Blue Label Telecoms

Group earnings continued to escalate, comprising a hybrid of organic growth in local operations augmented by the impact of a fair value gain resulting from Oxigen Services India (Oxigen) being viewed as a venture capital investment.

South African distribution perpetuated its dominance in contribution to Group earnings, with its core headline earnings equating to a growth of 26%.

Although Blue Label Mexico (BLM) continued to incur losses, the Group’s share thereof declined by 32%, from R32.5 million to R22.1 million.

Continued growth in market share contributed to the increase in Group revenue. This growth was confined to 3% in line with the continuous shift in consumer buying patterns from traditional purchasing of airtime to that of “PINless top-ups”. Only the gross profit earned on the latter is accounted for in Group revenue as opposed to the gross amount generated from transactions of this nature. On imputing such revenue, the effective growth would have equated to 9%.

An improvement in gross profit margins from 7.13% to 8.64% resulted in gross profit escalating by R226 million (25%) to R1.14 billion.

After accounting for a negative turnaround in foreign exchange movements of R78 million and an increase in other overheads of R53 million, the resultant EBITDA increased by R95 million (15%) to R715 million.

The Group, through its wholly owned subsidiary, Gold Label Investments, holds an effective 58.18% interest in Oxigen. This investment has historically been accounted for as an investment in an associate, applying the equity method up to 30 November 2016.

The investment in Oxigen was initially of a long-term nature as it was expected to emulate the business model of the South African distribution operations. However, its profile has changed from that of the traditional Group business model to one of generating growth in the market value of the investment with a view to unlocking the Group’s share thereof. With the advent of its change in focus to financial services through wallet subscription, it is no longer strategically aligned with the other business units of the Group and is unlikely to generate profitability in the short to medium term. However, the market value of the company is expected to increase in conjunction with its growth in wallet subscribers. This in turn creates the potential to unlock the investment value in the future and the Group is pursuing this new strategy with respect to its investment in Oxigen.

Accordingly, Oxigen is now viewed as a venture capital investment, which, in accordance with IAS 28 – Investment in Associates and Joint Ventures has been accounted for at fair value as at 30 November 2016. The differential between the carrying value of the investment and its fair value is reflected as a gain on associate measured at fair value.

The fair value gain of R264 million, less deferred taxation thereon of R9 million and the Group’s share of losses for the period under review of R120 million, equated to a net increase of R135 million to Group earnings. On exclusion of this net increase, headline earnings would have amounted to R410 million and core headline earnings to R417 million, equating to 61.48 cents and 62.53 cents per share respectively. In both instances, effective growth per share would have equated to 15%.

Capital and reserves accumulated to R4.76 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 15% to R6.96 per share.

South African distribution

Growth in revenue of 3% was organically achieved through the expansion of its distribution channels. Revenue generated on “PINless top-ups” increased by R935 million from R1.8 billion to R2.8 billion, equating to effective growth in South African distribution revenue of 9%, in that only the commission earned thereon is recognised.

Net commissions earned on the distribution of prepaid electricity continued to increase, escalating by R8 million to R103 million
on turnover of R6.9 billion generated on behalf of the utilities.

Gross profit margins improved from 6.29% to 7.84%, resulting in an increase in gross profit of R223 million (28%) from R795 million to R1.0 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.

The resultant growth in EBITDA of 29% to R746 million equated to an EBITDA margin of 5.74%.

Contribution to Group core headline earnings increased by R100 million (26%) to R491 million.

International

The decline in EBITDA of R46 million related to a negative turnaround in foreign exchange movements.

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

Oxigen Services India

The financial performance of Oxigen for the six months ended 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.

Total wallet subscribers accumulated to 25.6 million as at 30 November 2016. This quantum is expected to increase in perpetuity and in turn increase the value of Oxigen. The expenditure incurred on the creation of additional wallets was congruent with the decision that has been made to focus on the value creation of a compounding wallet subscriber base as opposed to the revenue generated thereon.

Oxigen has consequently been accounted for as a venture capital investment with effect from the 30 November 2016. The differential between the carrying value of the investment and its fair value amounted to R264 million and has been accounted for in the condensed Group statement of comprehensive income as a gain on associate measured at fair value. The fair value gain of R264 million, less deferred taxation thereon of R9 million and the Group’s share of losses for the period under review of R120 million, equated to a net increase of R135 million to headline earnings.

Going forward, losses incurred by Oxigen will have no impact on Group earnings. The investment therein will be measured at fair value.

Blue Label Mexico

BLM’s losses declined from R67.4 million to R44.7 million, of which the Group’s share was R22.1 million after the amortisation of intangible assets. In the comparative period, the Group’s share of losses amounted to R32.5 million.

The decline in losses was achieved in spite of a reduction in revenue by 28%. This decline was caused by intense competition among carriers, resulting in lower tariffs payable by the end user. It is anticipated that pricing will stabilise and increase in the near future.

The decline in revenue was compensated for by an increase in gross profit of R15.1 million (46%), 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 among the networks to the benefit of the company.

Focus on cost efficiencies resulted in decreases in operational expenditure by 14%. While the resultant EBITDA remained negative, it declined by R20.4 million (50%).

The distribution of starter packs now generates monthly compounded annuity income. 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 should result in a further decline in losses for the balance of the financial year.

Mobile

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

The growth in revenue at improved margins and containment of overheads resulted in this segment achieving a growth in EBITDA of 19%. Its contribution to core headline earnings increased by 22% to R25 million.

Solutions

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 period, core headline earnings in the remaining entities declined by R0.9 million.

On exclusion of Velociti’s historical contribution, revenue generated by the remaining entities, dominated by Blue Label Data Solutions, increased by 36%. However, margin compression resulted in static growth in gross profit, which, together with an increase in overheads, resulted in the decline in core headline earnings.

Corporate

Of the decline in EBITDA of R36 million, R30 million pertained to a negative turnaround in foreign exchange movements and R6 million to professional fees incurred relating to potential acquisitions.

Its negative contribution to Group core headline earnings increased by R24 million to R73 million.

Depreciation, amortisation and impairment charges increased by R8 million to R55 million. Of this amount, R9.1 million pertained to the amortisation of intangible assets resulting from purchase price allocations from historical acquisitions compared to R10.4 million in the comparative period.

Finance costs

Finance costs totalled R142 million, of which R66 million related to interest paid on borrowed funds and R76 million to imputed IFRS interest adjustments on credit received from suppliers. On a comparative basis, interest paid on borrowed funds amounted to R12 million and the imputed IFRS interest adjustment equated to R87 million.

The increase of R54 million on interest paid on borrowed funds was mainly due to 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 period. The additional finance costs were more than compensated for by the growth in gross profit and gross profit margins.

Finance income

Finance income totalled R118 million, of which R38 million was attributable to interest received on cash resources and R80 million to imputed IFRS interest adjustments on credit afforded to customers. On a comparative basis, interest received on cash resources amounted to R28 million and the imputed IFRS interest adjustment to R68 million.

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

Total assets increased by R968 million to R8.3 billion. Non- current assets increased by R106 million, and current assets by R862 million.

The movement in non-current assets included increases in investments in associate and joint venture companies of R33 million, in capital expenditure net of depreciation of R14 million, in loans receivable of R77 million and R8 million in trade receivables relating to postpaid contracts in excess of 12 months. These increases were partially offset by a decrease in intangible assets of R26 million.

The net increase of R33 million in investment in associate and joint venture companies comprised the R264 million gain on Oxigen measured at fair value, the acquisition of Utilities World for R12 million, interest capitalised on loans of R13 million and loans granted of R5 million. These increases were partially offset by the Group’s share of losses therein, totalling R148 million inclusive of the amortisation of applicable intangible assets, a negative impact on foreign currency translation reserves of R82 million, and unrealised foreign exchange losses on loans of R31 million.

The net decline of R26 million in intangible assets mainly pertained to the amortisation of intangibles by R72 million, offset by R46 million expended on the purchase of computer software, internally generated software development costs and starter pack bases.

Of the increase in current assets, material movements related to increases in inventories of R383 million, loans receivable of R5 million, cash resources of R243 million and trade receivables of R220 million.

The stock turn equated to 31 days compared to 25 days for the financial year ended 31 May 2016. 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 debtor’s collection period increased to 40 days compared to 38 days for the financial year ended 31 May 2016.

Net profit attributable to equity holders of R545 million, less a dividend of R243 million, resulted in retained earnings accumulating to R3.4 billion.

Trade and other payables increased by R722 million, with average credit terms increasing to 51 days compared to 40 days for the financial year ended 31 May 2016.

Cash flows generated from operating activities amounted to R709 million, predominately attributable to increased trading activity, net of working capital requirements.

Cash flows applied to investing activities amounted to R207 million. Of this amount, R46 million related to the purchase of intangible assets, R79 million to net loans granted, R37 million to capital expenditure, R49 million to earn outs relating to prior acquisitions and R7.5 million to the acquisition of Utilities World. These outflows were partially offset by R1.5 million from the sale of fixed assets and R10 million from a contingent consideration received emanating from the sale of Ukash.

After applying R7 million to the acquisition of treasury shares and a dividend payment of R249 million to shareholders andnon-controlling interests, cash on hand at year-end amounted to R832 million.

Forfeitable shares totalling 1 386 327 (2015: 2 583 819) were issued to qualifying employees. During the period nil (2015: 530 375) shares were forfeited and 2 141 673 (2015: 2 915 266) shares vested.

A binding umbrella restructure agreement has been entered into between Blue Label, Cell C, debt providers of Cell C, athird-party investor and other relevant parties, in terms of which the maximum net borrowings of Cell C will be reduced to approximately R6,0 billion. The third-party investor is to subscribe for 15% of the share capital of Cell C and Blue Label’s subscription for 45% of the share capital of Cell C remains unchanged.

The binding restructure agreement is subject to the conclusion of the relevant transaction agreements by no later than 30 June 2017.

The Board remains positive with regard to the investment in Cell C and other commercial benefits that will flow therefrom.

The demand for low-cost smart phones and tablets is expected to accelerate and in turn enhance revenue and profitability.

The financing of the mobile device element of postpaid contracts as well as that of providing short-term finance for emergencytop-ups are initiatives that are currently under consideration.

Losses in BLM are expected to continue to decline with the advent of sustainable improved gross profit margins and increased annuity revenue generated from starter packs.

A “Big Data” programme has consolidated and aggregated transactions across various divisions within the Group which will create the opportunity to upsell and cross-sell the bouquet of various products and services that Blue Label has to offer through their distribution channels.

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

27 February 2017

*Supervised the preparation of the Group’s interim results.