Blue Label Telecoms

Group earnings continued to increase organically primarily attributable to South Africa Distribution increasing its contribution to Group core headline earnings by 19%.

Although Blue Label Mexico (“BLM”) incurred losses, its losses continued to decline, with the Group’s share thereof reducing by 42%, from R63 million to R37 million.

The continuous shift in consumer buying patterns from traditional purchasing of airtime to that of “PINless topups”, resulted in limited growth in Group revenue. Only the gross profit earned thereon is accounted for in Group revenue as opposed to the gross amount generated from transactions of this nature. On imputing such amounts, the effective growth would have equated to 7%.

Gross profit increased by R343 million (19%) to R2.2 billion congruent with an increase in margins from 6.98% to 8.26%.

After accounting for a negative turnaround in foreign exchange movements of R125.7 million, a net negative movement of R37.9 million relating to a release of a contingent portion of deferred purchase considerations and an increase in overheads of R90 million, the resultant EBITDA increased by R91 million (7%) to R1.33 billion.

The investments in Oxigen Services India, Oxigen Online Services India, collectively (“Oxigen Services India”), and 2DFine Holdings Mauritius (“2DFine”) were historically accounted for as investments in associates and joint venture, applying the equity method up until 30 November 2016. From that date these entities are accounted for as venture capital investments, which, in accordance with IAS 28 – Investments in Associates and Joint Ventures, have been accounted for at fair value. The differential between the carrying value of the investments and their fair value is reflected as a gain on associates and joint venture measured at fair value.

A fair value gain of R160 million and the Group’s share of losses for the year under review of R125 million, equated to a net positive contribution of R35 million to Group earnings. On exclusion of this positive contribution, headline earnings would have amounted to R752 million and core headline earnings to R766 million, equating to 112.74 cents and 114.85 cents per share respectively.

Capital and reserves accumulated to R5 billion, net of accumulated dividends paid to date totalling R1.16 billion, further strengthening the Group’s balance sheet. The net asset value increased by 11% to R7.32 per share.

South African Distribution

Revenue remained consistent with that of the prior year. However, revenue generated on “PINless top-ups” increased by R2 billion from R4.1 billion to R6.1 billion, equating to effective growth in South African Distribution revenue of 7%, in that only the commission earned thereon is recognised.

Net commissions earned on the distribution of prepaid electricity continued to increase, escalating by R18 million to R215 million on a value of R14 billion generated on behalf of the utilities.

Gross profit margins improved from 6.15% to 7.43%, resulting in an increase in gross profit of R334 million (21%) from R1.58 billion to R1.92 billion. The improvement in margins was attributable to a hybrid of additional discounts received on early settlement payments and compounded annuity revenue. The increase in gross profit was partially negated by additional net finance costs, congruent with applying excess funds and facilities on a piecemeal basis to early settlement discounts.

EBITDA increased by 22% to R1.39 billion equating to an EBITDA margin of 5.38%.

Contribution to Group core headline earnings increased by R142 million (19%) to R893 million.

International

The decline in EBITDA of R76 million was directly attributable to a negative turnaround in foreign exchange movements.

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

Oxigen Services India and 2DFine Holdings Mauritius
The financial performance of Oxigen Services India for the six months ending November 2016 was equity accounted for, of which the Group’s share of losses amounted to R120 million. The major portion of these losses was attributable to substantial expenditure incurred on the marketing of the brand and the acquisition of wallets.

The Group’s share of losses in 2DFine amounted to R5.4 million for the six months ending November 2016. These losses were attributable to interest incurred on historical loans from Gold Label Investments and Blue Label. In the prior year, the Group’s share of profits amounted to R19.7 million. This pertained to a gain on dilution of R30 million, being the Group’s share of the increased net asset value emanating from a rights issue in Oxigen Services India, offset by a share of losses of R10.2 million relating to interest incurred on the above loans. The gain on dilution was deducted as a headline earnings adjustment, resulting in a negative contribution of R59.3 million by the International segment to core headline earnings.

With effect from 30 November 2016, Oxigen Services India and 2DFine have been accounted for as venture capital investments, and as a result thereof the investments are measured at fair value. Consequently, any further losses incurred by the above entities from that date will have no impact on Group earnings.

The differential between the carrying value of the investments and their fair value amounted to R160 million and has been accounted for in the reviewed condensed Group statement of comprehensive income as a gain on associate and joint venture measured at fair value. The fair value gain of R160 million and the Group’s share of losses for the year of R125 million, equated to a net positive contribution of R35 million to Group earnings.

Blue Label Mexico
BLM’s losses declined from R130 million to R74 million, of which the Group’s share amounted to R37 million after the amortisation of intangible assets. In the comparative period the Group’s share of losses amounted to R63 million.

The decline in losses was achieved in spite of a reduction in revenue by 23%. This decline was caused by intense competition amongst carriers, resulting in lower tariffs payable by the end user. However, in the latter half of the financial year pricing stabilised, resulting in an increase in revenue during that period.

The overall decline in revenue was compensated for by an increase in gross profit of R26.6 million (32%), underpinned by higher gross profit margins.

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.

Focus on cost efficiencies resulted in a decrease in operational expenditure by 9%. Whilst the resultant EBITDA remained negative, it increased by R42.7 million (61%).

Bill payments, credit and debit card acquiring, food vouchers and compounding annuity revenue emanating from starter pack distribution are perpetually increasing, which together with improved margins and expense containment resulted in a decline in losses.

Mobile

	May 2017 R’000			May 2016 R’000		Growth R’000		Growth %
Revenue	347 858			291 856		56 002		19%
Gross profit	200 079			182 533		17 546		10%
EBITDA	99 101			111 142		(12 041)		(11%)
Core net profit	56 327			64 273		(7 946)		(12%)
Core headline earnings	56 289			65 333		(9 044)		(14%)

This segment comprises Viamedia, Supa Pesa, Blue Label One, Cellfind, Panacea and Simigenix.

Although revenue increased by 19% and gross profit by 10%, a negative movement of R12 million relating to a release of a contingent portion of deferred purchase consideration resulted in negative growth in EBITDA by 11%.

On exclusion of the deferred purchase consideration adjustment, the effective contribution to core headline earnings equated to a growth of R3 million (5%).

Solutions

	May 2017 R’000			May 2016 R’000		Growth R’000		Growth %
Revenue	177 621			190 326		(12 705)		(7%)
Gross profit	55 480			64 418		(8 938)		(14%)
EBITDA	34 020			35 889		(1 869)		(5%)
Core net profit	18 956			16 116		2 840		18%
Core headline earnings	18 956			21 564		(2 608)		(12%)

In October 2015 Velociti was disposed of at a loss of R5.4 million. On exclusion of this capital loss from core net profit in the prior year, core headline earnings in the remaining entities declined by R2.6 million.

On omission of Velociti’s historical contribution, revenue generated by the remaining entities, dominated by Blue Label Data Solutions, increased by 10%. However, margin compression resulted in static growth in gross profit, which together with an increase in overheads, which included a R4 million loan impairment, resulted in the decline in its core headline earnings of 12%.

Corporate

	May 2017 R’000			May 2016 R’000		Growth R’000		Growth %
Revenue	(158 302)			(84 057)		(74 245)		(88%)
Core net profit	(150 142)			(93 748)		(56 394)		(60%)
Core headline loss	(150 103)			(93 745)		(56 358)		(60%)

Of the decline in EBITDA of R74 million, R46 million pertained to a negative turnaround in foreign exchange movements and R26 million to a net negative movement relating to a release of a contingent portion of deferred purchase considerations.

Its negative contribution to Group core headline earnings increased by R56 million to R150 million.

Depreciation, amortisation and impairment charges increased by R15 million to R113 million. Of this amount, R18 million pertained to the amortisation of intangible assets resulting from purchase price allocations on historical acquisitions compared to R20.6 million in the comparative year. The balance of the increase was congruent with capital expenditure incurred during the year.

Finance costs
Finance costs totalled R303 million, of which R106 million related to interest paid on borrowed funds and R197 million to imputed IFRS interest adjustments on credit received from suppliers. On a comparative basis, interest paid on borrowed funds amounted to R48 million and the imputed IFRS interest adjustment equated to R166 million.

The increase of R58 million on interest paid on borrowed funds was mainly due to applying 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. The additional finance costs were more than compensated for by the growth in gross profit and gross profit margins.

Finance income
Finance income totalled R242 million, of which R79 million was attributable to interest received on cash resources and R163 million to imputed IFRS interest adjustments on credit afforded to customers. In the prior year, interest received on cash resources amounted to R64 million and the imputed IFRS interest adjustment to R130 million.

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

Total assets increased by R1.4 billion to R8.7 billion of which current assets increased by R1.5 billion and non-current assets reduced by R76 million.

Non-current assets included increases in capital expenditure net of depreciation of R11 million, in loans receivable of R30.9 million and trade and other receivables of R13.3 million. These increases were offset by decreases of R86 million in intangible assets and goodwill and R50.6 million in investments in associates and joint ventures.

The net decrease of R50.6 million in investment in associate and joint ventures comprised the R160 million gains measured at fair value relating to Oxigen Services India and 2DFine, a capital contribution of R25.5 million to Oxigen Services India, a further equity loan granted to Lornanox of R9.3 million, the acquisition of Utilities World for R12 million, interest of R23.5 million capitalised on loans and loans granted of R14 million. These increases were offset by the Group’s share of losses therein totalling R165 million inclusive of the amortisation of applicable intangible assets, a negative impact on foreign currency translation reserves of R82.4 million and unrealised foreign exchange losses on loans of R47.2 million.

The net decline of R86 million in intangible assets and goodwill mainly pertained to the amortisation of intangibles by R143 million, offset by R56 million expended on the purchase of software, internally generated software development costs and starter pack bases.

Of the increase in current assets, material movements included increases in inventories of R521 million, loans receivable of R90 million, cash resources of R762 million and trade receivables of R80 million.

The stock turn equated to 33 days compared to 25 days for the comparative year. Bulk inventory purchase opportunities at favourable discount rates 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 debtors’ collection period increased to 39 days compared to 38 days for the comparative year.

Net profit attributable to equity holders of R787 million, less a dividend of R243 million, resulted in retained earnings accumulating to R3.6 billion.

Trade and other payables increased by R881 million, with average credit terms increasing to 53 days compared to 40 days for the comparative year.

Cash flows generated from operating activities amounted to R1.36 billion, predominately attributable to increased trading activity, net of working capital requirements.

Cash flows applied to investing activities amounted to R320 million. Of this amount, R56 million related to the purchase of intangible assets, R57 million to capital expenditure, R25.5 million to a capital contribution to Oxigen Services India, R133 million to net loans granted, R50.7 million to earn outs relating to prior acquisitions and R7.5 million to the acquisition of Utilities World. These outflows were partially offset by R1.7 million from the sale of fixed assets and R13 million from an earn-out received emanating from the sale of Ukash.

After applying R7 million to the acquisition of treasury shares and a dividend payment of R270 million to shareholders and non-controlling interests, cash on hand at year end amounted to R1.35 billion.

Forfeitable shares totalling 1 376 257 (2016: 2 591 066) were issued to qualifying employees. During the year 121 226 (2016: 612 453) shares were forfeited and 2 141 673 (2016: 3 163 359) shares vested.

The Group’s current dividend policy is to declare an annual dividend. On 23 August 2017 the Board approved a gross ordinary dividend (dividend number 8) of 40 cents per ordinary share (32 cents per ordinary share net of dividend withholding tax) for the year ended 31 May 2017.

The dividend of R349 803 616 inclusive of withholding tax equates to a 2.25 cover on headline earnings. The dividend for the year ended 31 May 2017 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 874 509 041. The Company’s tax reference number is 9062246179. The salient dates are as follows:

Share certificates may be dematerialised or rematerialised between Wednesday, 13 September 2017 and Friday, 15 September 2017, 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 24 days after the Directors have performed the solvency and liquidity testing.

Dividend tax is provided for at 20% of the amount of any dividend paid by Blue Label, subject to certain exemptions. The dividend 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.

Blue Label is one of the primary distribution channels for Cell C Proprietary Limited (“Cell C”) products and services. The acquisition therein provides a compelling value proposition to the Group, to Cell C and its customers through vertical integration that will afford both companies the opportunity to realise synergies in product distribution. Cell C now has a sustainable capital structure to deliver on their strategic objectives.

3G Mobile Proprietary Limited (“3G Mobile”) is one of Africa’s largest distributors and financiers of mobile devices and handsets to major retailers and cellular network providers. It has distribution rights for all major tier one and tier two mobile devices and allied products from the manufacturers thereof. Through its wholly owned subsidiary, Comm Equipment Company Proprietary Limited, it provides the financing of the mobile handset component of postpaid and hybrid contracts to Cell C, with the capability of extending such services to other networks and channels. These functions supplement Blue Label’s strategic objectives to provide value added services to both Cell C and its own customer base.

3G Mobile provides the ideal platform to combine Blue Label’s low cost and certified pre-owned mobile handset divisions into a consolidated group. The acquisition thereof is both earnings accretive and provides a solid foundation for distribution into the burgeoning low cost smartphone market.

Blue Label Mexico is expected to provide a positive contribution to Group profitability, given their consistent growth in revenue generation at sustainable improved gross profit margins and compounding annuity revenue generated from starter packs.

“Big Data” creates the opportunity to upsell and cross sell the various bouquets of products and services that Blue Label has to offer, through its distribution channels, by intelligently understanding consumer behaviour.

Value added services, including the provision of short-term finance for products and services required by consumers, are initiatives that are currently under consideration.

These condensed Group financial statements for the year ended 31 May 2017 have been reviewed by PricewaterhouseCoopers Inc., who expressed an unmodified review conclusion. A copy of the auditor’s review report is available for inspection at the Company’s registered office together with the financial statements identified in the auditor’s report.

The auditor’s report does not necessarily report on all of the information contained in this announcement. Shareholders are therefore advised that in order to obtain a full understanding of the nature of the auditor’s engagement they should obtain a copy of the auditor’s report together with the accompanying financial information from the issuer’s registered office.

This announcement which sets out the reviewed annual results for Blue Label Telecoms Limited for the year ended 31 May 2017 contains “forward-looking statements”, which have not been reviewed 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 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 2017

* Supervised the preparation of the reviewed condensed Group financial statements.