | |||||
| Net profit after tax | 820 861 | 731 612 | 89 249 | 12% | |||||
| Non-controlling interest | (33 896) | (40 022) | 6 126 | 15% | |||||
| Net profit attributable to equity holders of parent | 786 965 | 691 590 | 95 375 | 14% | |||||
| Core intangible adjustment | 14 069 | 16 650 | (2 581) | (16%) | |||||
| Core net profit | 801 034 | 708 240 | 92 794 | 13% | |||||
| Headline earnings adjustment | 362 | (23 329) | 23 691 | 102% | |||||
| Core headline earnings | 801 396 | 684 911 | 116 485 | 17% | |||||
| Earnings per share (cents) | 117.92 | 103.85 | 14.07 | 14% | |||||
| Headline earnings per share (cents) | 117.98 | 100.35 | 17.63 | 18% | |||||
| Core headline earnings per share (cents) | 120.09 | 102.85 | 17.24 | 17% |
Revenue
Although growth in revenue was confined to R107 million, revenue generated on "PINless top-ups" escalated, congruent with the continued shift in consumer buying patterns from the traditional purchasing of airtime to that of "PINless top-ups". As only the commission earned thereon is accounted for, the effective growth in group revenue equated to 7%.
Gross profit
The increase in revenue, underpinned by an improvement in gross profit margins from 6.98% to 8.26%, resulted in gross profit increasing by R343 million (19%) to R2.17 billion.
The improvement in margins was attributable to a hybrid of additional discounts received on early settlement payments and compounded annuity revenue.
Overheads
Overheads, comprising employee costs and operating expenses, increased by 20% to R858 million, of which the former accounted for 6% and the latter 41%.
The increase in operating expenses was predominately due to foreign exchange losses incurred as well as sponsorship costs both totalling R81 million.
EBITDA
After accounting for a negative turnaround in foreign exchange movements of R126 million, a net negative movement of R38 million relating to a release of a contingent portion of deferred purchase considerations and an increase in overheads of R90 million, the resultant EBITDA increased by R91 million (7%) to R1.33 billion.
Depreciation, amortisation and impairment charges
Depreciation, amortisation and impairment charges increased by R15 million to R113 million.
Of this amount, R18 million pertained to the amortisation of intangible assets resulting from purchase price allocations on historical acquisitions compared to R20.6 million in the comparative year. The balance of the increase was congruent with capital expenditure incurred during the year.
Net finance costs
Finance costs
Finance costs totalled R303 million, of which R106 million related to interest paid on borrowed funds and R197 million to imputed IFRS interest adjustments on credit received from suppliers. On a comparative basis, interest paid on borrowed funds amounted to R48 million and the imputed IFRS interest adjustment equated to R166 million.
The increase of R58 million on interest paid on borrowed funds was mainly due to applying funds to bulk inventory purchase transactions and early settlement payments attracting favourable discounts.
Finance facilities were utilised on a piecemeal basis for this purpose and repaid during the current year. The additional finance costs were more than compensated for by the growth in gross profit and gross profit margins.
Finance income
Finance income totalled R242 million, of which R79 million was attributable to interest received on cash resources and R163 million to imputed IFRS interest adjustments on credit afforded to customers. In the prior year, interest received on cash resources amounted to R64 million and the imputed IFRS interest adjustment to R130 million.
The increase in interest received from cash resources was mainly attributable to growth in working capital resources, partially offset by the utilisation of funds for financing and investing activities.
Gain on associates and joint venture measured at fair value
With effect from 30 November 2016, Oxigen Services India and 2DFine have been accounted for as venture capital investments. The differential between the carrying value of the investments and their fair values amounted to R160 million and has been accounted for as a gain on associate and joint venture measured at fair value. This is further elaborated on in the International Distribution segment, under "Oxigen Services India and 2DFine Holdings Mauritius".
Share of losses from associates and joint ventures
The Group's share of losses primarily related to Oxigen Services India, 2DFine and BLM.
The financial performance of Oxigen and 2DFine for the six months ended November 2016 was equity accounted for, of which the Group's share of losses amounted to R125 million. Consequently, any further losses incurred by Oxigen and 2DFine Holdings Mauritius, from that date, will have no impact on Group earnings. The investment therein will continue to be measured at fair value.
The Group's share of losses in BLM amounted to R37 million after the amortisation of intangible assets.
Non-controlling interests
Non-controlling interests comprise a minority share of profits in Cigicell, Transaction Junction, Via Media and Blue Label Data Solutions, the total of which equated to R34 million.
Of this amount, R6.9 million was attributable to Cigicell, R12.1 million to Via Media, R10.1 million to Transaction Junction and R4.5 million to Blue Label Data Solutions.
Core headline earnings
Core headline earnings increased by R116 million (17%) to R801 million. This equated to core headline earnings per share of 120.09 cents.
Segmental report
South African Distribution
| May 2017 R'000 |
May 2016 R'000 |
Growth R'000 |
Growth % |
||||||
|---|---|---|---|---|---|---|---|---|---|
| Revenue | 25 786 396 | 25 722 540 | 63 856 | 0% | |||||
| Gross profit | 1 917 023 | 1 582 743 | 334 280 | 21% | |||||
| EBITDA | 1 388 296 | 1 133 433 | 254 863 | 22% | |||||
| Core net profit | 893 106 | 750 951 | 142 155 | 19% | |||||
| Core headline earnings | 893 128 | 751 086 | 142 042 | 19% | |||||
| Gross profit margin | 7.43% | 6.15% | |||||||
| EBITDA margin | 5.38% | 4.41% |
Revenue remained consistent with that of the prior year. However, revenue generated on "PINless top-ups" increased by R2 billion from R4.1 billion to R6.1 billion, equating to effective growth in South African Distribution revenue of 7%, in that only the commission earned thereon is recognised.
Net commissions earned on the distribution of prepaid electricity continued to increase, escalating by R18 million to R215 million on a value of R14 billion generated on behalf of the utilities.
Gross profit margins improved from 6.15% to 7.43%, resulting in an increase in gross profit of R334 million (21%) from R1.58 billion to R1.92 billion. The improvement in margins was attributable to a hybrid of additional discounts received on early settlement payments and compounded annuity revenue. The increase in gross profit was partially negated by additional net finance costs, congruent with applying excess funds and facilities on a piecemeal basis to early settlement discounts.
EBITDA increased by 22% to R1.39 billion equating to an EBITDA margin of 5.38%.
Contribution to Group core headline earnings increased by R142 million (19%) to R893 million.
International Distribution
| May 2017 R'000 |
May 2016 R'000 |
Growth R'000 |
Growth % |
||||||
|---|---|---|---|---|---|---|---|---|---|
| EBITDA | (31 792) | 44 152 | (75 944) | (172%) | |||||
| Gain on associate measured at fair value | 160 200 | – | 160 200 | ||||||
| Share of (losses)/profits from associates and joint ventures | (162 218) | (70 283) | (91 935) | (131%) | |||||
| – Oxigen Services India | (119 831) | (27 672) | (92 159) | (333%) | |||||
| – Blue Label Mexico | (36 978) | (63 293) | 26 315 | 42% | |||||
| – 2DFine Holdings Mauritius | (5 409) | 19 734 | (25 143) | (127%) | |||||
| – Mpower | – | 948 | (948) | (100%) | |||||
| Core net loss | (17 213) | (29 352) | 12 139 | 41% | |||||
| Core headline loss | (16 874) | (59 327) | 42 453 | 72% |
The decline in EBITDA of R76 million was directly attributable to a negative turnaround in foreign exchange movements.
The share of net losses from associates and joint ventures comprised the following:
Oxigen Services India and 2DFine Holdings Mauritius
The financial performance of Oxigen Services India for the six months ended November 2016 was equity accounted for, of which the Group's share of losses amounted to R120 million. The major portion of these losses was attributable to substantial expenditure incurred on the marketing of the brand and the acquisition of wallets.
The Group's share of losses in 2DFine amounted to R5.4 million for the six months ended November 2016. These losses were attributable to interest incurred on historical loans from Gold Label Investments and Blue Label.
In the prior year, the Group's share of profits amounted to R19.7 million. This pertained to a gain on dilution of R30 million, being the Group's share of the increased net asset value emanating from a rights issue in Oxigen Services India, offset by a share of losses of R10.2 million relating to interest incurred on the above loans. The gain on dilution was deducted as a headline earnings adjustment, resulting in a negative contribution of R59.3 million by the International segment to core headline earnings.
With effect from 30 November 2016, Oxigen Services India and 2DFine have been accounted for as venture capital investments, and as a result thereof the investments are measured at fair value. Consequently, any further losses incurred by the above entities from that date will have no impact on Group earnings.
The differential between the carrying value of the investments and their fair value amounted to R160 million and has been accounted for in the reviewed condensed Group statement of comprehensive income as a gain on associate and joint venture measured at fair value. The fair value gain of R160 million and the Group's share of losses for the year of R125 million, equated to a net positive contribution of R35 million to Group earnings.
Blue Label Mexico
BLM's losses declined from R130 million to R74 million, of which the Group's share amounted to R37 million after the amortisation of intangible assets. In the comparative period the Group's share of losses amounted to R63 million.
The decline in losses was achieved in spite of a reduction in revenue by 23%. This decline was caused by intense competition amongst carriers, resulting in lower tariffs payable by the end user. However, in the latter half of the financial year pricing stabilised, resulting in an increase in revenue during that period.
The overall decline in revenue was compensated for by an increase in gross profit of R26.6 million (32%), underpinned by higher gross profit margins.
The increase in gross profit was primarily attributable to BLM becoming a multicarrier distributor as opposed to historically being confined to one network. This has created a more competitive environment amongst the networks to the benefit of the Company.
Focus on cost efficiencies resulted in a decrease in operational expenditure by 9%. While the resultant EBITDA remained negative, it increased by R42.7 million (61%). Bill payments, credit and debit card acquiring, food vouchers and compounding annuity revenue emanating from starter pack distribution are perpetually increasing, which together with improved margins and expense containment resulted in a decline in losses.
Mobile
| May 2017 R'000 |
May 2016 R'000 |
Growth R'000 |
Growth % |
||||||
|---|---|---|---|---|---|---|---|---|---|
| Revenue | 347 858 | 291 856 | 56 002 | 19% | |||||
| Gross profit | 200 079 | 182 533 | 17 546 | 10% | |||||
| EBITDA | 99 101 | 111 142 | (12 041) | (11%) | |||||
| Core net profit | 56 327 | 64 273 | (7 946) | (12%) | |||||
| Core headline earnings | 56 289 | 65 333 | (9 044) | (14%) |
This segment comprises Viamedia, Supa Pesa, Blue Label One, Cellfind, Panacea and Simigenix.
Although revenue increased by 19% and gross profit by 10%, a negative movement of R12 million relating to a release of a contingent portion of deferred purchase consideration resulted in negative growth in EBITDA by 11%.
On exclusion of the deferred purchase consideration adjustment, the effective contribution to core headline earnings equated to a growth of R3 million (5%).
Solutions
| May 2017 R'000 |
May 2016 R'000 |
Growth R'000 |
Growth % |
||||||
|---|---|---|---|---|---|---|---|---|---|
| Revenue | 177 621 | 190 326 | (12 705) | (7%) | |||||
| Gross profit | 55 480 | 64 418 | (8 938) | (14%) | |||||
| EBITDA | 34 020 | 35 889 | (1 869) | (5%) | |||||
| Core net profit | 18 956 | 16 116 | 2 840 | 18% | |||||
| Core headline earnings | 18 956 | 21 564 | (2 608) | (12%) |
In October 2015, Velociti was disposed of at a loss of R5.4 million. On exclusion of this capital loss from core net profit in the prior year, core headline earnings in the remaining entities declined by R2.6 million.
On omission of Velociti's historical contribution, revenue generated by the remaining entities, dominated by Blue Label Data Solutions, increased by 10%. However, margin compression resulted in static growth in gross profit, which together with an increase in overheads, which included a R4 million loan impairment, resulted in the decline in its core headline earnings of 12%.
Corporate
| May 2017 R'000 |
May 2016 R'000 |
Growth R'000 |
Growth % |
||||||
|---|---|---|---|---|---|---|---|---|---|
| EBITDA | (158 302) | (84 057) | (74 245) | (88%) | |||||
| Core net loss | (150 142) | (93 748) | (56 394) | (60%) | |||||
| Core headline loss | (150 103) | (93 745) | (56 358) | (60%) |
Of the decline in EBITDA of R74 million, R46 million pertained to a negative turnaround in foreign exchange movements and R26 million to a net negative movement relating to a release of a contingent portion of deferred purchase considerations. Its negative contribution to Group core headline earnings increased by R56 million to R150 million.
Statement of financial position
Total assets increased by R1.4 billion to R8.7 billion of which current assets increased by R1.5 billion and non-current assets reduced by R76 million.
Non-current assets included increases in capital expenditure net of depreciation of R11 million, in loans receivable of R30.9 million and trade and other receivables of R13.3 million. These increases were offset by decreases of R86 million in intangible assets and goodwill and R50.6 million in investments in associates and joint ventures.
The net decrease of R50.6 million in investment in associate and joint ventures comprised the R160 million gains measured at fair value relating to Oxigen Services India and 2DFine, a capital contribution of R25.5 million to Oxigen Services India, a further equity loan granted to Lornanox of R9.3 million, the acquisition of Utilities World for R12 million, interest of R23.5 million capitalised on loans and loans granted of R14 million. These increases were offset by the Group's share of losses therein totalling R165 million inclusive of the amortisation of applicable intangible assets, a negative impact on foreign currency translation reserves of R82.4 million and unrealised foreign exchange losses on loans of R47.2 million.
The net decline of R86 million in intangible assets and goodwill mainly pertained to the amortisation of intangibles by R143 million, offset by R56 million expended on the purchase of software, internally generated software development costs and starter pack bases.
Of the increase in current assets, material movements included increases in inventories of R521 million, loans receivable of R90 million, cash resources of R762 million and trade receivables of R80 million.
The stock turn equated to 33 days compared to 25 days for the comparative year. Bulk inventory purchase opportunities at favourable discount rates validated the consequent increase in inventory. The nature of the business enables it to reduce its inventory holdings within the above number of days at any given time.
The debtors' collection period increased to 39 days compared to 38 days for the comparative year.
Net profit attributable to equity holders of R787 million, less a dividend of R243 million, resulted in retained earnings accumulating to R3.6 billion.
Trade and other payables increased by R881 million, with average credit terms increasing to 53 days compared to 40 days for the comparative year.
Statement of cash flows
Cash flows generated from operating activities amounted to R1.36 billion, predominately attributable to increased trading activity, net of working capital requirements.
Cash flows applied to investing activities amounted to R320 million. Of this amount, R56 million related to the purchase of intangible assets, R57 million to capital expenditure, R25.5 million to a capital contribution to Oxigen Services India, R133 million to net loans granted, R50.7 million to earn outs relating to prior acquisitions and R7.5 million to the acquisition of Utilities World. These outflows were partially offset by R1.7 million from the sale of fixed assets and R13 million from an earn-out received emanating from the sale of Ukash.
After applying R7 million to the acquisition of treasury shares and a dividend payment of R270 million to shareholders and non-controlling interests, cash on hand at year-end amounted to R1.35 billion.
Forfeitable share scheme
Forfeitable shares totalling 1 376 257 (2016: 2 591 066) were issued to qualifying employees. During the year 121 226 (2016: 612 453) shares were forfeited and 2 141 673 (2016: 3 163 359) shares vested.
Dividend
The Group's current dividend policy is to declare an annual dividend. On 23 August 2017 the Board approved a gross ordinary dividend (dividend number 8) of 40 cents per ordinary share (32 cents per ordinary share net of dividend withholding tax) for the year ended 31 May 2017.
The dividend of R349 803 616 inclusive of withholding tax equates to a 2.25 cover on headline earnings. The dividend for the year ended 31 May 2017 has not been recognised in the financial statements as it was declared after this date.
Subsequent events
On 2 August 2017, Blue Label, through its wholly owned subsidiary, The Prepaid Company Proprietary Limited (The Prepaid Company), acquired 45% of the issued share capital of Cell C for a purchase consideration of R5.5 billion. In part settlement of this amount, 183 333 333 ordinary shares in Blue Label were subscribed for by third parties at an issue price of R15.00 per share, equating to R2.75 billion.
On the same date, The Prepaid Company concluded an agreement to purchase 100% of the issued share capital in 3G Mobile from its shareholders for a purchase consideration of R1.9 billion. The acquisition has been structured in two stages, whereby 47.37% of the issued share capital was initially acquired for a purchase consideration of R900 million. The remaining 52.63% of the issued share capital will be acquired for a further R1.0 billion, subject to the fulfilment of conditions precedent. Of the initial purchase of 47.37%, 16 666 666 ordinary shares were issued to the vendors at R15.00 per share, equating to R250 million. The balance of R650 million will be payable on 28 February 2018.
As part of the restructure of the debt within Cell C by third-party lenders, The Prepaid Company will be required to provide liquidity support to Magnolia Cellular Investment 2 (RF) Proprietary Limited (SPV2), which is 100% held by 3C Telecommunications Proprietary Limited (3C), of up to USD80 million, which liquidity support will be provided over 24 months and will be in the form of subordinated funding to SPV2. Oger Telecoms contributed USD20 million of the aforesaid USD80 million thus reducing The Prepaid Company's obligation in this regard to a maximum of USD60 million. In addition, to the extent that certain assets of Oger Telecoms are realised within the aforesaid 24-month period, a portion of such realisation shall further reduce The Prepaid Company's obligation. In this regard, USD16 million has been realised to date, thereby reducing its current exposure to a maximum of USD44 million.
The Prepaid Company, with effect from 2 August 2017, purchased Bond notes, issued by Cedar Cellular Investments 1 Proprietary Limited (SPV1), which is 100% held by 3C, from Saudi Oger Limited with a capital redemption value of USD18 million and with a coupon rate of 8.625% per annum for a purchase consideration of USD18 million, of which USD6 million has been paid, USD3 million will be paid imminently and USD9 million will be payable on 30 November 2017. The Prepaid Company is entitled to assign its rights and obligations, in whole or in part, to a nominee. Accordingly, it has assigned such rights and obligations in respect of 50% of the Bond notes, which assignment has been accepted by the assignee.
The Prepaid Company concluded an agreement with Cell C on 2 August 2017 in terms of which it has undertaken to advance R1.34 billion on a piecemeal basis for the purpose of applying such funds towards capital expenditure. This advance, which is interest bearing, will be repayable in full by the end of July 2018.
Subsequent to year-end, dividend number 8 was declared and approved by the Board.
Appreciation
I wish to express my gratitude to the Group's finance team for their professional input and dedication throughout the year.
Dean Suntup
Financial Director
23 November 2017