Financial Director's report

PERFORMANCE

Dean Suntup, Financial Director

COVID-19 pandemic

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 negatively impacted 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 the lockdown period 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 goodsand 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 there to impacting 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.

FINANCIAL HIGHLIGHTS AND SALIENT FEATURES

Successful completion of the disposal of the Blue Label Mobile Group and the handset division of 3G Mobile
Revenue of R21.1 billion*
Gross profit of R2.12 billion
Increase in gross profit margin from 9.21% to 10.05%
Net cash generated from operating activities of R1.3 billion
Interest-bearing borrowings reduced to R2.3 billion (2019: R3.2 billion)
Headline earnings of 58.16 cents per share (2019: 312.49 cents loss per share)
Core headline earnings of 62.71 cents per share** (2019: 304.77 cents loss per share)


*	On inclusion of the gross amount generated on "PIN less top-ups", prepaid electricity, ticketing and gaming, the effective increase equated to 7% from R56.0 billion to R59.9 billion
**	On exclusion of negative contributions by the ceased operations of WiConnect and fair value downward adjustments, core headline earnings per share from the balance of the entities within the Blue Label Group equated to 86.13 cents per share

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.

Group results

Core headline earnings for the year ended 31 May 2020 amounted to R562 million, equating to core headline earnings of 62.71 cents per share. Core headline earnings for the year ended 31 May 2019 amounted to a loss of R2.78 billion, equating to a negative 304.77 cents per share.

On exclusion of extraneous costs of R210 million in the current year and R3.66 billion in the comparative year, as illustrated in the tables below, core headline earnings from trading operations declined by R100 million (11%) from R872 million to R772 million, equating to core headline earnings of 86.13 cents per share. Core headline earnings for the current year, after the exclusion of extraneous costs, comprised R632 million from continuing operations and R140 million from discontinued operations.

Earnings per share and headline earnings per share increased from a negative 727.81 and 312.49 cents per share in the prior year to a positive 13.89 and 58.16 cents per share respectively in the current year.

The financial results of Blue Label Mobile, the Handset division of 3G Mobile and WiConnect, totalling R93 million (2019: R122 million), are disclosed in core headline earnings from discontinued operations in both the current and comparative years and are not included in revenue, gross profit, EBITDA and net profit/(loss) after taxation.

Group revenue generated by the continuing operations within the Group declined by 10% to R21.1 billion. As only the gross profit earned on PINless top-ups, prepaid electricity, ticketing and gaming is recognised as revenue, on imputing the gross revenue generated thereon, the effective growth in revenue equated to 7% from R56.0 billion to R59.9 billion.

Gross profit declined by 2% from R2.17 billion to R2.12 billion, partially limited due to an increase in margins from 9.21% to 10.05%.

Group income statement

	Group May 2020 R'000	Extraneous costs* May 2020 R'000	Remaining May 2020 R'000	Group May 2019 R'000
Revenue
Revenue	21 135 326	—	21 135 326	23 602 264
Gross profit	2 124 611	—	2 124 611	2 173 685
EBITDA	825 364	(387 754)	1 213 118	257 300
Impairments on associates and joint venture	—	—	—	(2 639 564)
Share of profits/(losses) from associates and joint ventures	16 598	—	16 598	(3 693 431)
– Cell C	—	—	—	(3 609 496)
– Oxigen Services India	—	—	—	(86 637)
– Blue Label Mexico	(5 806)	—	(5 806)	(24 096)
– Other	22 404	—	22 404	26 798
Net profit/(loss) from continuing operations	226 786	(376 824)	603 610	(6 672 923)
Core headline earnings	562 132	(209 979)	772 111	(2 783 155)
– From continuing operations	469 113	(163 240)	632 353	(2 904 973)
– From discontinued operations	93 019	(46 739)	139 758	121 818
Gross profit margin	10.05%		10.05%	9.21%
EBITDA margin	3.91%		5.74%	1.09%
Weighted average shares ('000)	896 409		896 409	913 208
EPS (cents)	13.89		82.04	(727.81)
HEPS (cents)	58.16		81.58	(312.49)
Core HEPS (cents)	62.71		86.13	(304.77)
– From continuing operations	52.33		70.54	(318.11)
– From discontinued operations	10.38		15.59	13.34

	Extraneous costs** May 2019 R'000	Remaining May 2019 R'000	Growth remaining R'000	Growth remaining %
Revenue
Revenue	—	23 602 264	(2 466 938)	(10%)
Gross profit	—	2 173 685	(49 074)	(2%)
EBITDA	(1 066 437)	1 323 737	(110 619)	(8%)
Impairments on associates and joint venture	(2 639 564)	—	—
Share of profits/(losses) from associates and joint
ventures	(3 696 133)	2 702	13 896	514%
– Cell C	(3 609 496)	—	—
– Oxigen Services India	(86 637)	—	—
– Blue Label Mexico	—	(24 096)	18 290	76%
– Other	—	26 798	(4 394)	(16%)
Net profit/(loss) from continuing operations	(7 372 270)	699 347	(95 737)	(14%)
Core headline earnings	(3 655 111)	871 956	(99 845)	(11%)
– From continuing operations	(3 642 066)	737 093	(104 740)	(14%)
– From discontinued operations	(13 045)	134 863	4 895	4%
Gross profit margin		9.21%
EBITDA margin		5.61%
Weighted average shares ('000)		913 208
EPS (cents)		88.41	(6.37)	(7%)
HEPS (cents)		88.90	(7.32)	(8%)
Core HEPS (cents)		95.48	(9.35)	(10%)
– From continuing operations		80.71
– From discontinued operations		14.77

*	The predominant negative contributions to Group earnings in the current year were attributable to:
	–	fair value downward adjustments of the Glocell loan and an unrealised foreign exchange loss on the USD20 million liquidity support provided to SPV2⁽¹⁾;
	–	impairments of goodwill relating to Blue Label Connect and a partial impairment relating to Glocell Distribution⁽²⁾;
	–	extraneous expenditure within the Retail division as a result of the closure of the WiConnect stores⁽³⁾; and
	–	once-off expenditure and income⁽⁴⁾.

	Extraneous costs May 2020 R'000	Fair value losses⁽¹⁾ May 2020 R'000	Impairments⁽²⁾ May 2020 R'000	WiConnect⁽³⁾ May 2020 R'000	Once–offs⁽⁴⁾ May 2020 R'000
EBITDA	(387 754)	(115 065)	(213 584)	—	(59 105)
Net profit/(loss) from continuing operations	(376 824)	(96 481)	(213 584)	—	(66 759)
Core headline earnings	(209 979)	(96 481)	—	(183 773)	70 275
– From continuing operations	(163 240)	(96 481)	—	—	(66 759)
– From discontinued operations	(46 739)	—	—	(183 773)	137 034

**	The predominant negative contributions to Group earnings in the prior year were attributable to:
–	Cell C’s trading losses, impairment of its property, plant and equipment, the impact of a derecognition of its deferred tax asset and the consequent impairment of Blue Label’s total investment therein⁽⁵⁾;
–	fair value downward adjustments of the complete exposure relating to SPV1 and SPV2 (the structure of which was detailed in the trading statement published on SENS on 22 February 2019) and the Glocell loan⁽⁸⁾;
–	partial impairments of goodwill relating to Viamedia and Blue Label Connect and a partial impairment of the investment in the SupaPesa joint venture⁽⁷⁾;
–	an Impairment of Blue Label’s total investment in the Oxigen India Group, including 2DFine Holdings Mauritius, as well as providing for loan impairments and guarantees payable thereon⁽⁸⁾.
–	expenditure within the Retail division of the WiConnect stores⁽⁹⁾; and
–	once-off expenditure and income⁽¹⁰⁾.

	Extraneous costs May 2019 R'000	Cell C⁽⁵⁾ May 2019 R'000	Fair value losses⁽⁶⁾ May 2019 R'000	Impairments⁽⁷⁾ May 2019 R'000	OSI adjustments⁽⁸⁾ May 2019 R'000	WiConnect⁽⁹⁾ May 2019 R'000	Once-offs⁽¹⁰⁾ May 2019 R'000
EBITDA	(1 066 437)	—	(873 877)	(50 398)	(193 364)	—	51 202
Impairments on associates and joint venture	(2 639 564)	(2 521 152)	—	—	(118 412)	—	—
Share of profits/(losses) from associates and joint ventures	(3 696 133)	(3 609 496)	—	—	(86 637)	—	—
– Cell C	(3 609 496)	(3 609 496)	—	—	—	—	—
– Oxigen Services India	(86 637)	—	—	—	(86 637)	—	—
Net profit/(loss) from continuing operations	(7 372 270)	(6 130 647)	(837 831)	(50 398)	(398 412)	—	45 018
Core headline earnings	(3 655 111)	(2 616 427)	(837 831)	—	(232 826)	(13 045)	45 018
– From continuing operations	(3 642 066)	(2 616 427)	(837 831)	—	(232 826)	—	45 018
– From discontinued operations	(13 045)	—	—	—	—	(13 045)	—

The increase in EBITDA of R568 million was attributable to the movement in extraneous costs of R679 million. In the current year, these costs amounted to R388 million, of which R66 million pertained to fair value downward adjustment of the Glocell loan, R49 million to the unrealised foreign exchange loss on the USD20 million SPV2 liquidity support, R157 million to an impairment of goodwill relating to Blue Label Connect, R57 million to a partial goodwill impairment relating to Glocell Distribution and R59 million to once-off expenditure. The comparative year included extraneous costs of R1.1 billion, of which R874 million pertained to fair value losses relating to SPV1, SPV2 and the Glocell loan, and R193 million to guarantees payable and loan impairments recognised on behalf of Oxigen Services India.

On exclusion of the above extraneous costs both in the current and comparative year, EBITDA declined by R111 million to R1.21 billion.

No further fair value losses relating to the SPVs, with the exception of the unrealised foreign exchange loss on the USD20 million SPV2 liquidity support, were recognised in the current year as the exposure thereto was fully accounted for as at 31 May 2019. As the carrying value of Blue Label's investment in Cell C was fully impaired for the year ended 31 May 2019, the financial results of Cell C did not have any impact on Blue Label's earnings for the current year.

The Blue Label Group generated positive cash flows from its trading operations for the year ended 31 May 2020. This, together with the proceeds received from the disposals of the 3G Handset division and the Blue Label Mobile Group, have been applied to reduce interest-bearing debt resulting in the strengthening of the Group's balance sheet.

Core headline earnings from discontinued operations amounted to R93 million inclusive of extraneous expenditure pertaining to the closure of the WiConnect stores and the accounting implications of the put option for the acquisition of the remaining 40% minority shareholding in Airvantage and AV Technology. The composition thereof is tabled below:

Discontinued operations

	Total May 2020 R'000	Africa Distribution May 2020 R'000	International May 2020 R'000	Mobile May 2020 R'000	Extraneous costs May 2020 R'000
Revenue	2 176 836	1 662 483	37 177	194 544	282 632
Gross profit	493 505	240 629	32 052	159 470	61 354
EBITDA	156 397	160 201	22 864	65 599	(92 267)
Share of (losses)/profits from
associates and joint ventures	(2 958)	—	—	(2 958)	—
Core headline earnings	93 019	90 185	13 826	35 747	(46 739)

The disposal of 3G Mobile’s handset trading operations and the Blue Label Mobile Group has successfully been completed.

Extraneous costs include:

	Total May 2019 R’000	Africa Distribution May 2019 R’000	International May 2019 R’000	Mobile May 2019 R’000	Extraneous costs May 2019 R’000
Revenue	2 267 169	1 801 459	35 013	233 176	197 521
Gross profit	472 436	233 403	33 383	177 677	27 973
EBITDA	205 379	142 644	33 003	85 256	(55 524)
Share of (losses)/profits from associates and joint ventures	(37 488)	(6 314)	—	(1 662)	(29 512)
Core headline earnings	121 818	66 146	20 227	48 490	(13 045)

– the financial results of the WiConnect stores;

– the accounting implications of the disposal of the discontinued operations; and

– the accounting effects of the put option for the acquisition of the remaining 40% minority share of Airvantage and AV Technology.

The proceeds of the above disposals were applied to the reduction of interest-bearing borrowings within the Group. The Group’s strategic intent is to "go back to basics" and to significantly improve cash generation in order to deliver returns to shareholders.

Segmental report

Africa distribution

	May 2020 R'000	Extraneous costs^{(1, 2, 3)} May 2020 R'000	Remaining May 2020 R'000
Revenue	20 946 222	—	20 946 222
Gross profit	2 066 476	—	2 066 476
EBITDA	931 175	(328 649)	1 259 824
Impairments on associates and joint venture	—	—	—
Share of profits/(losses) from associates and joint ventures	2 635	—	2 635
– Cell C	—	—	—
– Other	2 635	—	2 635
Net profit/(loss) from continuing operations	375 952	(310 065)	686 017
Core headline earnings	522 976	(280 254)	803 230
– From continuing operations	616 564	(96 481)	713 045
– From discontinued operations	(93 588)	(183 773)	90 185

	May 2019 R'000	Extraneous costs^{(5, 6, 7, 9)} May 2019 R'000	Remaining May 2019 R'000	Growth remaining R'000	Growth remaining %
Revenue	23 399 026	—	23 399 026	(2 452 804)	(10%)
Gross profit	2 111 800	—	2 111 800	(45 324)	(2%)
EBITDA	507 485	(924 275)	1 431 760	(171 936)	(12%)
Impairments on associates and joint venture	(2 521 152)	(2 521 152)	—	—
Share of profits/(losses) from associates and joint ventures	(3 605 759)	(3 609 496)	3 737	(1 102)	(29%)
– Cell C	(3 609 496)	(3 609 496)	—	—
– Other	3 737	—	3 737	(1 102)	(29%)
Net profit/(loss) from continuing operations	(6 179 847)	(7 018 876)	839 029	(153 012)	(18%)
Core headline earnings	(2 525 872)	(3 467 303)	941 431	(138 201)	(15%)
– From continuing operations	(2 578 974)	(3 454 258)	875 284	(162 239)	(19%)
– From discontinued operations	53 102	(13 045)	66 147	24 038	36%

Refer below for footnote (1) – (3) and for footnote (5) – (9).

The financial results of the Handset division of 3G Mobile, Airvantage and WiConnect have been classified as discontinued operations and are not included in revenue, gross profit, EBITDA and net profit/(loss) after taxation.

Revenue generated by the continuing operations within the segment declined by 10% from R23.4 billion to R20.9 billion. As only the gross profit earned on PINless top-ups, prepaid electricity, ticketing and gaming is recognised as revenue, on imputing the gross revenue generated thereon, the effective growth in revenue equated to 7% from R55.8 billion to R59.7 billion.

Distribution in South Africa continues to expand its product and services portfolio, despite the general business and technology freeze experienced by many South African businesses during lockdown. Our continued focus on reducing the cost of and further digitising our distribution has seen our core products continue to migrate to pure digital channels. Our growing bundle of VAS and financial services products, that require face-to-face interaction, has experienced strong growth in formal retail, informal and petroleum channels. Our customer interaction centre has performed well with surveys indicating customer satisfaction with improved turnaround times. We continuously strive to differentiate ourselves from competitors and to ensure that we remain a distinctive magnet for foot traffic.

The Group continues to increase market share and bolster its product and services mix to defend and grow its positions in the market. Gross revenue generated on PINless top-ups increased by R3.4 billion from R11.6 billion to R15.0 billion.

We continue to drive penetration into our municipal prepaid utilities market. We have enhanced our revenue collection services through the development of a comprehensive revenue assurance product suite which has resulted in enhanced traction and margins in this market.

Net commissions earned on the distribution of prepaid electricity amounted to R288 million. Revenue generated on behalf of the utilities increased by 13% from R20.0 billion to R22.7 billion. We have launched a zero-rated USSD and WhatsApp service allowing indigent customers to access their free basic electricity allocation without needing to incur the cost of travelling.

Gross profit declined by 2% from R2.11 billion to R2.07 billion, limited due to an increase in margins from 9.03% to 9.87%.

The EBITDA in the comparative year included extraneous costs attributable to fair value losses relating to the exposure to SPV1, SPV2 and the Glocell loan of R874 million as well as a goodwill impairment of R49.2 million pertaining to Blue Label Connect. Extraneous costs in the current year comprise the fair value downward adjustment to the Glocell loan of R66 million, the unrealised foreign exchange loss on the USD20 million SPV2 liquidity support of R49 million, impairment of goodwill relating to Blue Label Connect of R156.5 million and a partial goodwill impairment relating to Glocell Distribution of R57 million.

As at 31 May 2019, the carrying value of Blue Label's investment in Cell C was fully impaired. Consequently, its financial results did not have an impact on Blue Label's earnings for the current year.

The comparative year reflected the negative contributions to core headline earnings by Cell C of R2.6 billion, WiConnect of R13 million and the fair value losses of R838 million pertaining to the exposure relating to SPV1, SPV2 and the Glocell loan. The current year reflects the fair value downward adjustment, net of taxation, to the Glocell loan of R47.8 million, the unrealised foreign exchange loss on the USD20 million SPV2 liquidity support of R49 million, and losses in WiConnect of R184 million.

On exclusion of the above negative contributions of R280 million in the current year and R3.5 billion in the comparative year, core headline earnings from trading operations declined by R138 million (15%) from R941 million to R803 million. Of the latter amount, R713 million related to continuing operations and R90 million to discontinued operations.

The decline of R138 million in core headline earnings was partly attributable to starter pack distribution, gaming vouchers and ticketing being negatively impacted during the initial lockdown period as a result of the COVID-19 pandemic. This also resulted in the Group incurring a general increase in allowances raised for expected credit losses. Furthermore, exposure to the Edcon Group amounting to R41 million, net of taxation, has been provided for in full. Of this amount, R21 million relates to the WiConnect retail stores.

International

	May 2020 R'000	Extraneous costs May 2020 R'000	Remaining May 2020 R'000
EBITDA	19 474	2 760	16 714
Impairments on associates and joint venture			—
Share of losses from associates and joint ventures	(5 806)	—	(5 806)
– Oxigen Services India	—	—	—
– Blue Label Mexico	(5 806)	—	(5 806)
– Other	—	—	—
Net profit/(loss) from continuing operations	6 071	2 760	3 311
Core headline earnings	21 615	2 760	18 855
– From continuing operations	7 789	2 760	5 029
– From discontinued operations	13 826	—	13 826

	May 2019 R'000	Extraneous costs May 2019 R'000	Remaining May 2019 R'000	Growth remaining R'000	Growth remaining %
EBITDA	(53 360)	(51 260)	(2 100)	18 814	896%
Impairments on associates and joint venture	(118 412)	(118 412)	—	—
Share of losses from associates and joint ventures	(110 441)	(86 637)	(23 804)	17 998	76%
– Oxigen Services India	(86 637)	(86 637)	—	—
– Blue Label Mexico	(24 096)	—	(24 096)	18 290	76%
– Other	292	—	292	(292)	(100%)
Net profit/(loss) from continuing operations	(277 445)	(251 442)	(26 003)	29 314	113%
Core headline earnings	(90 141)	(85 856)	(4 285)	23 140	540%
– From continuing operations	(110 368)	(85 856)	(24 512)	29 541	121%
– From discontinued operations	20 227	—	20 227	(6 401)	(32%)

The financial results of AV Technology and Airvantage Brazil have been classified as discontinued operations.

As at 31 May 2019, the carrying value of Blue Label's investment in the Oxigen India Group was fully impaired. Consequently, its financial results did not have an impact on Blue Label's earnings for the current year.

Extraneous costs in the current and prior year relate to Oxigen Services India. On exclusion of these costs, EBITDA increased by R19 million.

Losses in Blue Label Mexico declined from R47 million to R9 million, of which the Group's share amounted to R5.8 million after the amortisation of intangible assets. In the comparative year, the Group's share of losses amounted to R24 million.

The positive turnaround in Blue Label Mexico was attributable to various initiatives that were implemented in the last quarter of the previous financial year which perpetuated in the current year.

Although its revenue declined by R451 million (12%) from R3.6 billion to R3.2 billion, gross profit increased by R9 million (6%) underpinned by an increase in gross profit margins from 3.83% to 4.66%.

Operational expenditure declined by 12%, through the implementation of significant cost-saving initiatives. The resultant EBITDA increased by R31 million from a negative R23 million to a positive R8 million.

Depreciation declined by R8 million (27%), primarily attributable to the expiry of the tenure of certain point of sale (POS) terminals.

The resultant contributions by the International segment to Group core headline earnings amounted to R22 million, of which continuing operations accounted for R8 million and discontinued operations for R14 million.

Solutions

This segment comprises Datacel, Blue Label Data Solutions (BLDS), the data aggregation and lead generation entity in which the Group owns 81%, and a 50% joint venture shareholding owned by BLDS in United Call Centre Solutions, an outbound call centre operation.

	May 2020 R'000	May 2019 R'000	Growth remaining R'000	Growth remaining %
Revenue	189 104	203 238	(14 134)	(7%)
Gross profit	58 135	61 885	(3 750)	(6%)
EBITDA	40 330	37 786	2 544	7%
Share of profits from associates and joint ventures	19 769	22 769	(3 000)	(13%)
Net profit from continuing operations	40 913	43 563	(2 650)	(6%)
Core headline earnings	40 910	43 563	(2 653)	(6%)
– From continuing operations	40 910	43 563	(2 653)	(6%)
– From discontinued operations	—	—	—

The decline in revenue of 7% to R189 million was attributable to lower demand for aggregated data and lead generations as a result of COVID-19 restrictions, which impacted the call centre operations during the lockdown period.

Although revenue declined, gross profit margins increased from 30.45% to 30.74%, limiting the decline in gross profit to R4 million (6%). After an overhead decline of 21%, EBITDA increased by R3 million (7%) to R40 million.

Of the core headline earnings of R41 million, BLDS accounted for R24 million. United Call Centre Solutions generated earnings of R39.6 million, of which the Group's share thereof amounted to R16 million.

Corporate

	May 2020 R'000	Extraneous costs May 2020 R'000	Remaining May 2020 R'000	May 2019 R'000	Extraneous costs May 2019 R'000	Remaining May 2019 R'000	Growth remaining R'000	Growth remaining %
EBITDA	(165 615)	(61 865)	(103 750)	(234 611)	(90 902)	(143 709)	39 959	28%
Net loss from continuing operations	(196 150)	(69 519)	(126 631)	(259 194)	(101 952)	(157 242)	30 611	19%
Core headline earnings	(196 150)	(69 519)	(126 631)	(259 194)	(101 952)	(157 242)	30 611	19%

On exclusion of the extraneous costs pertaining to the loan impairment, the liability relating to financial guarantee contracts and foreign exchange movements in the Oxigen India Group and the accounting implications of the put option for the acquisition of the remaining 40% minority share of Airvantage and AV Technology, the negative contribution to Group core headline earnings declined by R31 million to R127 million.

Depreciation and amortisation

Depreciation, amortisation and impairment charges on continuing operations increased by R19 million to R189 million. This was due to an increase of R32.2 million on depreciation raised in terms of IFRS 16 – Leases. In terms of this statement, leases that were previously recognised as operating leases under IAS 17 are accounted for in line with the requirements of IFRS 16. A right-of-use asset has been raised equivalent to the lease liabilities and amortised over the remaining lease term. This has given rise to a depreciation charge that previously would have been included in other expenses as part of the operating lease rental expense. This increase was offset by a reduction of R12.6 million relating to the amortisation of intangible assets.

Net finance costs

Finance costs totalled R230 million comprising interest paid on borrowed funds of R203 million, R12 million on the unwinding on the lease liability now required in terms of IFRS 16 and R8 million on an imputed IFRS interest adjustment. On a comparative basis, interest paid on borrowed funds amounted to R209 million and the imputed IFRS interest adjustment equated to R15 million.

Finance income totalled R78 million, of which R63 million was for interest received on cash resources, R7 million on loans granted, and R3 million for imputed IFRS interest adjustments on credit afforded to customers. In the prior year, interest received on cash resources amounted to R27 million, interest on loans granted amounted to R53 million, and the imputed IFRS interest adjustment to R3 million.

Statement of financial position

Total assets decreased by R1.7 billion to R10.4 billion of which non-current assets accounted for R1.1 billion and current assets for R0.6 billion.

Non-current assets included decreases in investments in and loans to associates and joint ventures of R21 million, advances to customers of R135 million, intangible assets and goodwill of R1 billion, increases in capital expenditure net of depreciation of R39 million, and in other receivables of R9 million. These decreases were offset by increases in right-of-use assets of R88 million and loans receivable of R100 million.

The net decrease of R21 million in investments in and loans to associates and joint ventures comprised the Group's net share of profits totalling R15 million, its share of the movements in the foreign currency translation reserve amounting to R11 million offset by net loan decreases of R21 million, disposals of R21 million and dividends received of R6 million.

Of the net decrease in intangible assets and goodwill of R1 billion, R53 million was attributable to the impairment of goodwill relating to the disposal of the Handset division of 3G Mobile and Blue Label Mobile, R682 million to the disposal of these subsidiaries, R151 million to the amortisation of intangibles, R259 million to the impairment of goodwill and R22 million to disposal of intangibles. These decreases were offset by additions to intangible assets of R31 million and foreign currency adjustments of R29 million.

The material net decline in current assets included decreases in inventory of R938 million and trade and other receivables of R328 million, offset by increases in cash and cash equivalents of R629 million and advances to customers of R200 million.

The stock turn from continuing operations equated to 11 days compared to 21 days for the financial year ended 31 May 2019.

The debtor's collection period from continuing operations increased to 57 days compared to 50 days for the financial year ended 31 May 2019.

Net profit attributable to equity holders amounted to R124 million, contributing to accumulated capital and reserves of R2.5 billion.

Net borrowings decreased by R917 million.

Trade and other payables decreased by R760 million, with average credit terms from continuing operations equating to 80 days compared to 78 days for the financial year ended 31 May 2019.

Statement of cash flows

Cash generated from trading operations totalled R1.7 billion. Working capital movements comprised an increase in trade receivables of R148 million, an increase in advances to customers of R65 million and a decrease in trade payables of R397 million, offset by a decrease in inventory of R795 million. After incurring net finance costs and taxation, net cash generated from operating activities amounted to R1.3 billion.

Net cash flows from investing activities amounted to R454 million, primarily attributable to the receipt of funds, net of cash disposed, amounting to R698 million from the disposal of the 3G Mobile Handset division and the Blue Label Mobile Group, proceeds on disposal of capital assets of R34 million, dividends received from associates and joint ventures of R6 million, offset by the purchase of intangible assets of R31 million, capital expenditure of R139 million and net loans granted of R127 million.

Cash flows utilised in financing activities amounted to R1.1 billion, of which R902 million related to the net decrease in borrowings, dividend payments of R67 million to non-controlling interests, lease payments of R53 million, settlement of a financial guarantee amounting to R44 million, treasury shares acquired of R46 million, offset by R34 million from the dilution of shares in a subsidiary.

Cash and cash equivalents accumulated to R2 billion at 31 May 2020.

Subsequent events

Blue Label Mexico

On 16 September 2020, an agreement was concluded whereby Blue Label Telecoms would dispose of its 47.56% interest in Blue Label Mexico for a total purchase consideration of USD11.5 million, to its co-shareholder, Grupo Bimbo S.A.B de C.V. The effective date of the transaction was 21 September 2020.

SPV2 liquidity obligations

On 4 September 2020, The Prepaid Company paid USD10 million of the remaining USD20 million to SPV2 in line with its liquidity support obligations.

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.

Dividend

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

Appreciation

The Board of Blue Label would once again like to express its appreciation to its suppliers, customers, business partners and staff for their ongoing support and loyalty.

For and on behalf of the Board

Dean Suntup CA(SA)

Financial Director

23 September 2020