Commentary

OVERVIEW

Headline earnings per share increased by 21% to 82.26 cents, net of the Group’s share of losses of R85 million in Blue Label Mexico which equated to 12.82 cents per share. The remaining businesses within the Group contributed 95.08 cents to headline earnings per share.

The increase in headline earnings was achieved through organic growth in the South African distribution segment, assisted by the acquisitions of Retail Mobile Credit Specialists Proprietary Limited (RMCS) and Viamedia Proprietary Limited (Viamedia).

The growth in earnings was primarily attributable to increases in revenue of 14%, gross profit of 22% and EBITDA of 37%. Gross profit margins increased from 6.96% to 7.46%. Organic growth was achieved through the expansion of the Group’s bouquet of offerings to its escalating multitude of distribution channels.

Core earnings, which increased by 30% to R597 million, represent the earnings of the Group after adjusting for the amortisation of intangible assets net of taxation and non-controlling interests as a consequence of purchase price allocations in terms of IFRS 3(R): Business Combinations. Core earnings reflect the underlying financial performance of the Group.

The statement of financial position remains robust and liquid, with accumulated equity increasing to R3.9 billion, net of accumulated dividends paid to date totalling R704 million. Net asset value equated to R5.79 per share.

BASIS OF PREPARATION

The summarised Group annual financial statements have been derived from the Group annual financial statements and were prepared in accordance with the requirements of section 8.57 of the JSE Limited Listings Requirements, the presentation and disclosure requirements of IAS 34 Interim Financial Reporting and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council. The Group annual financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and the requirements of the Companies Act, No 71 of 2008. A copy of the Group annual financial statements can be obtained from the Company’s registered office at no charge.

This financial information has been prepared in accordance with the going concern principle, under the historical cost convention, except for certain financial and equity instruments which have been measured at fair value. The accounting policies and methods of computation are consistent with those used in the comparative financial information for the year ended 31 May 2014, with the exception of the standards that are effective for the first time in the current year. These have been disclosed in note 1 to the Group annual financial statements for the year ended 31 May 2015. These standards have not had a significant impact on the financial information.

In addition, the Group uses core net profit as a non-IFRS measure in evaluating its performance. This supplements the IFRS measures disclosed. Core net profit is calculated by adjusting net profit for the year with the amortisation of intangible assets that arises as a consequence of the purchase price allocations completed in terms of IFRS 3(R): Business Combinations.

The summarised Group annual financial statements should be read in conjunction with the Group annual financial statements which include details of all related party transactions.

SEGMENTAL REPORT

South African distribution

  2015
R’000
      2014
R’000
  Growth
R’000
  %
Growth
 
Revenue 21 657 891       19 103 652   2 554 239   13  
Gross profit 1 444 730       1 180 376   264 354   22  
EBITDA 1 038 252       821 310   216 942   26  
Core net profit 684 756       558 996   125 760   22  
Gross profit margin 6.67%       6.18%          
EBITDA margin 4.79%       4.30%          


The increase in revenue by 13% was predominantly achieved through access to additional channels of distribution. Revenue generated on “PINless top-ups” increased by R966 million from R1.7 billion to R2.7 billion. As only the commission earned thereon is accounted for, the effective growth in Group revenue equated to 17%.

Net commissions earned on the distribution of prepaid electricity increased by R31 million to R165 million (23%) on revenue of R10.4 billion generated on behalf of an escalating base of utilities.

The gross profit increase of 22% was achieved after inclusion of imputed IFRS interest adjustments. On exclusion of these adjustments for both the current and the comparative year, gross profit increased by R279 million, equating to an effective growth of 24%. Similarly the impact on gross profit margins on exclusion of imputed IFRS interest adjustments equated to a growth from 5.97% to 6.54%.

The growth in EBITDA of 26% was inclusive of the effects of imputed IFRS interest adjustments. On exclusion of these adjustments, growth of R231 million was achieved, equating to a 29% growth, with EBITDA margins increasing from 4.10% to 4.67%.

Core net profit increased by R126 million to R685 million (22%).

International distribution

  2015
R’000
      2014
R’000
  Growth
R’000
  %
Growth
 
EBITDA 35 379       (13 961)   49 340   353  
Share of (losses)/profits from associates and joint ventures (81 269)       (56 249)   (25 020)   (44)  
– Ukash 12 004       14 089   (2 085)   (15)  
– Oxigen Services India 2 619       (3 259)   5 878   180  
– Blue Label Mexico (88 508)       (60 844)   (27 664)   (45)  
– Other (7 384)       (6 235)   (1 149)   (18)  
Core net loss (54 646)       (59 987)   5 341   9  
– Equity holders of the parent (46 958)       (47 862)   904   2  
– Non-controlling interests (7 688)       (12 125)   4 437   37  

The group disposed of its interest in Ukash at the end of March 2015. This profit on disposal increased EBITDA by R37 million. The balance of the growth was attributable to a decline in expenditure incurred by Africa Prepaid Services Nigeria (APSN). Legal fees declined from R20.9 million to R9.4 million. These costs will not perpetuate as litigation matters have been settled.

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

Ukash

The Group’s share of profits in Ukash, after the amortisation of intangible assets, declined by 15% from R14 million to R12 million. This decline was attributable to the Group having sold its interest in Ukash after 10 months of trading in the current financial year.

Oxigen Services India

There was a turnaround of the Group’s share of losses of R3.3 million in the comparative year to a share of profits equating to R2.6 million in the current year, after the amortisation of intangible assets. This positive turnaround was attributable to increases in revenue by 15% and gross profit by 21%, reported in their local currency.

The benefits of Oxigen Services India’s defined strategy of becoming India’s first non-banked mobile wallet that empowers the unbanked masses to instantly transfer and receive cash across the entire country continues to gain momentum. This has been primarily due to its focus on money transfer services without detracting from its traditional airtime sales.

Daily money transfer deposits have increased from USD2.3 million per day as at 31 May 2014 to USD3.3 million per day as at 31 May 2015, this increased exponentially through its connectivity with the National Payment Corporation of India.

Blue Label Mexico

In the comparative year, Blue Label Mexico incurred losses of R131 million. The Group’s share thereof equated to R61 million after the amortisation of intangible assets. In the current year, Blue Label Mexico’s losses increased to an equivalent of R186 million, of which the Group’s share equated to
R89 million.

In spite of revenue increasing by 23%, the main reasons for further losses were attributable to continued margin compression and an increase in overhead costs. The increase in overheads was necessitated by the need for enhanced post-sale customer support as well as systems fortification.

Mobile

  2015
R’000
      2014
R’000
  Growth
R’000
  %
Growth
 
Revenue 240 168       152 618   87 550   57  
Gross profit 136 773       109 756   27 017   25  
EBITDA 51 359       34 273   17 086   50  
Core net profit 28 559       24 904   3 655   15  

This segment comprises Cellfind, Panacea Mobile, Blue Label Engage, Blue Label One, Simigenix and the recently acquired Viamedia.

Viamedia, which was acquired with effect from 1 September 2014, together with Blue Label One made positive contributions to growth in EBITDA and core net profit.

Their contributions to EBITDA growth were R46 million and R8 million respectively. Their combined contributions were offset by negative growth in EBITDA of R37 million in the balance of the companies comprising this segment.

Margin compression on bulk SMS distribution by Cellfind and Panacea was the main factor causing their negative contributions to growth.

At core net profit level, positive contributions to growth by Viamedia of R26 million and Blue Label One by R5.5 million were negated by net negative growth contributions of R27.8 million by the balance of the companies comprising this segment.

Blue Label Engage was disposed of in December 2014 and Blue Label One has been restructured into a more efficient operation through the closure of loss-making divisions.

Solutions

  2015
R’000
      2014
R’000
  Growth
R’000
  %
Growth
 
Revenue 146 163       145 396   767   1  
Gross profit 62 837       59 402   3 435   6  
EBITDA 40 831       29 257   11 574   40  
Core net profit 23 975       12 547   11 428   91  


The Solutions segment houses Blue Label Data Solutions (BLDS), Forensic Intelligence Data Solutions (FIDS), Datacision, Blue Label Call Centre, Datacel Direct, Velociti and CNS Call Centres.

BLDS contributed R32.8 million to EBITDA and the call centre operations R8 million. The latter contributed R3.4 million in the prior year.

Contributions of R19.2 million and R5.5 million to core net profit were generated by BLDS and the call centre operations respectively. In the comparative year, BLDS made a positive contribution of R13 million while the call centre operations contributed a nominal R0.3 million to core net profit.

The remaining companies contributed a negative R0.7 million to core net profit.

Corporate

  2015
R’000
      2014
R’000
  Growth
R’000
  %
Growth
 
EBITDA (85 656)       (82 886)   (2 770)   (3)  
Core net loss (93 754)       (87 983)   (5 771)   (7)  

The increases in negative EBITDA and core net loss were primarily attributable to bonuses granted to senior executives who did not receive bonuses in the prior year, partially offset by a once-off income receipt.

DEPRECIATION, AMORTISATION AND IMPAIRMENT CHARGES

Depreciation, amortisation and impairment charges increased by R29 million of which R16 million emanated from the acquisitions of RMCS and Viamedia. Of this amount, R13 million pertained to the purchase price allocation amortisation of intangibles.

NET FINANCE COSTS

Finance costs

Finance costs totalled R233 million, of which R68 million related to interest paid on borrowed funds and R165 million to imputed IFRS interest adjustments on credit received from suppliers. On a comparative basis, interest paid on borrowed funds amounted to R23 million and the imputed IFRS interest adjustment equated to R144 million. Interest paid on borrowed funds was attributable to the cost of financing bulk inventory purchase transactions and early settlement payments attracting discounts, for which facilities were utilised and repaid during the current year.

Finance income

Finance income totalled R173 million, of which R31 million was attributable to interest received on cash resources and R142 million to imputed IFRS interest adjustments. On a comparative basis, interest received on cash resources amounted to R39 million and the imputed IFRS interest adjustment to R117 million. The decline in interest received on cash resources was attributable to the utilisation of funds on hand for the payment of dividends, acquisitions, bulk inventory purchase transactions and early settlement discounts.

STATEMENT OF FINANCIAL POSITION

Total assets increased by R524 million to R7 billion, of which growth in non-current assets accounted for R242 million and current assets for R282 million.

The net increase in non-current assets was mainly attributable to a net growth in intangible assets and goodwill totalling R249 million, to capital expenditure net of depreciation of R9 million and to loans receivable of R11 million. These increases were offset by a net decline in investment in associates and joint ventures of R50 million.

The net increase in intangible assets and goodwill mainly pertained to the acquisition of Viamedia, in which goodwill equated to R186 million and intangibles R63 million. A further R125 million was incurred for the purchase of software, development costs, starter pack bases and distribution channels. Amortisation of intangibles amounted to R122 million.

The net decline in investment in associates and joint ventures was predominantly due to the disposal of the Group’s interest in Ukash amounting to R94 million, a share of net losses of R79 million and a negative impact of R10 million in foreign currency translation reserves. These declines were offset by an additional R50 million capital contribution to Blue Label Mexico and a contingent purchase consideration of R30 million for the acquisition of an effective 37.5% shareholding in the Supa Pesa group. Movements in loans equated to a further R53 million, comprising loans granted of R13 million, interest capitalised of R14 million and unrealised foreign exchange gains of R26 million.

The net increase in current assets mainly comprised an increase in accounts receivable of R530 million and an increase in inventories of R127 million in line with bulk inventory purchases. Cash resources declined by R396 million congruent with the application of cash to fund the increase in assets and payment of dividends.

In spite of an increase in inventory of R127 million, the stock turn improved from 35 days reported at the interim reporting date to 26 days at year end. The discount afforded on bulk inventory purchases justified the quantum of inventory held.

The debtor’s collection period increased from 44 days reported at the interim reporting date to 46 days at year end.

The net profit attributable to equity holders of R578 million, less a dividend of R182 million, resulted in retained earnings accumulating to R2.6 billion.

Trade and other payables increased by R105 million with credit terms averaging 53 days.

STATEMENT OF CASH FLOWS

Cash flows from operating activities amounted to R132 million net of the funding of additional working capital requirements of R657 million.

Cash flows applied to investing activities amounted to R329 million. Of this amount R50 million related to the additional investment in Blue Label Mexico, R13 million to loans to associates, R157 million to the acquisition of Viamedia, R125 million to the purchase of intangible assets, R10 million to net loans granted, R53 million to capital expenditure and R20 million to the settlement of contingent purchase considerations for RMCS and Panacea Mobile. The above funds applied to investing activities were partially offset by proceeds received of R95 million on the disposal of Ukash.

After applying R19 million to the acquisition of treasury shares and a dividend payment of R187 million to shareholders and non-controlling interests, the balance of cash on hand amounted to R788 million.

Although cash on hand declined by R402 million, inventory of R1.4 billion is a highly liquid commodity.

FORFEITABLE SHARE SCHEME

Forfeitable shares totalling 2 937 836 (2014: 2 782 541) were issued to qualifying employees. During the period 419 998 (2014: 1 074 880) shares were forfeited and 3 819 409 (2014: 3 629 922) shares vested.

DIVIDEND NUMBER 6

The Group’s current dividend policy is to declare an annual dividend. On 18 August 2015, the board approved a gross ordinary dividend (number 6) of 31 cents per ordinary share (26.35 cents per ordinary share net of dividend withholding tax) for the year ended 31 May 2015. This dividend of R209 097 803, inclusive of withholding tax, equates to a 2.62 cover on headline earnings. The dividend for the year ended 31 May 2015 has not been recognised in the financial statements as it was declared after this date.

The dividend has been declared from income reserves. The Company has no secondary tax on companies credits available. The issued share capital at the declaration date was 674 509 042 ordinary shares. The Company’s income tax reference number is 9062246179.

Last date to trade cum dividend Friday, 4 September 2015
Shares commence trading ex dividend Monday, 7 September 2015
Record date Friday, 11 September 2015
Payment of dividend Monday, 14 September 2015

Share certificates may not be dematerialised or rematerialised between Monday, 7 September 2015 and Friday, 11 September 2015, 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 divided. 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.

LITIGATION UPDATE

The arbitration proceedings between APSN and the former subsidiary of Telkom SA SOC Limited (Telkom), Multi-Links Telecommunications Limited (Multi-Links) have been settled.

The litigation action in the High Court of South Africa between Telkom and Multi-Links, on the one hand, and Blue Label, Africa Prepaid Services, APSN and certain individuals, on the other, has been settled.

In terms of the settlement agreement all claims and counterclaims have been withdrawn and all of the parties have agreed that they will have no further claims against one another arising out of the disputes forming the subject of both the arbitration proceedings and the action, including any claims for costs.

PROSPECTS

Oxigen Services India applied for a payments bank licence to the Reserve Bank of India (RBI) in February 2015. This application was submitted after extensive prior piloting of processes in conjunction with RBI. The latter is expected to announce the names of successful applicants by the end of August 2015. This will supplement its current domestic remittance offering with cash-out and international remittance capabilities without having to utilise third-party licence holders. Transaction fees will be enhanced by the above capabilities.

Oxigen has been appointed the sole successful bidder in the global bid of Indian Banks’ Association, for its proprietary “super” point-of-sale terminals. These micro ATM terminals will be deployed in conjunction with the banks, resulting in an accelerated footprint expansion in the rural areas. Oxigen’s recharge, bill payment and wallet services, will be available through these terminals.

Blue Label Mexico has commenced the distribution of prepaid starter packs. Given its vast distribution capabilities, it is well placed to generate monthly compounded annuity revenue thereon.

Towards the end of the financial year, BLT and the Edcon group entered into an initiative whereby a company was formed to establish stand-alone retail outlets under the brand “Edgars Connect”. This will create an ideal platform for BLT to implement its strategy of marketing its products and services on a retail basis.

The prevalence of prepaid water meters continues to emulate the prepaid electricity model. Installation of meters by third parties, supported by state-of-the-art software, has enabled Blue Label to enter into the prepaid water arena. Vouchers are purchased by consumers at the multitude of points of presence that it has established. Existing relationships with several municipalities is expected to result in increased growth in this initiative.

South African distribution has enhanced its bouquet of products to include mobile handsets and tablets. This initiative is expected to gain significant momentum going forward.

TicketPro continues to increase its range of ticketing and access control services and solutions. Its technology offering and distribution reach provide it with a competitive edge, as it steadily grows market share.

The Group’s distribution footprint is perfectly positioned to offer a money transfer solution that will provide reach across all sectors of the South African economic landscape.

SUBSEQUENT EVENTS

Subsequent to year end, dividend number 6 was declared and approved by the board.

Shareholders are advised that Mr Y Mahomed has been appointed as an independent non-executive director to the board with effect from 18 August 2015. Mr Y Mahomed was previously a founding member of 3C Telecommunications Proprietary Limited, the holding company of Cell C Proprietary Limited (Cell C). He was a director of Cell C until June 2015.

INDEPENDENT AUDIT

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 2015 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 2015 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.

APPRECIATION

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
Join Chief Executive Officers

DA Suntup* CA(SA)
Financial Director

19 August 2015

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