FINANCIAL PERFORMANCE

Directors' report

The Directors have pleasure in presenting the Group annual financial statements of Blue Label Telecoms Limited (Blue Label Telecoms or the Company) and its subsidiary, associate and joint venture companies (the Group or Blue Label) for the year ended 31 May 2020.

Principal activities and strategy

Blue Label Telecoms' core business is the virtual distribution of secure electronic tokens of value and transactional services across its global footprint of touchpoints. The Group's stated strategy is to extend its global footprint of touchpoints, both organically and acquisitively, to meet the significant demand for the delivery of multiple prepaid products and services through a single distributor, across various delivery mechanisms and via numerous merchants or vendors.

Financial results

The Group recorded a net profit after tax attributable to equity holders for the year ended 31 May 2020 of R124 million (2019: loss of R6 646 million). Full details of the financial position and results of the Group and its segments are set out in the Group annual financial statements. The Group annual financial statements for the year ended 31 May 2020 were approved by the Board and signed on its behalf on 27 August 2020.

Share capital

Full details of the authorised, issued and unissued capital of the Company at 31 May 2020 are contained in note 6.1 of the Group annual financial statements.

Dividends

The Board of Directors has elected not to declare a dividend.

Subsequent events and going concern

Blue Label Mexico

Blue Label Telecoms is currently in the process of concluding the disposal of its 47.56% interest in Blue Label Mexico, the structure of which is yet to be finalised. Once completed, shareholders will be notified accordingly.

Banking facilities

On 29 November 2019, The Prepaid Company's Investec banking facilities totalling R2.176 billion were successfully renewed, of which R1.5 billion was extended for a period of 12 months to 31 March 2021 and R676 million for nine months to 31 August 2020. Of the latter amount, R542 million has been paid to date.

As at the date of publication of the 31 May 2020 financial statements, the Prepaid Company renegotiated a further extension of the R1.5 billion facility from 31 March 2021 to 30 September 2021, demonstrating Investec's confidence in Blue Label. The exposure to Investec is required to be no more than R1 billion as at 31 March 2021.

As at 31 May 2020, The Prepaid Company's Investec facilities were disclosed as current borrowings, as the extension to 30 September 2021 was only granted in August 2020.

On 9 September 2016, Comm Equipment Company (CEC) entered into a debt funding agreement with Investec and Rand Merchant Bank. This debt funding was divided into three separate facilities, namely senior facility A of R858 million, senior facility B of R650 million and mezzanine facility of R410 million. In February 2020, the proceeds of R604 million from the sale of the 3G Mobile Handset division were applied against the senior A facility. All three facilities were due to expire on 31 August 2020.

CEC's facilities have been renegotiated to 31 August 2021 comprising R267 million for senior facility A, R200 million for senior facility B and R411 million for the mezzanine facility.

As at 31 May 2020, CEC's debt facilities were disclosed as current borrowings, as the extension to 31 August 2021 was only granted in August 2020.

Going concern

In spite of certain restrictions caused by the COVID-19 pandemic, Blue Label has continued to deliver essential services, including electricity, airtime, data and other digital services, as well as providing financial transactional services. The lockdown regulations and the downturn in economic activity have not impacted negatively on airtime, data and electricity sales volumes. The Group's digital expertise has enabled uninterrupted access of all its products and services through banks, formal retailers, independent retailers, petroleum forecourts and spaza shops across South Africa. Cash flow generated by the core businesses within the Group has consequently not been negatively impacted.

The products and services that Blue Label provides fulfil essential needs of the consumer, even more so during lockdown due to home confinement. In essence, such demand would only decline if consumer cash resources dwindle as a result of a decline in their income. In a situation of this nature, Blue Label's products and services would remain a priority in consumer spend and retain a level of resilience in comparison to other consumer goods and services.

The Group's retail business, starter pack distribution, gaming vouchers and ticketing were negatively impacted during the initial lockdown period. Starter pack distribution and gaming voucher trading volumes are now back to pre-COVID-19 levels.

The lockdown, however, had a significant negative impact on the retail operations of WiConnect and given the uncertainty of the duration of the pandemic and the resultant losses attributable thereto impacting on its financial feasibility, a decision was made prior to year-end to cease the operations of the WiConnect retail stores. This resulted in a negative impact of R318 million on the Group's basic earnings for the year ended 31 May 2020. The actual cash outflow required for the closure of the stores, which is included in the R318 million expense, will however be confined to approximately R30 million, in that the balance of such negative earnings represents all trading losses which have been expended, impairments to property, plant and equipment and goodwill.

Challenging economic conditions, an unfavourable trading environment, margin compression as a result of reduced incentives from the mobile networks and an increase in product costs, exacerbated by COVID-19, necessitated an impairment of goodwill in Blue Label Connect of R157 million, a partial goodwill impairment in Glocell Distribution of R57 million and a fair value downward adjustment of the Glocell loan, net of taxation, of R47 million.

In considering credit risk, management included considerations related to COVID-19 when calculating ECLs. The considerations resulted in increased probability of default percentages in the current year when compared to the prior year and ultimately in an increase of the average ECL/impairment ratio on total trade receivables from 2.46% in the prior year to 3.68% in the current year. The Group did not experience any significant defaults or requests from material clients for easing of payment terms or payment holidays.

The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group has sufficient liquidity to meets its obligations and will be able to operate within its current funding levels without breaching any of its current covenants into the foreseeable future.

The Directors are of the opinion that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing the financial statements.

Directorate

The following are the details of the Company's Directors:

Name Office Appointment date Date and nature of change
Larry M Nestadt Independent Non-Executive Director 5 October 2007
Brett M Levy Joint Chief Executive Officer 1 February 2007
Mark S Levy Joint Chief Executive Officer 1 February 2007
Kevin M Ellerine Non-Executive Director 8 December 2009
Gary D Harlow Independent Non-Executive Director 5 October 2007
Joe S Mthimunye Independent Non-Executive Director 5 October 2007
Dean A Suntup Financial Director 14 November 2013
Jeremiah S Vilakazi Independent Non-Executive Director 19 October 2011

Directors' interests

The individual interests declared by Directors in the Company's share capital as at 31 May 2020, held directly or indirectly, were as follows:

    Nature of interest
Direct beneficial Indirect beneficial
Director/officer 2020   2019   2020   2019  
BM Levy 67 220 664   67 174 937   17 772 778   17 772 778  
MS Levy 59 813 256   59 767 529   17 772 777   17 772 777  
KM Ellerine*     120 000 000   114 660 000  
GD Harlow     1 685 114   4 445 569  
JS Mthimunye 130 000   130 000   242 573   242 573  
LM Nestadt     10 000 000   10 000 000  
DA Suntup 3 850 297   3 826 078   177 778   177 778  
JS Vilakazi        

* KM Ellerine is a beneficiary of these shares together with multiple other beneficiaries.

The aggregate interest of the current Directors in the capital of the Company was as follows:

Number of shares
Director/officer 2020   2019  
Beneficial 298 665 237   295 970 019  

The beneficial interest held by Directors and officers of the Company constitutes 32.69% (2019: 32.73%) of the issued share capital of the Company.

Details of Directors' emoluments and equity compensation benefits are set out in note 5.3 of the Group annual financial statements and details of the forfeitable share plan are set out in note 5.1.

Resolutions

On 28 November 2019, the Company passed and filed with the Companies and Intellectual Property Commission the following special resolutions:

Except for the aforementioned, no other special resolutions, the nature of which might be significant to shareholders in their appreciation of the state of affairs of the Group, were passed by the Company or its subsidiaries during the period covered at the date of signing these Group annual financial statements.

Company Secretary

The Board is satisfied that J van Eden has the requisite knowledge and experience to carry out the duties of a company secretary of a public company in accordance with section 88 of the Companies Act and is not disqualified to act as such. She is not a Director of the Board and maintains an arm's-length relationship with the Board.

The business and postal address of the Company Secretary appear on the Company's website at

www.bluelabeltelecoms.co.za.

Auditors

PricewaterhouseCoopers Inc. will continue in office in accordance with section 90(6) of the Companies Act.

Larry Nestadt

Chairman