Blue Label Telecoms

On 2 August 2017, Blue Label, through its wholly owned subsidiary The Prepaid Company (“TPC”), acquired 45% of Cell C Proprietary Limited (“Cell C”) and 47.37% of 3G Mobile Proprietary Limited (“3G Mobile”). The purchase consideration for these acquisitions was R5.5 billion and R0.9 billion respectively.

Core headline earnings for the six months ended November 2017 amounted to R1.36 billion, resulting in an increase of R804 million (146%). Post-dilution resulting from the issue of 200 million shares at R15 per share, core headline earnings per share increased by 108% to 168.42 cents per share.

These earnings comprised the Group’s share of profits in Cell C of R928 million, 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 and its share of profits in 3G Mobile of R36 million. The balance pertained to the remaining companies within the Group, inclusive of once-off costs of an imputed IFRS interest adjustment of R21 million attributable to the deferred payment of R650 million relating to the acquisition of 3G Mobile.

The core headline earnings in the current period were negatively impacted by R91 million as a result of the cessation of early settlement discounts and interest forfeiture in lieu of the utilisation of working capital resources to fund the cash element of the Cell C acquisition.

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 have been accounted for as venture capital investments at fair value. The net effect thereof, resulted in a positive contribution to Group earnings of R135 million in the comparative period and in turn a negative impact on earnings growth in the current period in this regard.

The underlying table demonstrates the impact on core headline earnings growth, on exclusion of the acquisitions of Cell C and 3G Mobile, non-recurring costs, the forfeiture of income as well as the accounting treatment of Oxigen Services India and 2DFine in the comparative period. Adjusted core headline earnings per share would have equated to a growth of 21% to 75.59 cents per share, congruent with not having to have issued any further shares to fund the above acquisitions.

Group revenue increased by 2% to R13.5 billion. On imputing gross amounts 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 equated to 10%.

EBITDA increased by 9% from R715 million to R778 million.

The Group’s share of losses in Blue Label Mexico continued to decline from R22.1 million to R10.5 million (52%).

As a result of the restructuring of working capital, cash generated from trading operations amounted to R3.3 billion, which facilitated the payment of the cash element of the acquisitive cost of the shares in Cell C.

The net asset value per share increased by 48% to R10.29.

South African Distribution

Growth in revenue of 2% was organically achieved through continued expansion of its distribution channels. Amounts generated on “PINless top-ups” increased by R1.2 billion from R2.8 billion to R4 billion, equating to an effective increase in South African Distribution of 10%, in that only the gross profit earned thereon is recognised.

Net commissions earned on the distribution of prepaid electricity continued to increase, escalating by R21 million to R124 million (21%) on an increase in revenue generated on behalf of the utilities from R6.9 billion to R8.4 billion (20%).

Gross profit margins declined from 7.84% to 7.68%, primarily attributable to the forfeiture of R50 million of early settlement discounts in lieu of the utilisation of working capital resources to fund the cash element of the Cell C acquisition. The forfeiture of early settlement discounts was partially replaced by marketing rebates which only came into effect from August.

The above decline in gross profit margins as well an increase in overheads, which included an expense of R12 million directly attributable to escalating the quantum of distribution channels, had a direct impact on negative growth in EBITDA.

Interest forfeiture attributable to the utilisation of cash resources towards the payment for the investment in Cell C amounted to R77 million. A further cost of R21 million, attributable to the deferred payment of R650 million relating to the acquisition of 3G Mobile, was imputed in terms of IFRS requirements.

The negative growth in EBITDA and the above net impact on finance costs were augmented by positive contributions of R924 million from Cell C, inclusive of the Group’s share of the recognition of the deferred tax asset amounting to R865 million and R31 million from 3G Mobile. This resulted in an increase in contribution to Group core headline earnings from R491 million to R1.39 billion (184%).

International

The increase in EBITDA of R44 million was attributable to a positive turnaround in foreign exchange movements of R28 million. The balance of R16 million related to the winding up process of the Africa Prepaid Services group.

As a consequence of the winding up process, non-controlling interest in the Africa Prepaid Services group were allocated R32 million, being their share of net loan releases.

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

Oxigen Services India and 2DFine Holdings Mauritius
In the comparative period, 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 R264 million, less deferred taxation thereon of R9 million and the Group’s share of losses of R120 million, resulted in a positive contribution to Group earnings of R135 million in the comparative period.

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 30 November 2017 increased by R0.7 million.

Blue Label Mexico
Blue Label Mexico’s losses declined from R44.7 million to R20.4 million, of which the Group’s share amounted to R10.5 million after the amortisation of intangible assets. In the comparative period the Group’s share of losses amounted to R22.1 million.

The decline in losses was attributable to an increase in revenue from R1.5 billion to R1.9 billion (27%). This was achieved in the pursuance of its strategy by increasing the number of transactional terminals, 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 the SIM distribution business throughout Mexico. Bill payments, credit and debit card acquiring and food vouchers have increased perpetually.

The resultant gross profit increased by R35 million (73%), 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 products.

Operational expenditure increased by 17%, 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 R23 million (111%) from a negative R21 million to a positive R2 million.

Mobile

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

Although revenue increased by 16%, gross profit remained static due to a decline in margins from 65.5% to 56.6%. This decline was attributable to a change in accounting treatment by recognising revenue as a principal as opposed to an agent in the comparative period.

Contribution to core headline earnings increased by 8% to R27.5 million, primarily due to an increase in interest received on positive cash resources generated.

Solutions

Although revenue growth was marginal at 3%, gross profit thereon increased by R4.7 million (16%) in line with margin increases from 28.9% to 32.8%.

Blue Label Data Solutions was the predominant contributor to the growth in core headline earnings from R11.3 million to R13.7 million (21%).

Corporate

Of the decline in negative EBITDA of R17 million, R18 million pertained to a positive turnaround in foreign exchange movements.

Accordingly, the negative contribution to Group core headline earnings declined by R17 million to R56 million.

Depreciation, amortisation and impairment charges increased by R5 million to R60 million. Of this increase, R6 million pertained to depreciation on additional capital expenditure incurred during the period less a reduction of R1 million relating to the amortisation of intangible assets emanating from purchase price allocations on historical acquisitions, which declined from R9.1 million to R8.1 million.

Finance costs
Finance costs totalled R218 million, of which R41 million related to interest paid on borrowed funds and R177 million to imputed IFRS interest adjustments on credit received from suppliers. On a comparative basis, interest paid on borrowed funds amounted to R66 million and the imputed IFRS interest adjustment equated to R76 million.

The decline of R25 million on interest paid on borrowed funds was due to both the underutilisation of the Group’s facilities as well as the application of surplus funds on hand to debt for the months of June and July 2017.

The decline in finance costs was, however, limited to R25 million due to interest costs increasing on a piecemeal basis from August to November 2017, congruent with the payment for the cash element of R2.75 billion for the acquisition of 45% of Cell C, which was effected on 2 August 2017. This payment was facilitated through a change in the working capital structure of the Group. In addition, a further R740 million was advanced to Cell C on a piecemeal basis for the purpose of applying such funds towards capital expenditure.

Finance income
Finance income totalled R148 million, of which R67 million was attributable to interest received on cash resources and R81 million to imputed IFRS interest adjustments on credit afforded to customers. In the prior period, interest received on cash resources amounted to R38 million and the imputed IFRS interest adjustment to R80 million.

The increase of R29 million in interest received from cash resources included interest of R15 million from Cell C for the advance of R740 million to them for capital expenditure.

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

Total assets increased by R6.6 billion to R15.3 billion of which non-current assets increased by R7.4 billion and current assets decreased by R0.8 billion.

Non-current assets included increases in capital expenditure net of depreciation of R0.9 million, in investment in and loans to associates and joint ventures of R7.4 billion, in loans receivable of R5.5 million and in a financial asset at fair value through profit and loss of R79 million. These increases were offset by decreases of R35 million in intangible assets and goodwill, trade and other receivable of R24.6 million and deferred tax assets of R9.4 million.

The net increase of R7.4 billion in investment in associate and joint venture companies comprised the acquisition of Cell C and 3G Mobile for R5.5 billion and R0.9 billion respectively, the Group’s net share of profits totalling R940 million inclusive of the amortisation of applicable intangible assets, R0.7 million gain on Oxigen measured at fair value, loans granted of R4.1 million, interest of R13.2 million capitalised on loans, unrealised foreign exchange profits on loans of R10.8 million and a positive impact on foreign currency translation reserves of R11.1 million. These increases were partially offset by dividends received of R1.8 million.

The net decline of R35 million in intangible assets and goodwill mainly pertained to the amortisation of intangibles by R54.7 million, offset by R19.7 million expended on the purchase of software and development costs.

The increase of R79 million in a financial asset at fair value through profit and loss, emanating from the Cell C transaction, related to a USD6 million part payment for the acquisition of bond notes issued by Cedar Cellular Investments 1 Proprietary Limited.

Of the decrease in current assets, material movements included decreases in inventories of R913 million, in loans granted to Cell C of R749 million, in other loans receivable of R75 million, in cash resources of R879 million and increases in trade receivables of R279 million.

The stock turn equated to 19 days compared to 33 days for the financial year ended 31 May 2017.

The debtor’s collection period increased to 41 days compared to 39 days for the financial year ended 31 May 2017.

Net profit attributable to equity holders of R1.3 billion, less a dividend of R350 million, resulted in retained earnings accumulating to R4.6 billion.

Share capital and share premium increased by R3 billion congruent with the issue of 200 million shares at an issue price of R15 per share, which were applied for part payment for the equity of Cell C and 3G Mobile.

Trade and other payables increased by R2.5 billion, inclusive of the deferred payment of R0.6 billion relating to the acquisition of 3G Mobile, with average credit terms increasing to 80 days compared to 53 days for the financial year ended 31 May 2017.

Cash flows generated from operating activities amounted to R3.1 billion, predominately attributable to a change in the working capital structure.

Cash flows applied to investing activities amounted to R6.3 billion. Of this amount, R5.5 billion was applied to the acquisition of Cell C, R740 million to the capital expenditure loan granted to Cell C, R79 million for the purchase of the bond notes, R22.2 million for professional fees, R20 million for the purchase of intangible assets, R27.9 million to settlement of contingent considerations and R26.4 million for capital expenditure. These outflows were offset by R66.6 million from loans receivable.

Cash flows from financing activities amounted to R2.35 billion, of which R2.75 billion related to proceeds received on shares issued. After applying R28.8 million to the acquisition of treasury shares and a dividend payment of R370 million to shareholders and non-controlling interests, cash on hand at period end amounted to R471 million.

Forfeitable shares totalling 1 888 961 (2016: 1 386 327) were issued to qualifying employees. During the period 174 418 (2016: nil) shares were forfeited and 2 432 743 (2016: 2 141 673) shares vested.

The Prepaid Company Proprietary Limited acquired the remaining 52.63% of the issued share capital of 3G Mobile with effect from 6 December 2017, the date on which the Competition Tribunal approval was granted.

On 2 January 2018 BLT acquired 60% of the issued share capital of Airvantage Proprietary Limited for a purchase consideration of R151 million. An agreement has been concluded to acquire 60% of the issued share capital of AV Technology Limited, an affiliate company of Airvantage incorporated in Mauritius, for a purchase consideration of USD6.4 million. The transaction will be completed once approval from the South African Reserve Bank is obtained.

On 9 February 2018, Gold Label Investments Proprietary Limited and 2DFine Investments Mauritius exercised their rights to acquire additional shares in Oxigen Services India and Oxigen Online Services India in proportion to their shareholdings. The total purchase consideration amounted to USD2.9 million.

In line with the Group’s strategy to continue expanding its distribution footprint and product offerings, focus will be on further penetration into the informal market through the provision of point of sale devices to the multitude of independent traders who do not have the tools to market and sell the Blue Label offering of product and services at present.

Blue Label is one of the primary distribution channels for Cell C products and services. Our investment in Cell C 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 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.

The proprietary software developed by Airvantage will afford Blue Label the opportunity to apply such intellectual property within the Group, thereby enabling it to broaden its offerings to its customer base. It is the intention of Airvantage to emulate its robust business model internationally in the near future.

Through Blue Label’s entrenched relationship with numerous municipalities on whose behalf prepaid electricity is sold and the proceeds thereof collected, it is the intention to supplement these services with a full turn-key revenue management system, credit control services, audits, meter replacements and new installations.

Following Blue Label Mexico’s continuous improvement in operations, it 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.

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 February 2018

* Supervised the preparation of the unaudited condensed Group interim results.