Blue Label Telecoms

Core headline earnings for the six months ended 30 November 2018 equated to a negative 11.39 cents per share, post a dilution resulting from the issue of additional shares to facilitate part-payment of the acquisitions of Cell C and 3G Mobile as well as the negative impact of the underlying factors expounded upon below.

The interim results for the comparative period ended 30 November 2017, incorporated the Group’s share of profits in Cell C of R928 million, inclusive of the recognition of a deferred tax asset of R865 million. This was a once-off recognition to earnings in that period. During the current reporting period, the Group’s share of losses in Cell C equated to R123 million. The negative movement to Group core headline earnings by Cell C amounted to R1.05 billion.

In terms of the restructure of Cell C’s debt to third-party lenders, The Prepaid Company (TPC) was obligated to purchase bond notes issued by SPV1 with a capital redemption value of USD21 million at a coupon rate of 8.625% per annum for a purchase consideration of USD9 million and to provide liquidity support to SPV2 of up to USD80 million in the form of subordinated funding. Oger Telecoms contributed USD36 million of the aforesaid USD80 million, thus confining TPC’s obligation in this regard to a maximum of USD44 million.

SPV1 and SPV2 own 11.8% and 16% of the shares issued by Cell C respectively. No other assets are held by these entities, and as such the Group’s bond note and liquidity support arrangements will be settled only once the value of Cell C’s shares are realised by both SPV1 and SPV2. Blue Label has a reversionary pledge of 5% of the shares issued by Cell C relating to the Group’s exposure in SPV2.

The derivatives were initially required to be recognised at fair value and thereafter to be measured at fair value through profit or loss. Although the valuation of Cell C as at 30 November 2018 of R13.4 billion was adequate to support the carrying value of the investment therein, it was not adequate enough to support the recoverability of the exposure to SPV1 and SPV2. As a result thereof, a fair value downward adjustment totalling R493 million, of which R47 million related to SPV1 and R446 million to SPV2, impacted negatively on core headline earnings. The remaining exposure to these derivatives is R121 million for SPV1 and R102 million for SPV2.

As illustrated in the table below, core headline earnings from the balance of the entities within the Blue Label Group increased by R80 million (19%) from R431 million to R510 million, equating to core headline earnings per share of 55.13 cents after the increase in the weighted average number of shares in issue from 806 million shares at 30 November 2017 to 926 million shares as at 30 November 2018.

Group
Unaudited	Group  November  2018  R’000		Cell C  November  2018  R’000	SPVs  adjustment  November  2018  R’000	Remaining  entities  November  2018  R’000
Revenue	12 301 717		–	–	12 301 717
Gross profit	1 307 990		–	–	1 307 990
EBITDA	379 168		–	(492 640)	871 808
Share of (losses)/profits from associates and joint ventures	(138 038)		(133 465)	–	(4 573)
– Cell C	(133 465)		(133 465)	–	–
– Blue Label Mexico	(13 002)		–	–	(13 002)
– Other	8 429		–	–	8 429
Net (loss)/profit	(116 532)		(133 465)	(492 640)	509 573
Core net (loss)/profit	(82 874)		(128 277)	(492 640)	538 043
Core headline earnings	(105 394)		(123 056)	(492 640)	510 302
Gross profit margin	10.63%				10.63%
EBITDA margin	3.08%				7.09%
Weighted average shares	925 687 772				925 687 772
EPS (cents)	(12.59)				55.05
HEPS (cents)	(15.02)				52.05
Core HEPS (cents)	(11.39)				55.13

 

Unaudited	Group  November  2017  R’000		Cell C  November  2017  R’000	Remaining  entities  November  2017  R’000	Growth  remaining  entities  R’000	Growth  remaining  entities  %
Revenue	13 633 442		–	13 633 442	(1 331 725)	(10%)
Gross profit	1 141 247		–	1 141 247	166 743	15%
EBITDA	768 475		–	768 475	103 333	13%
Share of (losses)/profits from associates and joint ventures	940 425		924 194	16 231	(20 804)	(128%)
– Cell C	924 194		924 194	–	–	–
– Blue Label Mexico	(10 511)		–	(10 511)	(2 491)	24%
– Other	26 742		–	26 742	(18 313)	(68%)
Net (loss)/profit	1 350 261		924 194	426 067	83 506	20%
Core net (loss)/profit	1 364 248		927 643	436 605	101 438	23%
Core headline earnings	1 358 229		927 643	430 586	79 716	19%
Gross profit margin	8.37%		–	8.37%
EBITDA margin	5.64%		–	5.64%
Weighted average shares	805 590 826			805 590 826
EPS (cents)	167.61			52.89	2.16	4%
HEPS (cents)	166.86			52.14	(0.09)	–
Core HEPS (cents)	168.60			53.45	1.68	3%

Group revenue declined by 10% to R12.3 billion. As only the gross profit earned on “PINless top-ups”, prepaid electricity and ticketing are accounted for, on imputing the gross revenue generated thereon, the effective growth in revenue equated to 7%. The composition thereof was as follows:

Unaudited	November  2018  R'000		November  2017  R'000		Growth  R'000		Growth  %
Prepaid airtime, data and related revenue	15 145 615		16 341 414		(1 195 799)		(7%)
– Prepaid airtime and data	9 651 183		12 387 119		(2 735 936)		(22%)
– “PINless” airtime top-ups*	5 494 432		3 954 295		1 540 137		39%
Postpaid airtime, data and related revenue	78 187		54 028		24 159		45%
Prepaid and postpaid SIM cards	603 092		425 555		177 537		42%
Services	331 717		311 157		20 560		7%
Gross electricity revenue	10 006 253		8 360 543		1 645 710		20%
– Electricity commission	190 470		154 325		36 145		23%
– Gross electricity revenue*	9 815 783		8 206 218		1 609 565		20%
Handsets, tablets and other devices	1 092 645		239 233		853 412		357%
Finance revenue	259 838		–		259 838		–
Gross ticketing revenue*	323 768		275 984		47 784		17%
Other revenue	94 585		62 025		32 560		52%
Gross revenue	27 935 700		26 069 939		1 865 761		7%
Less: imputed gross revenue(sum of*)	(15 633 983)		(12 436 497)		(3 197 486)		26%
Reported revenue	12 301 717		13 633 442		(1 331 725)		(10%)

The decline in prepaid airtime revenue, inclusive of gross revenue generated on “PINless top-ups” by 7%, was partly attributable to unfavourable market conditions and the reduction of low-margin yielding sales. This decline was offset by significant growth of 20% on prepaid electricity revenue generated on behalf of the utilities from R8.4 billion to R10 billion of which the commission earned thereon escalated by R25 million to R149 million. A further offset of R1.1 billion was attributable to revenue generated by 3G Mobile on handsets, tablets and other devices once it became a wholly owned subsidiary from December 2017.

The decline in EBITDA was entirely attributable to the fair value downward adjustment relating to SPV1 and SPV2. EBITDA generated by the remaining entities within the Group increased by 13% from R768 million to R872 million, underpinned by an increase in gross profit margins from 8.37% to 10.63%.

The Group’s share of losses in Blue Label Mexico increased from R10 million to R13 million (24%) having sustained a decline in gross profit by R10 million.

The net asset value per share equated to R9.67 and earnings per share declined from 167.61 cents to a negative 12.59 cents per share ((108)%). On exclusion of the financial results of Cell C and the negative impact of the SPV adjustments, earnings per share from the balance of the entities within the Blue Label Group amounted to 55.05 cents per share.

Africa Distribution

	Unaudited  November  2018  R'000		Unaudited  November  2017  R'000		Growth  R'000		Growth  %		Audited  May  2018  R'000
Revenue	12 017 922		13 357 831		(1 339 909)		(10%)		26 245 206
Gross profit	1 166 307		1 009 700		156 607		16%		2 014 169
EBITDA	318 065		732 048		(413 983)		(57%)		1 344 824
Share of (loss)/profit from associates and joint ventures	(139 451)		949 534		(1 088 985)		(115%)		583 122
– Cell C	(133 465)		924 194		(1 057 659)		–		562 567
– 3G Mobile	–		31 381		(31 381)		–		31 155
– Other	(5 986)		(6 041)		55		1%		(10 600)
Core net (loss)/profit	(105 425)		1 395 705		(1 501 130)		(108%)		1 385 494
Core headline earnings	(127 791)		1 394 892		(1 522 683)		(109%)		1 384 739
Gross profit margin	9.70%		7.56%						7.67%
EBITDA margin	2.65%		5.48%						5.12%

The composition of the above is expounded upon in the tables below, consisting of the financial results for the six month periods ended 30 November 2018, 30 November 2017 and 31 May 2018 respectively.

The comparison of these respective periods affords insight into the contributions to Group core headline earnings by 3G Mobile, Airvantage, Cell C and the historical remaining entities within this segment, as well as adjustments required outside the operational performance of the Africa Distribution segment.

Six month period ended 30 November 2018
Unaudited	November  2018  R'000		3G Group  R'000		Airvantage  R'000		Cell C  R'000		SPVs  adjustment  November  2018 R'000		IFRS 9  adjustment  R'000		Remaining  entities  R'000
Revenue	12 017 922		1 095 203		43 307		–		–		–		10 879 412
Gross profit	1 166 307		241 484		34 235		–		–		–		890 588
EBITDA	318 065		199 663		28 564		–		(492 640)		23 095		559 383
Share of losses from associates and joint ventures	(139 451)		–		–		(133 465)		–		–		(5 986)
– Cell C	(133 465)		–		–		(133 465)		–		–		–
– 3G Mobile	–		–		–		–		–		–		–
– Other	(5 986)		–		–		–		–		–		(5 986)
Core net (loss)/profit	(105 425)		144 264		10 081		(128 277)		(492 640)		23 886		337 261
Core headline earnings	(127 791)		144 264		10 076		(123 056)		(492 640)		23 886		309 679
Gross profit margin	9.70%		22.05%		79.05%								8.19%
EBITDA margin	2.65%		18.23%		65.96%								5.14%

Six month period ended 30 November 2017
Unaudited	November  2017  R'000		3G Group  R'000		Airvantage  R'000		Cell C  R'000		Adjustment  R'000		Remaining  entities  R'000
Revenue	13 357 831		–		–		–		–		13 357 831
Gross profit	1 009 700		–		–		–		–		1 009 700
EBITDA	732 048		–		–		–		–		732 048
Share of profits/(losses) from associates and joint ventures	949 534		31 381		–		924 194		–		(6 041)
– Cell C	924 194		–		–		924 194		–		–
– 3G Mobile	31 381		31 381		–		–		–		–
– Other	(6 041)		–		–		–		–		(6 041)
Core net profit	1 395 705		35 537		–		927 643		(21 194)		453 719
Core headline earnings	1 394 892		35 537		–		927 643		(21 194)		452 906
Gross profit margin	7.56%										7.56%
EBITDA margin	5.48%										5.48%

Six month period ended 31 May 2018
Unaudited	December  2017 –  May  2018  R'000		3G Group  R'000		Airvantage  R'000		Cell C  R'000		Adjustment  R'000		Remaining  entities  R'000
Revenue	12 887 375		1 387 029		36 929		–		–		11 463 417
Gross profit	1 004 469		226 184		29 241		–		–		749 044
EBITDA	612 776		181 322		20 650		–		(2 629)		413 433
Share of losses from associates and joint ventures	(366 412)		(226)		–		(361 627)		–		(4 559)
– Cell C	(361 627)		–		–		(361 627)		–		–
– 3G Mobile	(226)		(226)		–		–		–		–
– Other	(4 559)		–		–		–		–		(4 559)
Core net profit	(10 211)		121 942		8 267		(356 429)		(67 772)		283 781
Core headline earnings	(10 152)		121 185		8 267		(358 168)		(67 772)		286 336
Gross profit margin	7.79%		16.31%		79.18%						6.53%
EBITDA margin	4.75%		13.07%		55.92%						3.61%

3G Mobile

Revenue generated for the six months to 30 November 2018 amounted to R1.1 billion, gross profit to R241 million at a margin of 22.05% and EBITDA to R200 million. Core net profit for the six months as a wholly owned subsidiary amounted to R144 million.

From the date of acquisition of 47.37% in August 2017 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, its contribution as an associate amounted to R31 million.

On 6 December 2017 the remaining 52.67% of the company was acquired, at which date it became a wholly owned subsidiary. 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.

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%, EBITDA to R21 million and NPAT to R14 million, of which the Group’s share equated to R8.3 million.

Revenue generated for the six months to 30 November 2018 amounted to R43 million, gross profit to R34 million at a margin of 79.05%, EBITDA to R29 million and NPAT to R17.5 million. The Group’s share thereof equated to R10.3 million.

Cell C

On 2 August 2017, TPC acquired a 45% shareholding in Cell C.

For the six months ended November 2018, Cell C’s net loss amounted to R634 million. The Group’s share thereof amounted to R285 million. Blue Label’s accounting policies exclude equity-settled share-based payment charges from its associates and has not early adopted IFRS 16. Accordingly, an adjustment of R51 million and R106 million respectively was required. The net result was a negative contribution of R128 million to Blue Label’s core earnings.

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 was R512 million. In line with Blue Label’s accounting policies as above, an exclusion relating to equity-settled share-based payment charges from its associates and the reversal of the early adoption of IFRS 15 and IFRS16, resulted in a positive adjustment of R65 million and a negative adjustment of R6 million respectively. The net result was a positive contribution of R571 million to Blue Label’s core earnings.

Adjustments

The adjustment of R493 million for the six months ended 30 November 2018 was attributable to the fair value downward adjustment relating to the non-recoverability of the exposure to SPV1 and SPV2.

Adjustments for the six months ended 30 November 2017 amounted to R21 million relating to once-off costs of imputed IFRS interest adjustments attributable to the acquisition of 3G Mobile.

Adjustments for the six months ended 31 May 2018 amounted to R68 million, of which R43.3 million was attributable to once-off costs of imputed IFRS interest adjustments for the acquisitions of 3G Mobile and Airvantage and R28.1 million to interest and costs relating to the 3G Mobile acquisition. These adjustments were partly offset by a derivative fair value gain of R3.7 million on financial instruments.

Remaining entities

Unaudited	H1  November  2018  R'000		H1  November  2017  R'000		H1 vs H1  Growth  R'000		H1 vs H1  Growth  %		H2  December  2017 – May  2018  R'000		H1 vs H2  Growth  R'000		H1 vs H2  Growth  %
Revenue	10 879 412		13 357 831		(2 478 419)		(19%)		11 463 417		(584 005)		(5%)
Gross profit	890 588		1 009 700		(119 112)		(12%)		749 044		141 544		19%
EBITDA	559 383		732 048		(172 665)		(24%)		413 433		145 950		35%
Share of losses from associates and joint ventures	(5 986)		(6 041)		55		1%		(4 559)		(1 427)		(31%)
Core net profit	337 261		453 719		(116 458)		(26%)		283 781		53 480		19%
Core headline earnings	309 679		452 906		(143 227)		(32%)		286 336		23 343		8%
Gross profit margin	8.19%		7.56%						6.53%
EBITDA margin	5.14%		5.48%						3.61%

Although there was a decline in core headline earnings from R453 million for the six months ended 30 November 2017 to R310 million for the current reporting period, the comparative period included rebates of R136 million post-taxation from Cell C. The recapitalisation of Cell C enabled Blue Label to reduce its inventory holding, and in turn to recognise the pre-existing rebates received from the sale of the inventory on a piecemeal basis over the course of that period.

Post the recapitalisation of Cell C, core headline earnings for the six months ended 31 May 2018 amounted to R286 million in comparison to the R310 million earned in the current reporting period, equating to a growth of 8%. This comparison illustrates the growth in earnings post the recognition of the pre-existing rebates that took place between August 2017 and November 2017.

Revenue declined by 19% from R13.4 billion to R10.9 billion, in that only the gross profit earned on “PINless top-ups”, prepaid electricity and ticketing are accounted for. On imputing the gross revenue generated thereon, the effective growth in revenue equated to 3%.

The decline in prepaid airtime revenue, inclusive of gross revenue generated on “PINless top-ups” by 7%, was partly attributable to unfavourable market conditions and the reduction of low-margin yielding sales. This decline was offset by significant growth of 20% on prepaid electricity revenue generated on behalf of the utilities.

Net commissions earned on the distribution of prepaid electricity continued to increase, escalating by R25 million to R149 million (20%) on an increase in revenue generated on behalf of the utilities from R8.4 billion to R10 billion (20%).

Although gross profit declined from R1 billion for the six months ended 30 November 2017 to R891 million for the current reporting period, the comparative period included the recognition of pre-existing rebates at a pre-tax level of R188 million as expounded upon above, at a margin of 7.56%. Gross profit for the six months ended 31 May 2018 amounted to R749 million in comparison to the R891 million earned in the current reporting period, on margin increases from 6.53% to 8.19%.

The core headline earnings adjustment of R28 million for the six months ended 30 Nov 2018 was attributable to the fair value uplift relating to the acquisition of the remaining 60% of Lornanox Proprietary Limited, formerly trading as Edgars Connect and renamed WiConnect. As this fair value uplift is a headline earnings adjustment, it had no impact on core headline earnings.

International

	Unaudited  November  2018  R’000		Unaudited  November  2017  R’000	Growth  R’000	Growth  %	Audited  May  2018  R’000
Revenue	12 940		–	12 940		–
Gross profit	11 647		–	11 647		–
EBITDA	26 700		22 203	4 497	20%	(2 903)
Gain on associate measured at fair value	13 115		716	12 399		(173 645)
Share of (losses)/profits from associates and joint ventures	(13 002)		(10 246)	(2 756)	(27%)	(21 647)
– Blue Label Mexico	(13 002)		(10 511)	(2 491)	(24%)	(21 900)
– Mpower	–		265	(265)		253
Non-controlling interest	(3 780)		(32 460)	28 680		(26 058)
Core net profit/(loss)	22 258		(16 714)	38 972	233%	(225 450)
Core headline profit/(loss)	22 115		(21 878)	43 993	201%	(230 614)

The composition of the above results for the six months ended November 2018, is expounded upon in the table below:

International

Unaudited	November  2018  R’000		Airvantage  Brazil  R’000	AV  Technology  R’000	Adjustment  %	Remaining  entities  R’000
Revenue	12 940		–	12 940	–	–
Gross profit	11 647		–	11 647	–	–
EBITDA	26 700		3 025	9 864	(784)	14 595
Gain on associate measured at fair value	13 115		–	–	–	13 115
Share of losses from associates and joint ventures	(13 002)		–	–	–	(13 002)
– Blue Label Mexico	(13 002)		–	–	–	(13 002)
– Mpower	–		–	–	–	–
Non-controlling interest	(3 780)		(1 303)	(2 477)	–	–
Core net profit	22 258		1 709	5 490	(934)	15 993
Core headline profit	22 115		1 709	5 490	(934)	15 850

On 2 January 2018 Blue Label acquired 60% of the issued share capital of Airvantage Proprietary Limited for a purchase consideration of R151 million, inclusive of its 80% ownership in Airvantage Brazil.

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

Consequently, in both of the above instances no comparatives existed for the six months ended November 2017.

The increase in EBITDA of R4.5 million was attributable to positive foreign exchange movements of R7 million, non-comparatives applicable to Airvantage Brazil and AV Technology amounting to R13 million, offset by loan releases of R16 million relating to the winding up process of the Africa Prepaid Services group in the comparative period.

Non-controlling interest of R3.8 million related to minority shareholders in both Airvantage Brazil and AV Technology. The R32 million in the comparative period related to the Africa Prepaid Services group for its share of the loan releases as a consequence of the winding up process therein.

Oxigen Services India and 2DFine

The investments in Oxigen Services India, Oxigen Online Services India and 2DFine group (collectively OSI) are accounted for as venture capital investments at fair value.

The change in fair value between 31 May 2018 and 30 Nov 2018 increased by R13 million, offset by a net loan impairment of R2 million. However, a further loan impairment of R13 million was accounted for in the corporate segment. The net overall impact on Group earnings amounted to a negative contribution of R2 million.

Blue Label Mexico

Losses in Blue Label Mexico increased from R20 million to R25 million, of which the Group’s share amounted to R13 million after the amortisation of intangible assets. In the comparative year the Group’s share of losses amounted to R10.5 million.

The increase in loss was attributable to a decline in revenue from R1.9 billion to R1.8 billion (5%), compounded by a decline in gross profit margins from 4.30% to 4.03%. In spite of containing overheads and a reduction in depreciation, the above resulted in the Group’s share of losses increasing by R2.5 million.

In order to mitigate further losses, major rationalisation and restructure programmes were implemented with effect from December 2018. These measures should result in it becoming profitable.

Mobile

	Unaudited  November  2018  R’000		Unaudited  November  2017  R’000	Growth  R’000	Growth %	Audited  May  2018  R’000
Revenue	165 439		172 988	(7 549)	(4%)	359 970
Gross profit	96 612		97 873	(1 261)	(1%)	204 349
EBITDA	48 580		47 283	1 297	3%	101 883
Core net profit	30 277		27 548	2 729	10%	59 553
Core headline earnings	30 266		27 512	2 754	10%	59 679

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

Although revenue declined by 4%, margin increases from 56.58% to 58.40% limited a decline in gross profit to 1%. EBITDA increased by 3% attributable to a reduction in overheads.

Contribution to Group core headline earnings increased by 10% to R30 million.

Solutions

	Unaudited  November  2018  R’000		Unaudited  November  2017  R’000	Growth  R’000	Growth %	Audited  May  2018  R’000
Revenue	105 416		102 623	2 793	3%	195 089
Gross profit	33 425		33 673	(248)	(1%)	63 574
EBITDA	21 978		24 442	(2 464)	(10%)	42 838
Share of (losses)/profits from associates and joint ventures	13 852		519	13 333	2 569%	4 579
Core net profit	25 155		13 715	11 440	83%	29 836
Core headline earnings	25 155		13 710	11 445	83%	29 814

This segment comprises Datacel, Blue Label Data solutions (BLDS), a data aggregation and lead generation entity in which the Group owns 81%, and a 50% joint venture shareholding by BLDS in United Call Centre Solutions, an outbound call centre operation.

The growth in revenue by 3% to R105 million was attributable to increased demand for aggregated data and lead generations. A marginal decline in gross profit margins from 32.81% to 31.71% resulted in a nominal movement in gross profit. After overhead increases of 12%, EBITDA equated to R22 million.

Of the core headline earnings of R25 million, BLDS accounted for R15 million. United Call Centre Solutions generated earnings of R27.5 million, of which BLDS’s share amounted to R13.8 million. After accounting for minority shareholding of 19%, the Group’s share thereof amounted to R11.2 million.

Corporate

	Unaudited  November  2018  R’000		Unaudited  November  2017  R’000	Growth R’000	Growth %	Audited  May  2018  R’000
EBITDA	(36 155)		(57 501)	21 346	37%	(146 489)
Core net loss	(55 139)		(56 007)	868	2%	(211 464)
Core headline loss	(55 139)		(56 007)	868	2%	(211 602)

Of the decline in negative EBITDA of R22 million, R6 million pertained to a positive turnaround in foreign exchange movements and R17 million to a release of a portion of a putoption liability for the acquisition of the remaining 40% minority share of Airvantage SA and AV Technology Mauritius.

The negative contribution to Group core headline earnings declined by R1 million to R55 million, which losses included the loan impairment of R13 million pertaining to 2DFine resulting from the fair value adjustment in the Oxigen group and imputed IFRS interest adjustments of R7 million pertaining to the unwinding of the put-option liability.

Depreciation, amortisation and impairment charges increased by R68 million to R128 million. Of this increase, R9.6 million pertained to depreciation on additional capital expenditure incurred during the year, impairments of R0.4 million and R42.8 million relating to the amortisation of intangible assets of which R38.8 million emanated from purchase price allocations on historical acquisitions, which increased from R8.1 million to R46.9 million. The remaining R15 million related to the impairment on the loans to 2DFine Holdings by R26.5 million, offset by an increase of R11.4 million in a surety asset raised.

Finance costs totalled R119 million, of which R112 million related to interest paid on borrowed funds and R7 million to imputed IFRS interest adjustments. On a comparative basis, interest paid on borrowed funds amounted to R41 million and the imputed IFRS interest adjustment equated to R86 million. Of the latter amount, R65 million was attributable to credit received from suppliers and R21 million to the acquisition of 3G Mobile.

The increase of R71 million was attributable to additional borrowings utilised from existing facilities.

Finance income totalled R78 million, of which R77 million was attributable to interest received on cash resources and R1 million to imputed IFRS interest adjustments on credit afforded to customers. In the prior year, interest received on cash resources amounted to R68 million and the imputed IFRS interest adjustment to R1 million.

The increase of R10 million in interest received from cash resources related to an advance to Cell C for capital expenditure.

Total assets increased by R1.2 billion to R19.1 billion mainly due to the increase of non-current assets by R1 billion. Current assets increased by R0.2 billion.

Non-current assets included increases of R347 million in intangible assets and goodwill, of R482 million in financial assets at fair value through profit or loss, R212 million in trade and other receivables, R67 million in capital expenditure net of depreciation, R44 million in deferred tax assets and R26 million in venture capital associates and joint ventures. These increases were offset by a net decrease of R183 million in investments in and loans to associates and joint ventures.

The net decrease of R183 million in investments in and loans to associate and joint venture companies comprised the Group’s share of net losses totalling R138 million inclusive of the amortisation of applicable intangible assets, the step-up of Lornanox from an associate to a subsidiary which amounted to a net R52 million, dividends received of R4 million and a net negative impact of R14 million relating to the IFRS 9 impact on the loans to associates and joint ventures. These decreases were offset by a positive impact on foreign currency translation reserves of R14 million and net loans granted of R7 million.

Of the net increase in intangible assets and goodwill of R347 million, R255 million related to goodwill and R92 million to intangible assets. Of the goodwill increase, R158 million pertained to Glocell, R51 million to Airvantage Mauritius and R46 million to Lornanox. The increase in intangible assets related to purchase price allocations of R55 million raised in terms of IFRS 3 for Glocell and R78 million for Airvantage Mauritius, an additional R56 million expended on the purchase of software, internally generated software development costs and customer lists and a positive impact of foreign currency translation reserves of R5 million. These intangible increases were offset by amortisation of R97 million.

The net increase in venture capital associates and joint ventures of R26 million related to an increase of R13 million in the fair value of the investment in Oxigen Services India, offset by a loan impairment of R26 million. In addition there were unrealised foreign exchange profits on loans of R25 million and interest of R14 million capitalised thereon.

The increase of R482 million in a financial assets at fair value through profit or loss was due to a trade debtor of R361 million being reclassified into this category following the acquisition of 48% of Glocell Distribution. This was reflected in current assets in the prior period. The remaining R121 million related to the derivative asset on SPV1 which was classified in the prior period in current assets at a value of R168 million. The decrease of R47 million related to the fair value loss on this derivative. The reclassification from current to non-current assets was due to a change in the timing of the expected exit event.

Of the increase in current assets, material movements included increases in inventories of R752 million, in trade and other receivables of R711 million, offset by a repayment of a R1 billion loan granted to Cell C, other loans of R38 million and a decrease of R168 million in the financial assets at fair value through profit or loss.

The stock turn equated to 22 days compared to nine days for the financial year ended 31 May 2018. 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 below the above number of days at any given time.

The debtor’s collection period increased to 95 days compared to 75 days for the financial year ended 31 May 2018. This increase in credit afforded was indicative of the impact of financing the handset element of 24-month postpaid 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 52 days compared to 43 days for the financial year ended 31 May 2018.

Net loss attributable to equity holders of R117 million as well as a R115 million adjustment to the opening balance on initial application of IFRS 9 and IFRS 15, resulted in retained earnings accumulating to R4.1 billion.

Share capital and share premium decreased by R246 million congruent with the repurchase of 32.9 million shares at a weighted average price of R6.78 per share and the purchase of treasury shares amounting to R42 million, less R21 million of shares that vested.

Borrowings increased by R638 million, of which R290 million was applied by CEC for the financing of mobile handsets and R348 million utilised for working capital requirements.

Financial liabilities at fair value through profit or loss increased by R393 million due to the fair value loss on SPV2 of R446 million, offset by the liquidity support payment of R53 million (USD4 million) to SPV2.

Trade and other payables increased by R652 million, with average credit terms increasing to 85 days compared to 66 days for the financial year ended 31 May 2018.

Negative cash generated from operating activities, amounting to R1.19 billion, was in line with increases in inventory by R715 million and accounts receivable by R1.3 billion, offset by additional credit of R457 million afforded to the Group by its suppliers.

The increase in inventory was attributable to bulk purchasing at favourable discounts. Although this resulted in a temporary increase in inventory holding days, being a highly liquid asset, such excess inventory of approximately R1.2 billion is capable of reduction within any given month. Of the increase in accounts receivable, R396 million pertained to the financing of the handset element of postpaid contracts over a 24-month period by CEC, of which R260 million was funded through the utilisation of facilities available to it. A further R142 million related to a prepayment to utilities for prepaid electricity, which was replaced by inventory one day post the reporting period due to timing differences.

Cash generated from operating activities on a normalised basis equated to a positive R409 million after adding back the excess inventories of R1.2 billion, the prepayment of R142 million and R260 million of the utilisation of facilities for the funding of handsets.

Cash flows generated from investing activities amounted to R847 million, mainly attributable to the R1 billion loan that was repaid by Cell C, offset by funds applied, net of cash acquired, to the acquisition of AV Technology amounting to R19 million. A further R53 million was granted for the liquidity support to SPV2, R54 million for the purchase of intangible assets and R57 million for capital expenditure.

Cash flows from financing activities amounted to R337 million, of which R633 million related to an increase in borrowings. After applying R224 million to the share buyback, R42 million to the acquisition of treasury shares and a dividend payment of R29 million to non-controlling interests, cash on hand at year-end amounted to R940 million.

Forfeitable shares totalling 6 387 930 (2017: 1 888 961) were issued to qualifying employees. During the period 224 545 (2017: 174 418) shares were forfeited and 2 245 445 (2017: 2 432 743) shares vested.

The route-to-market expansion by Blue Label Distribution into the rural areas and townships is expected to continue its momentum in the further deployment of vending outlets, affording customer convenience and significant savings in transport costs.

Starter pack sales which generate compounding monthly annuity revenue continue to grow in these rural and township localities.

The distribution of both high-end and affordable low-cost handsets continues to exceed expectations with further inroads into the wider Africa market.

Cell C has concluded a binding term sheet with the Buffet consortium in terms of which Buffet shall, subject to the fulfilment of certain conditions precedent, become a minority shareholder in Cell C. With Buffet‘s support the Cell C balance sheet will be bolstered and ensure Cell C’s sustainable growth for the future.

Cell C’s preliminary unaudited financial information for the year ended 31 December 2018 is available on the Company’s website. (www.bluelabeltelecoms.co.za/inv-latest-results.php.)

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

28 February 2019

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