Blue Label Telecoms

Core headline earnings for the year ended 31 May 2018 amounted to R1.03 billion, resulting in an increase of R236 million (30%). Core headline earnings per share increased from 116.24 cents per share to 120.61 cents per share (4%), post a dilution resulting from the issue of an additional 272 million shares to fund an element of acquisitions made during the financial year. Core headline earnings are calculated after adding back the amortisation of intangible assets as a consequence of the purchase price allocations to headline earnings.

On 2 August 2017, Blue Label, through its wholly owned subsidiary, The Prepaid Company (“TPC”), acquired 45% of Cell C Limited (“Cell C”) for R5.5 billion and 47.37% of 3G Mobile Proprietary Limited (“3G Mobile”) for R0.9 billion. On 6 December 2017, TPC acquired the remaining 52.63% of 3G Mobile for R1 billion. On 2 January 2018, Blue Label acquired 60% of Airvantage Proprietary Limited (“Airvantage”) for R151 million. The total of R7.55 billion was partly funded through the issue of 272 million shares amounting to R3.9 billion.

The core headline earnings comprised the Group’s share of profits of R569 million in Cell C which included the recognition of an increase in a deferred tax asset of R1.92 billion, of which the Group’s 45% share amounted to R865 million, its profit contributions from 3G Mobile of R157 million and from Airvantage of R2.6 million. These contributions were from the effective dates of each acquisition and not for a full year. The balance of earnings pertained to the remaining companies within the Group, inclusive of a derivative fair value gain of R3.7 million and once-off costs of imputed IFRS interest adjustments of R65 million attributable to the acquisitions of 3G Mobile and Airvantage. A further R28 million pertained to interest and costs relating to the 3G Mobile acquisition.

Core headline earnings in the current year were negatively impacted by R217 million as a result of the cessation of early settlement discounts and interest forfeiture. This was in lieu of the utilisation of working capital resources to fund the cash element of the acquisitions.

The investments in Oxigen Services India, Oxigen Online Services India (collectively, “Oxigen Services India”) and 2DFine Holdings Mauritius (“2DFine”) were accounted for as investments in associates and joint venture, applying the equity method up until 30 November 2016. Thereafter, these entities are accounted for as venture capital investments at fair value. The net effect thereof, resulted in a positive contribution to Group earnings of R35 million in the comparative year. In the current year, a downward fair value movement of R173 million less deferred taxation of R3 million thereon, which together with a net loan impairment of R87 million resulted in a negative impact of R257 million on Group earnings.

The underlying table demonstrates the impact on core headline earnings growth, on exclusion of the acquisitions of Cell C, 3G Mobile and Airvantage, the derivative fair value gain, non-recurring costs, cessation of early settlement discounts, interest forfeiture, the winding up process of Africa Prepaid Services as well as the impact on the accounting treatment pertaining to Oxigen Services India and 2DFine. Adjusted core headline earnings per share would have equated to a growth of 16% to 132.56 cents per share, had there been no further shares to fund the above acquisitions.

	May 2018  R’000		May 2017  R’000	Growth  R’000	Growth
EPS (cents)	116.12		114.13	1.99	2
Core headline earnings	1 032 016		795 684	263 332	30
Core HEPS (cents)	120.61		116.24	4.36	4
Core headline earnings adjusted for:
Share of losses, fair value loss and loan impairments from Oxigen	256 941		(35 484)
Share of profits from Cell C	(569 475)		–
Profit contribution from 3G Mobile	(156 722)		–
Profit contribution from Airvantage	(2 627)		–
Fair value gain on financial instruments	(3 688)
Present value interest expense relating to 3G Mobile/Airvantage	64 525		–
Transaction interest and costs relating to 3G Mobile acquisition	28 128		–
Cessation of settlement discounts and interest forfeiture	216 604		–
Once-off winding up cost of Africa Prepaid Services Group	20 737		–
Adjusted core headline earnings	886 439		760 200	126 239	17
Adjusted core HEPS (cents)	132.56		113.91	18.65	16

Group revenue increased by 1% to R26.8 billion. On imputing gross revenue generated on the continued growth in sales of “PINless top-ups”, of which only the gross profit earned thereon is accounted for, the effective growth in revenue equated to 9%.

EBITDA increased by 4% from R1.29 billion to R1.34 billion, underpinned by an increase in gross profit margins from 8.04% to 8.52%.

The Group’s share of losses in Blue Label Mexico declined from R37 million to R21.9 million (41%).

Cash generated from operating activities amounted to R3.2 billion, partly facilitating the payment of the cash element of the acquisitive transactions.

The net asset value per share increased by 35% to R9.88 and earnings per share increased by 2% to 116.12 cents per share.

Africa Distribution

	May 2018  R’000		May 2017  R’000	Growth  R’000	Growth  %
Revenue	26 245 206		25 944 102	301 104	1
Gross profit	2 014 169		1 873 443	140 726	8
EBITDA	1 344 824		1 344 714	110	–
Share of profits/(losses) from associates and joint ventures	583 122		(5 404)	588 526	101
– Cell C	562 567		–	562 567	–
– 3G Mobile	31 155		–	31 155	–
– Other	(10 600)		(5 404)	(5 196)	(96)
Core net profit	1 385 494		887 396	498 098	56
Core headline earnings	1 384 739		887 417	497 322	56
Gross profit margin	7.67%		7.22%
EBITDA margin	5.12%		5.18%

The contributions to Group core headline earnings by the Africa Distribution segment totalled R1.38 billion, equating to a growth of R497 million (56%). The financial results for the year ended May 2018 includes the contributions of 3G Mobile, Cell C, Airvantage and the remaining entities within this segment that were in existence in the comparative year.

The table below illustrates the composition of the Africa Distribution division:

	May 2018  R’000		3G Group  R’000	Airvantage  R’000	Cell C  R’000	Remaining  entities  R’000
Revenue	26 245 206		1 387 029	36 929	–	24 821 248
Gross profit	2 014 169		226 184	29 241	–	1 758 744
EBITDA	1 344 824		181 322	20 650	–	1 142 852
Share of (losses)/profits from associates and joint ventures	583 122		31 155	–	562 567	(10 600)
– Cell C	562 567		–	–	562 567	–
– 3G Mobile	31 155		31 155	–	–	–
– Other	(10 600)			–		(10 600)
Core net profit	1 385 494		157 479	8 267	571 214	648 534
Core headline earnings	1 384 739		156 722	8 267	569 475	650 275
Gross profit margin	7.67%		16.31%	79.18%	–	7.09%
EBITDA margin	5.12%		13.07%	55.92%	–	4.60%

3G Mobile

From the date of acquisition of 47.37% until 30 November 2017, its financial results for the four-month period were equity accounted for as an associate. Its core net profit during that period amounted to R75 million, of which the Group’s share equated to R35 million. After the amortisation of intangible assets it’s contribution as an associate amounted to R31 million.

On 6 December 2017 the remaining 52.67% of the company was acquired and it became a wholly owned subsidiary from that date. Revenue generated for the six months to 31 May 2018 amounted to R1.4 billion, gross profit to R226 million at a margin of 16.31% and EBITDA to R181 million. Its core net profit for the six months as a wholly owned subsidiary amounted to R122 million.

Core net profit for the 10 months ended 31 May 2018 totalled R196 million, of which the Group’s share equated to R157 million.

Airvantage

On 2 January 2018, Blue Label acquired 60% of Airvantage. Revenue generated by it for the five months to 31 May 2018 amounted to R37 million, gross profit to R29 million at a margin of 79.18% and EBITDA to R21 million.

Its core net profit contribution for the above period totalled R8.3 million.

Cell C

On 2 August 2017, The Prepaid Company acquired a 45% shareholding in Cell C.

For the 10 months ended May 2018, Cell C’s net profit amounted to R1.14 billion. This comprised trading losses of R782 million offset by the recognition of a deferred tax asset amounting to R1.92 billion. The Group’s share of this net profit is R512 million. BLT’s accounting policies exclude equity settled share-based payment charges from its associates and we have not early adopted IFRS 15 and IFRS16. Thus an adjustment of R65 million and negative R6 million respectively is required.

The net result was a positive contribution of R571 million to BLT’s core earnings.

Remaining entities

The decline in revenue by R1.1 billion was attributable to the continuous shift in consumer buying patterns from traditional purchasing of airtime to that of “PINless top-ups”. Revenue generated on “PINless top-ups” increased by R2.7 billion from R6.1 billion to R8.8 billion (44%), equating to an effective increase of 5%, in that only the gross profit earned thereon is recognised.

Net commissions earned on the distribution of pre-paid electricity continued to increase, escalating by R24 million to R239 million (11%) on an increase in revenue generated on behalf of the utilities from R14 billion to R16.9 billion (21%).

Gross profit margins declined from 7.22% to 7.09%, partly attributable to the forfeiture of R50 million in early settlement discounts. As a consequence of applying cash resources towards the acquisitive costs of the investments made during the financial year, bulk purchasing opportunities and early settlement discounts were impeded to the extent of those cash resources. The impact thereon equated to a minimum of R251 million, being the interest forfeiture that arose as a result of this alternative application of funds.

The above forfeiture of R301 million, together with an increase in overheads, which included costs attributable to the escalation of the quantum of distribution channels, had a direct impact on negative growth in EBITDA.

Core net profit was inclusive of a derivative fair value gain of R3.7 million offset by once-off costs of the imputed IFRS interest adjustments of R65 million attributable to the acquisition of 3G Mobile and Airvantage as well as R28 million pertaining to interest and costs relating to the 3G Mobile acquisition.

International

	May 2018  R’000		May 2017  R’000	Growth  R’000	Growth  %
EBITDA	(2 903)		(31 792)	28 889	(91)
Gain on associate measured at fair value	(173 645)		160 200	(333 845)
Share of (losses)/profits from associates and joint ventures	(21 647)		(162 218)	140 571	87
– Oxigen Services India	–		(119 831)	119 831	100
– Blue Label Mexico	(21 900)		(36 978)	15 078	41
– 2DFine Holdings Mauritius	–		(5 409)	5 409	(100)
– Mpower	253		–	253
Non-controlling interest	(26 058)		7	(26 065)
Core net loss	(225 451)		(17 213)	(208 238)	(1 210)
Core headline loss	(230 615)		(16 874)	(213 741)	(1 267)

The decline in negative EBITDA of R29 million was attributable to a positive turnaround in foreign exchange movements of R24 million and loan releases of R16 million relating to the winding up process of the Africa Prepaid Services group. These positive contributions were offset by start-up expenses of R11 million incurred by Airvantage pertaining to its newly established operation in Brazil.

Non-controlling interest relates to minority shareholders in the Africa Prepaid Services group and Airvantage. The former was allocated R32 million for its share of the loan releases as a consequence of the winding up process therein, offset by the minority share of expenses of R4.8 million in Airvantage Brazil.

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

Oxigen Services India and 2DFine

In the comparative year, the investments in Oxigen Services India and 2DFine were accounted for as investments in associates and joint venture, applying the equity method up until 30 November 2016. From that date these entities have been accounted for as venture capital investments at fair value. The fair value gain of R160 million and the Group’s share of losses of R125 million, resulted in a positive contribution to Group earnings of R35 million in the comparative year.

The fair value of venture capital investments is required to be assessed at each reporting period. The change in fair value between 31 May 2017 and 31 May 2018 decreased by R173 million less deferred taxation of R3 million thereon, which together with a net loan impairment of R16 million resulted in a negative impact of R186 million on Group earnings. A further loan impairment of R71 million was accounted for in the corporate segment.

Although negotiations remain in progress with potential investors, until such time as a transaction is completed, the lack of cash resources will inhibit its propensity for growth through the roll out of a significant number of micro-ATM terminals. The latter is the essence of its ability to generate growth in the market value of the investment therein and is the cause of the necessity to reduce the fair value of the Oxigen group.

Blue Label Mexico

Blue Label Mexico’s losses declined from R74.4 million to R42.8 million, of which the Group’s share amounted to R21.9 million after the amortisation of intangible assets. In the comparative year the Group’s share of losses amounted to R36.6 million.

The decline in loss was attributable to an increase in revenue from R3.1 billion to R4 billion (30%). This was achieved in the pursuance of its strategy by increasing the number of transactional terminals at higher ARPUs, in line with customer penetration through incremental products and services provided as well as extending its reach to merchants through the distribution channels of Grupo Bimbo.

The distribution of starter packs generates monthly compounded annuity income. This has gained momentum, placing Blue Label Mexico as the leader in SIM distribution throughout Mexico. Bill payments, credit and debit card acquiring and food vouchers have increased perpetually.

Gross profit increased by R43 million (39%), underpinned by an increase in gross profit margins. The growth in margins was congruent with the increase in the distribution of starter packs, higher margins afforded by the smaller networks and the expansion of the bouquet of its product offerings.

Operational expenditure increased by 7%, of which payroll costs accounted for the majority of the increase in line with the necessity to employ additional staff in support of the growth in business operations.

The resultant EBITDA equated to a turnaround of R27 million (98%) from a negative R27 million to break even.

Mobile

	May 2018 R’000		May 2017 R’000	Growth R’000	Growth %
Revenue	359 970		347 858	12 112	3
Gross profit	204 349		200 079	4 270	2
EBITDA	101 883		99 101	2 782	3
Core net profit	59 553		56 327	3 226	6
Core headline earnings	59 679		56 289	3 390	6

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

The revenue increase of 3%, resulted in a marginal increase in gross profit at static margins. Overhead increase was confined to 2%, resulting in a growth in EBITDA by 3% to R102 million.

Contribution to core headline earnings increased by 6% to R60 million, supported by an increase in net finance income through positive cash generation from operations.

Solutions

	May 2018 R’000		May 2017 R’000	Growth R’000	Growth %
Revenue	195 089		177 621	17 468	10
Gross profit	63 574		55 480	8 094	15
EBITDA	42 838		34 020	8 818	26
Share of (losses)/profits from associates and joint ventures	4 579		455	4 124	906
Core net profit	29 836		18 956	10 880	57
Core headline earnings	29 814		18 956	10 858	57

Escalating demand for aggregated data and lead generations resulted in an increase in revenue by 10% to R195 million at a gross profit margin increase from 31.2% to 32.6%. Overhead increases were limited to 1%, resulting in a 26% growth in EBITDA to R43 million.

A joint venture with United Call Centre Solutions, an outbound call centre operation, contributed R4.3 million towards profitability.

Of the core headline earnings of R30 million, Blue Label Data Solutions accounted for R24.5 million in comparison to R17.5 million in the prior year, equating to growth of 40%.

Corporate

	May 2018  R’000		May 2017  R’000	Growth  R’000	Growth  %
EBITDA	(146 489)		(158 302)	11 813	7
Core net loss	(211 463)		(150 142)	(61 321)	(41)
Core headline loss	(211 601)		(150 103)	(61 498)	(41)

Of the decline in negative EBITDA of R12 million, R15 million pertained to a positive turnaround in foreign exchange movements offset by an increase of R3 million in expenditure.

The negative contribution to Group core headline earnings increased by R61 million to R211 million, which losses included the loan impairment of R71 million pertaining to 2DFine resulting from the downward adjustment to the fair value of the Oxigen group.

Depreciation, amortisation and impairment charges increased by R130 million to R243 million. Of this increase, R2 million pertained to depreciation on additional capital expenditure incurred during the year, R91 million to impairments and R37 million relating to the amortisation of intangible assets of which R29 million emanated from purchase price allocations on historical acquisitions, which increased from R18 million to R47 million.

The Group has reconsidered its accounting policy with respect to financing components included in its sale and purchase transactions in the ordinary course of business. It has concluded that there is no financing component in the above transactions. In accordance with IAS 8, it has therefore restated the comparative financial information for this change in accounting policy.

Finance costs

Finance costs totalled R307 million, of which R167 million related to interest paid on borrowed funds and R140 million to imputed IFRS interest adjustments. Of the latter amount, R75 million was attributable to credit received from suppliers and R65 million to the acquisitions of 3G Mobile and Airvantage. On a comparative basis, interest paid on borrowed funds amounted to R106 million and the imputed IFRS interest adjustment equated to R4 million.

The increase of R61 million was attributable to the part payment for the cash elements of the acquisition of shareholdings in Cell C and 3G Mobile. These payments were facilitated through a change in the working capital structure of the Group. In addition, a further R1 billion was advanced to Cell C on a piecemeal basis for the purpose of it applying such funds towards capital expenditure.

Finance income

Finance income totalled R195 million, of which R192 million was attributable to interest received on cash resources and R3 million to imputed IFRS interest adjustments on credit afforded to customers. In the prior year, interest received on cash resources amounted to R79 million and the imputed IFRS interest adjustment to R5 million.

The increase of R113 million in interest received from cash resources included interest of R84 million from Cell C for the advance of the R1 billion to them for capital expenditure.

The limited growth in finance income was predominately attributable to the utilisation of an element of cash resources for the funding of the Cell C transaction.

Total assets increased by R9.2 billion to R18 billion of which non-current assets accounted for R7.2 billion and current assets for R2 billion.

Non-current assets included increases in investments in and loans to associates and joint ventures of R6.1 billion, in intangible assets and goodwill of R998 million, in capital expenditure net of depreciation of R25.5 million, in loans receivable of R16.4 million, in trade and other receivables of R331 million and deferred tax assets of R19 million. These increases were offset by a net decrease of R266 million in venture capital associates and joint ventures.

The net increase of R6.1 billion in investment in associate and joint venture companies comprised the acquisition of Cell C, 3G Mobile and iCrypto for R5.5 billion, R0.9 billion and R11.7 million respectively, the Group’s net share of profits totalling R592 million inclusive of the amortisation of applicable intangible assets and loans granted of R18.5 million. These increases were offset by the step-up of 3G from an associate to a subsidiary which amounted to R927 million, dividends received of R4.3 million and a negative impact on foreign currency translation reserves of R15.9 million.

Of the net increase in intangible assets and goodwill of R998 million, R432 million related to goodwill and R566 million to intangible assets. Of the goodwill increase, R381 million pertained to 3G Mobile and R53 million to Airvantage. The increase in intangible assets related to purchase price allocations raised in terms of IFRS 3 of R464 million for 3G Mobile and R193 million for Airvantage as well as an additional R48 million expended on the purchase of software and internally generated software development costs. These intangible increases were offset by amortisation of R139 million and a negative impact of foreign currency translation of R2 million.

The net decrease in venture capital associates and joint ventures of R266 million was due to a decline of R173 million in the fair value of the investment in Oxigen Services India and 2DFine which necessitated a loan impairment of R142 million. In addition there were unrealised foreign exchange losses on loans of R9.8 million. These negative movements were offset by a capital contribution for a rights issue amounting to R25.1 million, interest capitalised of R23 million on loans as well as loans granted of R11.1 million.

Of the increase in current assets, material movements included increases in the loan granted to Cell C of R1 billion, in a financial asset at fair value through profit and loss of R168 million, in trade and other receivables of R2.8 billion offset by decreases in inventories of R1.6 billion and in cash resources of R403 million.

The increase of R168 million in a financial asset at fair value through profit and loss, emanating from the Cell C transaction, related to a USD9 million (R117 million) part payment for the acquisition of bond notes issued by Cedar Cellular Investments 1 Proprietary Limited. A net fair value gain of R5.6 million was recognised in the current year relating to this financial asset as well as the USD80 million liquidity support provided to Magnolia Cellular Investment 2 (RF) Proprietary Limited.

The stock turn equated to nine days compared to 33 days for the financial year ended 31 May 2017.

The debtor’s collection period increased to 75 days compared to 39 days for the financial year ended 31 May 2017. This increase in credit afforded was indicative of the impact of financing the handset element of 24-month post-paid contracts provided to the Cell C customer base by Comm Equipment Company Proprietary Limited (“CEC”), a wholly owned subsidiary of 3G Mobile. The debtor’s collection period afforded through traditional trading averaged 43 days.

Net profit attributable to equity holders of R994 million, less a dividend of R350 million, resulted in retained earnings accumulating to R4.3 billion.

Share capital and share premium increased by R3.9 billion congruent with the issue of 272 million shares for capital raised to facilitate part payment of the acquisitions made during the financial year.

Borrowings increased by R3 billion, of which R1.5 billion accounted for facilities utilised by CEC for the financing of mobile handsets and the balance utilised for working capital requirements.

Trade and other payables increased by R1.5 billion, with average credit terms increasing to 66 days compared to 53 days for the financial year ended 31 May 2017.

Cash flows generated from operating activities amounted to R3.2 billion, partly attributable to a change in the working capital structure.

Cash flows applied to investing activities amounted to R7.8 billion. Of this amount, funds applied to acquisitions amounted to R5.5 billion for Cell C, R857 million for 3G Mobile, R151 million for Airvantage and R11.7 million for iCrypto Inc. A further R1 billion was loaned to Cell C for its capital expenditure requirements, R25 million relating to the rights issue in Oxigen Services India, R117 million for the purchase of the bond notes, R55 million for professional fees, R31 million for the purchase of intangible assets and R72 million for capital expenditure.

Cash flows from financing activities amounted to R4.2 billion, of which R3.65 billion related to proceeds received on shares issued and R935 million to an increase in borrowings. After applying R28.8 million to the acquisition of treasury shares and a dividend payment of R378 million to shareholders and non-controlling interests, cash on hand at year end amounted to R948 million.

Forfeitable shares totalling 1 809 711 (2017: 1 376 257) were issued to qualifying employees. During the year 456 379 (2017: 121 226) shares were forfeited and 2 432 743 (2017: 2 141 673) shares vested.

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

The Board has approved a share buyback programme.

On 30 June 2018, TPC subscribed for 48% of Glocell Distribution Proprietary Limited (“Glocell Distribution”), a newly formed company that acquired the business operations of Glocell Proprietary Limited (“Glocell”). The business operations include the vending of airtime and other value-added services to a long established client base. The cost of subscription for the shares amounted to R173.4 million by way of capitalising debt owing by Glocell to TPC.

On 2 August 2018, Cell C procured R1.4 billion of funding from a consortium of financial institutions for a tenure of 12 months, secured by airtime to the value of R1.75 billion. In the event of default, TPC has undertaken to purchase such inventory from the consortium on a piecemeal basis over a specified period that has been agreed upon. Any shortfall of this purchase would be in lieu of purchases made from Cell C within that period. The payment terms as between TPC and Cell C on the normal Cell C trading account would be extended by 120 days, ensuring that TPC will not be at any risk of having to purchase airtime in excess of its monthly requirements.

On 1 August 2018, BLT acquired 60% of the issued share capital of AV Technology Limited for a purchase consideration of USD6.4 million (R84.2 million).

Post-year-end the Board approved a share buyback programme.

The Group is accelerating its programme of providing point of sale devices to traders within the informal market and hereby enable them to distribute Blue Label’s product offerings.

Blue Label is one of the primary distribution channels for Cell C products and services. The investment in Cell C provides opportunities to realise synergies and enhance product distribution initiatives.

3G Mobile continues to expand its handset financing model to include other products.

Airvantage has concluded an agreement with a large network operator in Brazil, where it will replicate its business model.

Blue Label Mexico is seeing consistent growth in revenue, improved gross profit margins and compounding annuity revenue generated from starter pack sales. This is expected to result in a positive contribution to Group earnings within the year ahead.

These summary consolidated financial statements for the year ended 31 May 2018 have been audited by PricewaterhouseCoopers Inc., who expressed an unmodified opinion thereon. The auditor also expressed an unmodified opinion on the consolidated annual financial statements from which these summary consolidated financial statements were derived.

A copy of the auditor’s report on the summary consolidated financial statements and of the auditor’s report on the annual consolidated financial statements are available for inspection at the company’s registered office, together with the financial statements identified in the respective auditor’s reports.

The auditor’s report does not necessarily report on all of the information contained in this announcement/financial results. 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.

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

21 August 2018

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