Commentary

FINANCIAL REVIEW

Revenue increased by 4%. Gross profit margins increased from 5,91% to 6,45%. EBITDA increased by 26%. EBITDA included the once off other income receipt of R79,4 million. The disclosure of information regarding this receipt is restricted by a confidentiality agreement. Headline earnings per share increased by 40% from 46,20 cents to 64,65 cents. On exclusion of the above once off receipt, growth in headline earnings per share would have equated to 19%.

The SA Distribution segment remains the predominant contributor to group profitability. Prepaid airtime volumes continued to increase and commissions on the sale of prepaid electricity escalated by 39%. Compounded annuity revenue from starter pack bases added momentum to profitability.

On the international front, Oxigen Services India has become a profitable entity as a result of the addition of financial service offerings to its bouquet of products. Ukash has continued to make positive contributions to group profitability. Whilst Blue Label Mexico’s (“BLM”) footprint expansion initiatives have accelerated at a vast rate through the Grupo Bimbo distribution network, the costs of gearing up infrastructure in support of the roll out of point of sale devices resulted in BLM incurring additional losses in the past year.

Cash flows generated from operating activities amounted to R528 million. Following the repurchase of Microsoft’s 12% interest in the group for R392 million, as well as a dividend payment of R107 million and investing activities of R277 million, cash on hand at year end amounted to R1,98 billion.

The statement of financial position remains robust and liquid, reflecting accumulated equity of R2,91 billion.

FINANCIAL OVERVIEW

• Revenues increased by 4% to R18,7 billion.
• Gross profit increased by R140 million to R1,2 billion supported by margin increases from 5,91% to 6,45%.
• Overheads increased by 16%.
• EBITDA increased by 26% to R750 million, inclusive of the once off income receipt of R79,4 million.
• Net profit after tax and non-controlling interests from continuing operations increased by 31% to R444 million. Growth would have equated to 11% on exclusion of the once off income receipt.
• Headline earnings per share increased by 40% from 46,20 cents to 64,65 cents 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 AC500 standards as issued by the Accounting Practices Board. The group annual financial statements have been prepared in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa. A copy of the group annual financial statements can be obtained from the company’s registered office.

This financial information has been prepared in accordance with the going concern principle, under the historical cost convention, except for certain financial and equity investments 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 2011, with the exception of the standards that are effective for the first time in the current period. These have been disclosed in note 1 to the annual financial statements for the year ended 31 May 2012. 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 arise 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

Prepaid airtime and annuity revenue generated from starter packs continued to be the major contributors to the increase in revenue of 3%. Commissions earned on the distribution of prepaid electricity amounted to R85 million (2011: R61 million) equating to revenue generated on behalf of utilities of R5,5 billion (2011: R3,4 billion). The group acts as an agent in the distribution of prepaid electricity. Gross profit inclusive of IFRS adjustments increased by R123 million (13%), supported by margin increases from 5,19% to 5,69%. Commissions on prepaid electricity accounted for 0,11% of this margin increase. On exclusion of IFRS adjustments, margins increased from 5,09% to 5,28%.

The growth in EBITDA of 13% was inclusive of the effects of IFRS adjustments. On exclusion of these adjustments in both the comparative and current years, a more representative growth of R33 million was achieved, equating to a 5% increase.

INTERNATIONAL DISTRIBUTION

The decrease in revenue in the international segment was due to the disposal of SharedPhone International (“SPI”). The decline in EBITDA was due to this disposal of SPI as well as an increase in legal fees expended on the ongoing litigation relating to Africa Prepaid Services Nigeria. Forex gains of R7,6 million, limited this decline to R7,2 million.

The Group’s objective in the international segment is to partner with local management in the countries in which it operates. These partnerships result in its international operations being equity accounted for. The group’s current active international operations, namely, Ukash, Oxigen Services India and Blue Label Mexico are disclosed accordingly under share of losses from associates and joint ventures.

DISCONTINUED OPERATIONS

Africa Prepaid Services Nigeria

In line with a commitment made in May 2011 for the disposal of the assets and liabilities of Africa Prepaid Services Nigeria (“APSN”), the financial performance thereof for both the years ended 31 May 2011 and 31 May 2012 are required to be reflected as a discontinued operation. The Multi-links contract was cancelled in November 2010. The share of losses of R5,5 million incurred in the current year was attributable to the expenditure relating to the winding down of the operation. The comparative year’s losses of R41 million comprised impairments of assets and goodwill amounting to R23 million, and the balance of R18 million being attributable to trading losses.

Blue Label Mexico

In February 2011, Grupo Bimbo acquired 40% of BLM by subscribing for new shares. Blue Label’s 70% shareholding was diluted to 40% as a result of this transaction, with BLM’s management retaining 20%. Accordingly, the group’s share of trading losses of R11,3 million for the period June 2010 to February 2011 was reflected as a discontinued operation. Thereafter, the group’s share of losses is reflected as “share of losses from associates and joint ventures”.

The group’s remaining 40% shareholding was required to be revalued based on the equity value payable by Grupo Bimbo for its 40% shareholding. This resulted in a net fair value gain of R146 million in the comparative year.

Share of losses from associates and joint ventures

Ukash

The comparative share of profits of R8,8 million included a deferred tax credit adjustment of R6,5 million, with trading profits net of amortisation of intangible assets amounting to R2,3 million. In the current year, prior to a deferred tax debit adjustment of R2,8 million, the share of profits earned on a pure trading basis, net of the amortisation of intangible assets, amounted to R5 million. This represented an increase of R2,7 million (117%). This was achieved through growth in revenue of 57% with a gross profit margin increase from 49% to 53%, all reported in their local currency.

Oxigen Services India

Blue Label’s share of profits equated to R4,6 million, compared to prior year share of losses of R5,2 million. This was mainly due to the addition of banking services to its prepaid airtime platform. These results were achieved through a 52% increase in revenue at gross profit margins of 2,95% (2011: 2,25%). EBITDA increased by 778%, all reported in their local currency.

Blue Label Mexico

The comparative share of losses of R6,5 million was for the period March 2011 to May 2011, during which period Blue Label’s equity holding in BLM was reduced from 70% to 40%. The current year’s share of losses of R25 million was for the full 12-month period. BLM’s total losses increased from R32 million to R60 million. The increase in losses was largely due to costs incurred in the process of gearing up for an extensive roll out of point of sale devices through the Grupo Bimbo distribution network.

MOBILE

This segment comprises Cellfind, Blue Label One and Content Connect Africa. The growth in EBITDA of R78 million was inclusive of the once off income receipt of R79,4 million.

A net decline at depreciation level and the movement in taxation relating to the once off income receipt accounted for the growth in its contribution to core net profit.

SOLUTIONS

The Solutions segment houses the Datacel group which operates call centres and provides data and lead generation services. Improvements in the call centre operations and the constant growth in data accumulation continued to manifest themselves in growth at all levels.

TECHNOLOGY

Technology losses are representative of the costs of development and support of the group’s Information Technology infrastructure. Income generation was limited to services to third parties.

CORPORATE

The increase in core net losses of the corporate segment was mainly attributable to the cost of executive bonuses. No executive bonuses were paid in the prior year.

DEPRECIATION, AMORTISATION AND IMPAIRMENT CHARGES

Depreciation declined by R4 million and amortisation of intangible assets in terms of purchase price allocations declined by R14 million. Impairments of goodwill, intangible assets and property, plant and equipment declined by R36 million.

NET FINANCE INCOME

Finance costs

Finance costs totalled R181 million, of which R3 million related to interest paid on borrowed funds and R178 million to imputed IFRS interest adjustments on credit received from suppliers. On a comparative basis, interest paid on borrowed funds was R8 million and the imputed IFRS interest adjustment was R108 million.

Finance income

Finance income totalled R171 million, of which R60 million was interest received on cash resources and R111 million pertained to IFRS adjustments. On a comparative basis interest received on cash resources amounted to R50 million and the imputed IFRS interest adjustment R96 million.

STATEMENT OF FINANCIAL POSITION

The decline in current assets was mainly attributable to the application of funds for an increase in investment in Oxigen Services India of R74 million, additional working capital provided to BLM of R26 million and the acquisition of starter pack bases for R121 million (included in intangible assets).

The acquisition of Microsoft’s 12% shareholding in the group for R392 million and the purchase of treasury shares for R16 million accounted for the decline in share capital, share premium and treasury shares.

Inventory declined by R473 million, returning to its optimal level of 11 days. The affording of additional credit to selected clients resulted in debtors collections increasing from 17 to 26 days. Creditor payment terms averaged 37 days.

STATEMENT OF CASH FLOWS

Cash flow of R528 million generated from operating activities was applied to investing activities to the extent of R277 million. This comprised the funding of an additional investment of R74 million in Oxigen Services India, the provision of working capital of R26 million to Blue Label Mexico and the acquisition of starter pack bases for R121 million.

A further R520 million was applied to financing activities to facilitate the purchase of Microsoft’s 12% shareholding in the group for R392 million, Treasury shares R16 million and a dividend payment of R107 million.

The resultant accumulated cash resources of the group declined by R251 million to R1,98 billion.

FORFEITABLE SHARE SCHEME

Forfeitable shares totalling 4 828 644 (2011: 6 829 416) were issued to qualifying employees. During the year 1 067 905 (2011: 1 316 366) shares were forfeited and 311 637 (2011: 909 823) shares vested during the current period.

DIVIDEND NO 3

The group’s current dividend policy is to declare an annual dividend. Accordingly, notice is hereby given that on Monday, 20 August 2012, the board approved a gross ordinary dividend (number 3) of 23 cents per ordinary share (19,55 cents per ordinary share net of dividend withholding tax) for the year ended 31 May 2012. The dividend, inclusive of withholding tax, equates to a 2,95 cover on headline earnings. The total declaration of R155 137 080 for the year ended 31 May 2012 has not been recognised in the financial statements as it was made after this date.

The dividend has been declared from income reserves. The company has no secondary tax on companies credits available. The dividend withholding tax rate is 15%. The issued share capital at the declaration date is 674 509 042 ordinary shares. The company’s income tax reference number is 9062246179.

The salient dates are as follows:

Share certificates may not be dematerialised or rematerialised between Monday, 10 September and Friday, 14 September 2012, both days inclusive.

PROSPECTS

The group is actively building its SMS aggregation capabilities through its own development and strategic acquisitions. The objective is to create economies of scale through mass aggregation, as well as enhancing the range of SMS services available to customers. Increasing customer awareness of the benefits of prepaid electricity and contracts with additional utility providers is likely to enhance commissions generated from prepaid electricity sales.

Annuity revenue from an expanding starter pack base is expected to compound accordingly.

The distribution capabilities of Grupo Bimbo, the largest bakery in the world, are expected to add significant momentum to the roll-out of point of sale devices in Mexico.

Oxigen Services India is expected to continue its drive into banking services initiatives in partnership with leading banks and financial institutions in India. The group will continue to focus on expanding its product range offerings and distribution network, organically and through acquisition.

The statement of financial position remains robust and liquid, which augurs well for future growth, acquisitions and distributions to shareholders.

SUBSEQUENT EVENTS

Subsequent to year end, dividend number 3 was declared and approved by the board.

CONTINGENCIES

Multi-Links Telecommunications Limited, a previously wholly owned subsidiary of Telkom Limited in Nigeria, concluded a Super Dealer agreement with Africa Pre- Paid Services (APS), in December 2008 in terms of which APS was appointed for an initial period of 10 years to sell, market and procure customers for Multi-links’ range of products and services in Nigeria (the agreement). On 29 May 2009, APS ceded and assigned all of its rights and obligations in terms of the agreement to APSN. On 26 November 2010 APSN cancelled the agreement arising from Multi-Links’ repudiation of its obligations under the contract. On 13 June 2011 APSN launched arbitration proceedings in South Africa (as per contract) against Multi-Links claiming damages (9 claims) in the total sum of USD481 million. Multi-Links is defending the matter and has filed a counterclaim in the amount of USD123 million. Telkom sold its shareholding in Multi-Links to Hip Oils Topco Limited during September 2011. In addition, in terms of an indemnity contained in the Sale and Purchase agreement between Telkom and Hip Oils Topco Limited concluded in August 2011, Telkom has issued an indemnity in relation to the APSN claim for amounts in excess of $10 million.

The arbitration has been set down for hearing from 4 November until 15 December 2012.

INDEPENDENT AUDIT

PricewaterhouseCoopers Inc.’s unmodified audit reports on the group annual financial statements and the summarised group annual financial statements for the year ended 31 May 2012 are available for inspection at the company’s registered office. Any reference to future financial performance in this announcement has not been audited or reported on by PricewaterhouseCoopers Inc.

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
Joint Chief Executive Officers

DB Rivkind CA(SA)*
Financial Director

20 August 2012

*Supervised the preparation and review of the group financial statements.