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Material risks and opportunities

In pursuing our goals towards creating, preserving and realising value for our stakeholders, within our ERM framework, we aim to proactively manage risk and opportunities in a dynamic operating context.

Risk management

The main purpose of risk management is to adequately position the organisation to understand and respond to the potential risks that could materially impact on the execution of our strategy and value creation.

Our Group's primary risks are identified in consideration of our strategy, and ever-changing internal and external operating environment. We continue to ensure that we strengthen the link between our strategy and the Group's risks by applying our Enterprise Risk Management (ERM) process in the context of our key business requisites. In pursuing our goals towards creating, preserving and realising value for our stakeholders, within our ERM framework, we aim to proactively manage risk and opportunities in a dynamic operating context. In 2020 we faced challenges and risks associated with various events that significantly impacted on our business, including COVID-19 and the recapitalisation process of Cell C. We continue to focus our risk management process on ensuring the adequacy, appropriateness and effectiveness of our key responses to mitigate potential significant business impacts and to ensure delivery on our committed targets.

Risks and opportunities surrounding the COVID-19 pandemic

Despite certain national 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. The majority of subsidiaries have evolved to meet the realities of the pandemic. 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 goods and services.

The Group's retail busines s, starter pack distribution, gaming vouchers and ticketing were negatively impacted during the initial lockdown period. However, 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.

In considering credit risk, management included considerations related to COVID-19 when calculating expected credit losses (ECL). These 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.

Top ten risks based on inherent risk exposures

1
Increased Threat of Cybercrime

VALUE DRIVER        GROUP TOP RISK      KEY RESPONSES

Technology

   

As the 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 managing 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 risk has been elevated due to the implementation of remote working arrangements for the majority of our staff as a direct consequence of the COVID-19 pandemic.

 

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 in order to ensure that the systems are as secure as possible and that new threats are appropriately addressed.

An ongoing mandatory cybersecurity awareness training programme has been rolled out for all staff in light of the majority of them working remotely.

 
2
UNSUCCESSFUL EXECUTION OF CELL C DEBT RESTRUCTURE

VALUE DRIVER        GROUP TOP RISK      KEY RESPONSES

Strategy

   

The debt restructure of Cell C is critical to the successful turnaround thereof and the successful outcome would reduce the negative perception of the market on Blue Label’s inherent value.

Failure in this regard would have a negative impact on Blue Label’s profitability to the extent of cessation of its trading activities with Cell C.

 
  • Liquidity platform was put in place to manage cash flow within the business and to see Cell C through the recapitalisation process.
  • Network strategy: implementation of the extended roaming agreement with MTN commenced on 1 May 2020, which enables network innovation, promotes efficient network infrastructure utilisation and sustainable investment in network infrastructure.
  • Operational rationalisation: the Company has taken active steps to reduce its focus on pure revenue and subscriber growth to focus on profitable, long-term growth. There is an unrelenting focus on cost-cutting and there is a change in the operating model from build, own and operate all functions to focused investment, partnering and an acquirer of services.
  • Cell C has deliberately decreased its subscriber base by 28% over the 12 months to end May 2020, taking total subscribers down to 11.8 million. In spite of this, service revenue only declined by 2% to R13.9 billion. By right sizing the customer base and focusing on profitable customers, Cell C achieved a 10% increase in EBITDA to R3.7 billion.
  • The turnaround strategy is clearly delivering improved operational efficiencies with the positive impact of these changes filtering through during the latter six months of the reporting period.
  • All stakeholders are actively involved in the recapitalisation process and progress is being made for its successful conclusion.
   

Comm Equipment Company Proprietary Limited, which provides financing for cellular handsets and other devices is largely dependent on the sustainability of Cell C. The business model of this financing arrangement indirectly exposes the Group to the credit risk of Cell C Proprietary Limited.

 
  • Management believes it has effectively mitigated this risk through the operational model utilised as well as the very high collateral requirements contractually in place.
  • The Group has stringent requirements for the granting of credit to these customers.
  • The Group has direct access to the customer cash flows received by Cell C in respect of the handsets and devices financed.
  • The Group has direct access to the customer cash flows received by Cell C in respect of the customer subscriptions.
  • In the unlikely event of default, the Group has the right to sell the customer base.
3
Unethical Behaviour and Fraud

VALUE DRIVER        GROUP TOP RISK      KEY RESPONSES

Reputation and Ethics

   

BLT has a zero tolerance towards fraud and irregularities, with a requirement for all incidents to be investigated irrespective of the amount involved. The Group is vulnerable to fraudulent activities based on the nature of our digital inventory.

The Group has embarked on a roll-out of new products/solutions, which increased the exposure to potential fraudulentrelated activities.

 

We continue to refine operational controls, security and our infrastructure to prevent the risk of fraud.

Fraud and ethics is reported on at the Group's Social, Ethics and Transformation Committee as well as the Audit, Risk and Compliance Committee, which feeds into the Board Committee.

The KPMG Services Proprietary Limited (KPMG) hotline remains available for anonymous reporting of any suspicions of fraud.

Mandatory digital staff programmes have been developed in order to enhance awareness relating to fraud and ethics.

We are in the process of developing a Fraud Management Framework to address the risk of fraud within the Group.

4
Prolonged Business Model Transformation Impacting Market Relevance

VALUE DRIVER        GROUP TOP RISK      KEY RESPONSES

Operational Excellence

   

Inability of the Group to transform from a product-centric business to a digital and technology company. Historically, the Group was focused on distribution of products. Going forward, the Group needs to evolve so that technology will drive product development.

 

Management have embraced this change in mindset, especially from the onset of COVID-19. Accordingly, various technology driven initiatives have been developed and brought to market. Emphasis has been placed on automation, consumer reach, consumer-centric design, enhanced software build and release mechanisms, simplified integrations as well as platform flexibility and scalability to transform the commercial offerings of the Group.

5
Maturity of Business Continuity Management

VALUE DRIVER        GROUP TOP RISK      KEY RESPONSES

Operational Excellence

   

Business Continuity Plans (BCPs) and the Disaster Recovery Plan (DRP) are essential to ensure that the business is prepared for severe interruptions and that business processes can continue during a time of emergency or disaster with minimum downtime.

A lack of understanding and proper planning and implementation of business continuity can result in critical business processes being halted, severely affecting Group profitability and its reputation amongst our key stakeholders.

 

A business continuity Management Steering Committee has been formed to ensure appropriate management of business continuity.

Implementation of the active-active failover architecture throughout the Group.

BCPs have been reviewed by BCP consultants and we are currently addressing gaps in our plans.

COVID-19 produced a unique opportunity to test our DRP which proved to be resilient with staff being able to successfully operate remotely with minimal disruption to operations.

We will conduct simulation exercises to validate the plans and to ensure that all staff are aware of their roles and responsibilities in the event of a disaster and other disruptive events similar to COVID-19.

6
Potential Theft of e-tokens of Value

VALUE DRIVER        GROUP TOP RISK      KEY RESPONSES

Technology

   

The business is reliant on high-volume, low-margin distribution and sale of e-tokens of value. E-tokens are a form of electronic cash utilised for secure transactions.

The potential theft of e-tokens of value and the increased threat of cybercrime has to be closely managed in order to ensure that virtual stock is not susceptible to theft or corruption of voucher pins.

 

Confidentiality, integrity and availability of the virtual stock is managed through role-based access control, secure transfer of supplier/customer files and encryption with Hardware Security Modules.

A robust set of automated internal controls have been implemented to timeously detect and prevent the theft or corruption of voucher pins and related digital products.

7
Customer and Revenue Concentration Risk

VALUE DRIVER        GROUP TOP RISK      KEY RESPONSES

Operational Excellence

   

Certain financial institutions and large retailers are reliant on Blue Label for service delivery based on the large volume of transactions to support growth in their businesses. Non-service delivery to these stakeholders could result in a major negative financial impact on Group profitability and its reputation.

 

Long-standing relationships with these parties have been developed and a solid track record in respect of service delivery with key stakeholders is actively managed.

Failover and business continuity mechanisms have been matured to provide a high degree of certainty to maintain uptime beyond 99% despite continuous transaction volume growth.

Software release methodology and application-level failover introduced which reduces the need for system downtime during system release and maintenance windows.

8
Group-wide Reconciliation and Settlement Process

VALUE DRIVER        GROUP TOP RISK      KEY RESPONSES

Operational Excellence

   

The business processes large transaction volumes to multiple vendors and across various systems.

In order to prevent loss of revenue and minimise any customer dissatisfaction, it is essential that we ensure that our reconciliation and settlement process is efficiently run.

 

All main reconciliations have been automated across the Group with the finance department resolving any partially matched and unmatched files on a daily basis.

9
Supplier Relationships (Network Operators and Utilities)

VALUE DRIVER        GROUP TOP RISK      KEY RESPONSES

Operational Excellence

   

Each subsidiary is highly dependent on its respective suppliers to achieve its business objectives.

There is a risk of customers (aggregators) with significant footprint in the market dealing directly with the utilities. This can result in a loss of revenue as our customers would become competitors.

In addition, there is a potential for network operators to launch applications whereby consumers are granted direct access to airtime purchases.

 

Top management continues to maintain a solid track record with existing suppliers and to strengthen relationships.

Long-term contracts remain in place with suppliers, ensuring sustainable business relationships.

Management of margin, the breadth of product suites and efficient technological integration into customer backend systems discourage them dealing directly with utilities.