Blue Label Telecoms Integrated Annual Report 2019

Blue Label integrated annual report 2019 13 ABOUT US 1 – 21 LEADERSHIP 22 – 29 PERFORMANCE 30 – 73 GOVERNANCE 74 – 120 SHAREHOLDERS’ INFORMATION AND ADMINISTRATION 121 – IBC Material risks The Group has identified the material risks that may have an impact on its operations. Each risk is detailed below, including its relevant strategic focus area and mitigation methodology. GOING CONCERN AND EXTENSION OF BANK FACILITIES INCREASED THREAT OF CYBERCRIME The Board of Directors has evaluated the going concern assumption as at 31 May 2019 and considered it to be appropriate in the preparation of the financial statements. The Prepaid Company’s Investec banking facilities, which would have expired on 30 September 2019, have been extended to 29 November 2019 and discussions are in progress for a further extension beyond that date. As at the date of the 31 May 2019 financial statements, the renegotiation of these facilities had not yet been completed, and although the directors are of the opinion that the facilities would be extended beyond November 2019, material uncertainty exists should these facilities not be extended. In this event, certain liabilities within the Group would not be settled in the normal course of business. The directors are confident that the successful completion of the disposals of the handset division of the 3G Group and the Blue Label Mobile Group, as well as the unwinding of the material portion of the finance book of Comm Equipment Company will result in a significant reduction in interest-bearing debt and in turn the strengthening of the Group’s balance sheet. As a majority of the Group’s inventory is of a virtual nature, defence against cybercrime will remain a top priority. The Group is dependent on the systems and platforms that it utilises to deliver its products and services, as well as manage its merchant base. In recent years, technology spend has been increasing in recognition of this key imperative to support not only organic and acquisitive growth in the business (and the concomitant rise in the number and type of transactions processed), but also to improve system availability and resilience. This invariably includes a major focus on the security of all systems, both production and enterprise, in order to suitably detect and manage security threats, as well as the ability to recover from damages due to cybersecurity breaches. Independent third parties continue to conduct vulnerability scans and penetration tests to ensure that the systems are as secure as possible and that new threats are appropriately addressed. EXECUTION AND DELIVERY OF CELL C AND 3G MOBILE STRATEGY The Board and management are extremely disappointed in the performance of Cell C and, as at 31 May 2019, our entire investment into Cell C and our exposure in the SPV1 and 2 structures, was written down to zero. We remain confident that Cell C will continue to operate. However, should this not be the case, it is anticipated that the loss in revenue from trading with Cell C ordinary business with the Group would equate to approximately a 25% reduction in net profit after tax. This business would however revert to the other mobile operators, in which case Blue Label is likely to be able to recover some of this business, albeit at a lower margin. The transactions currently being considered by Cell C regarding the extended roaming agreement and recapitalisation are progressing well. The 3G Group performed well for the year ending 31 May 2019, increasing revenue to R2.2 billion and core net profit by 42% to R278 million. TPC has taken a decision to dispose of the handset division of the 3G Group for a purchase consideration of R544 million. This transaction is subject to shareholder approval. The proceeds will be applied to reduce interest- bearing debt. The remainder of the 3G Group, namely the Comm Equipment Company (CEC), will be retained by Blue Label by way of a dividend in specie. As at 31 May 2019 the CEC finance book totalled R3.1 billion. A major portion of this book will be unwound on a piecemeal basis, and the proceeds of which will be applied to further reduce Blue Label’s interest-bearing debt. CEC will focus on securing alternative funding initiatives through opportunities that avail themselves within the Blue Label Group. 1 2 3