Blue Label Telecoms

The momentum of growth in Group earnings continued, resulting in headline earnings increasing by 22% to R668 million. This equated to an increase in headline earnings per share from 82.26 cents to 100.35 cents. After adjusting for the amortisation of intangible asset write-offs, net of taxation and non-controlling interests as a consequence of purchase price allocations, the resultant core headline earnings per share increased by 21% to 102.85 cents. Growth in earnings was predominantly achieved through increases in revenue of 19%, gross profit of 11% and EBITDA of 15%.

The Group’s performance was primarily attributable to organic growth, underpinned by an expanding multitude of distribution channels and in turn a growth in market share.

On the international front, the Group’s share of losses in Blue Label Mexico (BLM) declined by 28%, from R89 million to R63 million. A negative contribution of R27.7m from Oxigen services India (OSI) was congruent with significant expenditure incurred on the expansion of its mobile wallet subscriber base. The above losses incurred impacted negatively on Group headline earnings per share by 9.50 cents and 4.16 cents respectively.

Capital and reserves accumulated to R4.5 billion, net of accumulated dividends paid to date totalling R913 million, further strengthening the Group’s balance sheet. The net asset value equated to R6.62 per share.

South African Distribution

Growth in revenue of 19% was organically achieved through increased sales by expanding distribution channels. Revenue generated on “PINless top-ups” increased by R1.4 billion from R2.7 billion to R4.1 billion, equating to effective growth in South African distribution revenue of 23%, in that only the commission earned thereon is recognised.

Net commissions earned on the distribution of prepaid electricity continued to increase, escalating by R33 million to R197 million (20%) on turnover of R12.1 billion generated on behalf of the utilities.

Although there was a contraction in gross profit margins, gross profit increased by R138 million (10%) to R1.6 billion. The decline in margins from 6.67% to 6.15% was directly attributable to revenue generated from large distributors that were afforded additional margin incentives. This in turn manifested itself in an element of the growth in revenue.

The resultant growth in EBITDA of 9% to R1.1 billion equated to an EBITDA margin of 4.41%.

Contribution to core net profit increased by R66 million to R751 million (10%).

International Distribution

The share of net losses from associates and joint ventures comprised the following:

Ukash
Share of profits in Ukash ceased in March 2015 as the Group disposed of its interest therein.

Oxigen Services India
Since inception of the Group’s investment in OSI in 2004, focus has been on expanding its offline network of retail outlets. In this regard approximately 200 000 points of presence are operative. This element of the business generated profitability of R45 million of which the Group’s share equated to R25 million, in comparison to R2.6 million in the previous financial year.

In line with the dynamics of a shift in demand for online wallets, a strategic decision was made to enter this field. Although offline retail-based wallets continue to increase, penetration into the creation of wallets through online channels has the potential of compounding transactional growth through consumers being afforded the ability to transact on web-based and/or mobile applications.

The creation of these additional wallets will not only increase transactional revenue, but the wallets in themselves have an intrinsic value based on worldwide trends in this regard. In order to escalate penetration in both online and offline wallet acquisition, brand awareness is key to achieving this objective. Accordingly, during the second half of the financial year significant expenditure was incurred on the marketing of the brand and the acquisition of wallets. This resulted in the online company incurring losses of R92 million of which the Group’s share equated to R53 million. The Group’s net share of losses amounted to R28 million, equating to a negative turnaround of R30.3 million, after the amortisation of intangibles.

At the end of the previous financial year the total wallet subscribers amounted to 5.4 million. At the end of the current year this subscriber base has increased to 22.6 million, the bulk of which was congruent with the expenditure incurred in the second half of the financial year.

Daily money transfer deposits have grown from USD3.3 million per day as at 31 May 2015 to USD4.0 million per day as at 31 July 2016, increasing exponentially through its connectivity with the National Payment Corporation of India.

Blue Label Mexico
BLM’s losses declined from R186 million to R130 million, of which the Group’s share was R63.3 million after the amortisation of intangible assets.

The decline in losses was attributable to increases in revenue by 14%, gross profit by R67 million, underpinned by higher gross profit margins. Focus on cost efficiencies confined an increase in operational expenditure to 3%. The resultant EBITDA increased by R54 million (44%).

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.

The introduction of the distribution of starter packs that generate monthly compounded annuity income is expected to gain momentum which will result in further declines in losses going forward.

2DFine Holdings Mauritius
The Group’s effective shareholding in OSI prior to March 2016 was 55.83%. Of this shareholding, 37.22% was held by Gold Label Investments (GLI), a wholly owned subsidiary of the Group and 18.61% indirectly through the Group’s 50% shareholding in 2DFine Holdings Mauritius. In March 2016, a rights issue was offered by OSI for USD10.5 million. The Group exercised its rights for the entire amount through GLI congruent with 2DFine Holdings Mauritius waiving its rights. The effect of this is that GLI’s shareholding has increased from 37.22% to 40.97% and its indirect shareholding of 18.61% has been diluted to 17.21%. The latter has in turn resulted in a gain of R30 million on dilution, being the Group’s share of the increased net asset value emanating from the rights issue.

This gain was offset by the Group’s share of losses of R10.2 million attributable to interest paid on historical loans from GLI and BLT. The Group’s share of interest paid in the comparative year amounted to R7.6 million.

After deducting the gain on dilution of R30 million, the negative contribution by the international segment to core headline earnings amounted to R59.3 million.

Mobile

This segment comprises Viamedia, Supa Pesa, Blue Label One, Cellfind, Panacea and Simigenix, all of which contributed positive growth to revenue, EBITDA and core net profit.

Of the growth in EBITDA, Viamedia contributed R27 million, of which R17 million pertained to the release of a contingent portion of the acquisition price of a joint venture with Supa Pesa. The balance of the growth in EBITDA of R33 million pertained to the balance of the companies.

At core net profit level, of the positive contributions to growth, Viamedia accounted for R18 million, Blue Label One for R3 million and Cellfind, Panacea Mobile and Simigenix for R12 million. The balance of growth of R2 million was attributable to Blue Label Engage which incurred a loss in the comparative year. This company was disposed of in December 2014.

Solutions

In October 2015 Velociti was disposed of at a loss of R5.4 million. On exclusion of this capital loss as well as its historical positive contribution of R4 million to core net profit, the growth of the remaining entities increased from R20 million to R21.6 million (8%). This growth was primarily attributable to the contribution by Blue Label Data Solutions which generated revenue of R155 million and a growth in EBITDA of 12% from R33 million to R37 million. Its contribution to core headline earnings amounted to R21.4 million, equating to a growth of 12%.

Corporate

In the comparative year EBITDA losses were confined to R86 million inclusive of a once-off income receipt.

The current year EBITDA includes a release of the contingent portion of the acquisition price of Viamedia amounting to R31 million, partially offset by professional fees of R22 million relating to potential acquisitions. This limited EBITDA losses to R84 million, resulting in a marginal decline of 2%.

Depreciation, amortisation and impairment charges amounted to R98 million equating to an increase of R4 million on the comparative year. Of this amount, R20.6 million pertained to the amortisation of intangible assets resulting from purchase price allocations from historical acquisitions compared to R22.3 million in the comparative year.

Finance costs
Finance costs totalled R214 million, of which R48 million related to interest paid on borrowed funds and facilities and R166 million to imputed IFRS interest adjustments on credit received from suppliers. On a comparative basis, interest paid on borrowed funds and facilities amounted to R68 million and the imputed IFRS interest adjustment equated to R165 million.

The decline of R20 million on interest paid on borrowed funds and facilities was congruent with cash generated from trading operations. This decline was net of the perpetuation of applying excess 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.

Finance income
Finance income totalled R194 million, of which R64 million was attributable to interest received on cash resources and R130 million to imputed IFRS interest adjustments on credit afforded to customers. On a comparative basis, interest received on cash resources amounted to R31 million and the imputed IFRS interest adjustment to R142 million.

The increase in interest received from cash resources was directly attributable to growth in revenue, partially offset by the utilisation of funds for financing and investing activities.

Total assets increased by R279 million to R7.3 billion, of which growth in non-current assets accounted for R235 million and current assets for R44 million.

The movement in non-current assets included a net increase in investments in associate and joint venture companies of R362 million. These increases were offset by declines of R6 million of capital expenditure after depreciation, R53 million in intangible assets and goodwill, R24 million in loans receivable, R36 million in trade receivables relating to postpaid contracts in excess of 12 months and R8 million in other non-current assets.

The net increase in investment in associate and joint venture companies comprised additional capital contributions to BLM of R43 million and OSI of R168 million, a positive impact on foreign currency translation reserves of R82 million, a loan of R60 million granted to Edgars Connect, interest capitalised on loans of R46 million, unrealised foreign exchange gains thereon of R35 million and the gain of R30m on dilution relating to the Group’s share of the increased net asset value emanating from the rights issue in OSI. These increases were partially offset by the Group’s share of losses totalling R102 million inclusive of the amortisation of applicable intangible assets.

The net decline in intangible assets and goodwill mainly pertained to the amortisation of intangibles by R130 million, the decline in goodwill and intangible assets by R5 million relating to the disposal of Velociti, offset by R85 million expended on the purchase of software, development costs, starter pack bases and the expansion of distribution channels.

There was a net increase in current assets of R44 million. The material movements relate to an increase in inventories of R226 million and loans receivable of R54 million, offset by declines in cash resources of R199 million and trade receivables of R33 million.

The stock turn was 25 days. Bulk inventory purchase opportunities at favourable discounts 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 debtor’s collections improved from 46 days in the comparative year to 38 days.

The net profit attributable to equity holders of R692 million, less a dividend of R209 million, resulted in retained earnings accumulating to R3.1 billion.

In spite of an increase in trading activities, trade and other payables declined by R332 million as a result of early settlement payments in return for favourable settlement discounts. Consequently, average credit terms declined from 53 days in the comparative year to 40 days.

Cash flows from operating activities amounted to R433 million predominately attributable to increased trading activity, net of working capital requirements.

Cash flows applied to investing activities amounted to R396 million. Of this amount, R43 million related to an additional investment in BLM and R159 million to OSI. A further R59 million was applied to a loan to the associated Edgars Connect stores, R85 million to the purchase of intangible assets, R29 million to net loans granted and R42 million to capital expenditure. The above outflows were partially offset by net inflows received of R21 million of which R13 million related to the disposal of Velociti.

After applying R23 million to the acquisition of treasury shares and a dividend payment of R213 million to shareholders and non-controlling interests, cash on hand at year-end amounted to R589 million.

Forfeitable shares totalling 2 591 066 (2015: 2 937 836) were issued to qualifying employees. During the period 612 453 (2015: 419 998) shares were forfeited and 3 163 359 (2015: 3 819 409) shares vested.

Subsequent to year-end, dividend number 7 was declared and approved by the Board.

The Group’s current dividend policy is to declare an annual dividend. On 23 August 2016 the Board approved a gross ordinary dividend (dividend number 7) of 36 cents per ordinary share (30.6 cents per ordinary share net of dividend withholding tax) for the year ended 31 May 2016.

This dividend of R242 823 255 inclusive of withholding tax, equates to a 2.73 cover on headline earnings. The dividend for the year ended 31 May 2016 has not been recognised in the financial statements as it was declared after this date.

The dividend has been declared from income reserves. The issued share capital at the declaration date was 674 509 042 ordinary shares. The Company’s income tax reference number is 9062246179.

Share certificates may be dematerialised or rematerialised between Wednesday, 14 September 2016 and Friday, 16 September 2016, both days inclusive.

Before declaring the final dividend the Board applied the solvency and liquidity test on the Company and reasonably concluded that the Company will satisfy the solvency and liquidity test immediately after payment of the final dividend. The final dividend will be paid 26 days after the Directors have performed the solvency and liquidity testing.

Dividends tax is provided for at 15% of the amount of any dividend paid by Blue Label Telecoms, subject to certain exemptions. The dividends tax is a tax borne by the beneficial owner of the dividend and will be withheld by either the issuer of the dividend or by regulated intermediaries.

The participation in the recapitalisation of Cell C Proprietary Limited (Cell C) by way of subscription of shares therein is progressing positively. Management are of the opinion that the transaction is compelling both from an investment and commercial perspective.

The Group is well positioned to meet the increased demand for low cost smart phones and tablets, through its extensive distribution network in South Africa and beyond its borders.

The distribution of prepaid electricity will continue to grow, through enhanced government initiatives to roll out additional prepaid electricity meters throughout South Africa.

New initiatives at Blue Label Mexico, including the escalation of starter pack distribution, will contribute to a reduction in losses that have arisen from its aggressive roll out strategy.

OSI will focus on enhancing its mobile wallet subscriber base, with increased marketing to the vast unbanked population in India. This will result in growth in transactional revenue and the intrinsic value of the wallet subscriber base which has accumulated to 22.6 million active wallets at present.

PricewaterhouseCoopers Inc.’s unqualified audit reports on the Group annual financial statements and the summarised Group annual financial statements for the year ended 31 May 2016 are available for inspection at the Company’s registered office. This announcement which sets out the annual results for Blue Label Telecoms Limited for the year ended 31 May 2016 contains “forward-looking statements”, which have not been audited or reported on by the Group’s auditors, with respect to the Group’s financial condition, results of operations and businesses and certain of the Group’s plans and objectives.

The board of Blue Label Telecoms 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

LM Nestadt
Chairman

BM Levy and MS Levy
Joint Chief Executive Officers

DA Suntup* CA(SA)
Financial Director

23 August 2016

* Supervised the preparation and review of the Group’s audited year-end results.