Commentary
OVERVIEW
The Blue Label Group generated growth in revenue, gross profit and core headline earnings per share for the half-year ended 30 November 2019. This was a resilient performance in an adverse economic environment. The Group continues to increase market share and bolster its product and services mix to defend and grow its positions in the market.
Earnings per share and headline earnings per share increased from a negative 15.11 and 17.54 cents per share to a positive 34.83 and 39.98 cents per share respectively. Core headline earnings for the half-year ended 30 November 2019 amounted to R390 million, equating to core headline earnings of 43.18 cents per share compared to core headline losses of 13.90 cents per share in the comparative period.
The comparative period reflected fair value losses of R493 million relating to the exposure to SPV1 and SPV2 (as referred to in the SENS announcement dated 22 February 2019) as well as to the recognition of the Group's share of equity-accounted losses in Cell C of R133 million. On exclusion of these negative contributions, core headline earnings amounted to R487 million in that period.
No further fair value losses relating to the SPVs were recognised in the current reporting period as the exposure thereto was fully accounted for as at 31 May 2019. As the carrying value of Blue Label's investment in Cell C was fully impaired for the year ended 31 May 2019, the financial results of Cell C during the current period did not have any impact on Blue Label's earnings for this reporting period.
Core headline earnings for the current period amounted to R390 million, inclusive of non-recurring once-off costs of R61 million, of which R50 million pertained to extraneous expenditure within the retail division and R11 million to a fair value loss as a consequence of providing for an increase in the put option liability for the acquisition of the remaining 40% minority share of Airvantage and AV Technology which will be settled during the current calendar year.
The comparative period of R487 million included nonrecurring income of R48 million, of which foreign exchange gains accounted for R25 million and finance income for R13 million. These movements related to loans provided to Oxigen Services India and 2DFine Holdings Mauritius. No further income in this regard was accounted for in the current reporting period as the loans were fully impaired as at 31 May 2019. The balance of R10 million related to a fair value gain as a result of providing for a decline in the put-option liability mentioned above.
On exclusion of the above extraneous costs of R61 million in the current period and the non-recurring income of R48 million in the comparative period, core headline earnings generated from trading operations increased from R439 million to R451 million.
Agreements for the disposal of Blue Label's interests in Blue Label Mobile Group Proprietary Limited (Blue Label Mobile) and the handset division of 3G Mobile Proprietary Limited (3G Mobile) were entered into on 25 September 2019. Consequently, the earnings generated by these entities have been accounted for as discontinued operations in both the current and comparative reporting periods. The related assets and liabilities have been reclassified in the Group's statement of financial position as "assets/liabilities held-for-sale".
Group income statement
Group Reviewed November 2019 R’000 |
Group Unaudited November 2018 R’000 |
Cell C November 2018 R’000 |
SPVs November 2018 R’000 |
Remaining entities November 2018 R’000 |
Growth remaining entities R’000 |
Growth remaining entities % |
|||
Continuing operations | |||||||||
Revenue | 11 488 576 | 11 273 841 | – | – | 11 273 841 | 214 735 | 2% | ||
Gross profit | 1 208 302 | 1 098 939 | – | – | 1 098 939 | 109 363 | 10% | ||
EBITDA | 723 221 | 239 014 | – | (492 640) | 731 654 | (8 433) | (1%) | ||
Share of profits/(losses) from associates and joint ventures | 13 040 | (148 799) | (133 465) | – | (15 334) | 28 374 | 185% | ||
– Cell C | – | (133 465) | (133 465) | – | – | – | |||
– Oxigen Services India | – | (10 197) | – | – | (10 197) | 10 197 | 100% | ||
– Blue Label Mexico | (564) | (13 002) | – | – | (13 002) | 12 438 | 96% | ||
– United Call Centre Solutions | 11 551 | 13 726 | – | – | 13 726 | (2 175) | (16%) | ||
– Other | 2 053 | (5 861) | – | – | (5 861) | 7 914 | 135% | ||
Net profit/(loss) from continuing operations | 313 388 | (201 142) | (133 465) | (492 640) | 424 963 | (111 575) | (26%) | ||
Core headline earnings | 390 304 | (128 706) | (123 056) | (492 640) | 486 990 | (96 686) | (20%) | ||
– from continuing operations | 323 512 | (202 133) | (123 056) | (492 640) | 413 563 | (90 051) | (22%) | ||
– from discontinued operations | 66 792 | 73 427 | – | – | 73 427 | (6 635) | (9%) | ||
Gross profit margin | 10.52% | 9.75% | 9.75% | ||||||
EBITDA margin | 6.30% | 2.12% | 6.49% | ||||||
Weighted average shares (’000) | 903 958 | 925 688 | 925 688 | ||||||
EPS (cents) | 34.83 | (15.11) | 52.53 | (17.70) | (34%) | ||||
HEPS (cents) | 39.98 | (17.54) | 49.53 | (9.55) | (19%) | ||||
Core HEPS (cents) | 43.18 | (13.90) | 52.61 | (9.43) | (18%) |
The financial results of Blue Label Mobile and the handset division of 3G Mobile, totalling R67 million, are disclosed in core headline earnings from discontinued operations and are not included in revenue, gross profit, EBITDA or net profit/(loss) after taxation.
Group revenue generated by the continuing operations within the Group increased by 2% to R11.5 billion. As only the gross profit earned on "PINless top-ups", prepaid electricity, ticketing and gaming are accounted for, on imputing the gross revenue generated thereon, the effective growth in revenue equated to 12% from R27.1 billion to R30.3 billion.
Gross profit increased by 10% from R1.1 billion to R1.2 billion, underpinned by an increase in margins from 9.75% to 10.52%.
The increase in EBITDA was attributable to fair value losses of R493 million relating to SPV1 and SPV2 incurred in the comparative period. On exclusion of this negative contribution, EBITDA declined by R8 million to R723 million, net of the extraneous costs of R41 million incurred in the current period.
The core headline earnings of R390 million comprised R323 million from continuing operations and the R67 million that pertained to the discontinued operations. The composition of the latter is tabled below on a segmental basis:
Discontinued operations
Africa Reviewed November 2019 R’000 |
International Reviewed November 2019 R’000 |
Mobile Reviewed November 2019 R’000 |
Total November 2018 R’000 |
Africa Unaudited November 2018 R’000 |
International Unaudited November 2018 R'000 |
Mobile Unaudited November 2018 R’000 |
Total November 2018 R’000 |
|||||
Revenue | 1 241 491 | 18 860 | 109 234 | 1 369 585 | 862 270 | 12 940 | 121 455 | 996 665 | ||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Gross profit | 154 927 | 16 338 | 88 007 | 259 272 | 107 947 | 11 647 | 89 458 | 209 052 | ||||
EBITDA | 60 186 | 5 442 | 18 935 | 84 563 | 68 742 | 12 889 | 43 375 | 125 006 | ||||
Share of (losses)/profits from associates and joint ventures | – | – | (1 363) | (1 363) | – | – | 563 | 563 | ||||
Core headline earnings | 46 072 | 7 240 | 13 480 | 66 792 | 39 547 | 7 199 | 26 681 | 73 427 |
All suspensive conditions relating to the disposal of 3G Mobile's handset trading operations have been fulfilled and the selling price of R544 million was received on 14 February 2020. In relation to the disposal of Blue Label's interest in Blue Label Mobile, certain conditions precedent remain outstanding, the completion of which is at an advanced stage. Upon fulfilment thereof, R350 million of the selling price of R450 million as well as all monies paid by Blue Label Mobile towards the acquisition of Hyve Mobile Proprietary Limited and Mobile Content Africa Limited amounting to approximately R81 million will be received. The remaining R100 million plus interest thereon will be contingent upon terms of the conditions contained in the circular to shareholders published on 6 November 2019.
The total proceeds of the above disposals will be applied to the reduction of interest-bearing borrowings within the Group by approximately R1 billion. The Group's strategic intent is to "go back to basics" and significantly improve the cash generation of the Group in order to deliver returns to shareholders.
SEGMENTAL REPORT
Africa Distribution
Africa Reviewed November 2019 R’000 |
Africa Unaudited November 2018 R’000 |
Cell C November 2018 R’000 |
SPVs November 2018 R’000 |
Remaining entities November 2018 R’000 |
Growth remaining entities R’000 |
Growth remaining entities % |
|
Revenue | 11 381 337 | 11 168 425 | – | – | 11 168 425 | 212 912 | 2% |
---|---|---|---|---|---|---|---|
Gross profit | 1 174 858 | 1 065 513 | – | – | 1 065 513 | 109 345 | 10% |
EBITDA | 763 107 | 254 525 | – | (492 640) | 747 165 | 15 942 | 2% |
Share of profits/(losses) from associates and joint ventures | 2 047 | (139 452) | (133 465) | – | (5 987) | 8 034 | 134% |
– Cell C | – | (133 465) | (133 465) | – | – | ||
– Other | 2 047 | (5 987) | – | – | (5 987) | 8 034 | 134% |
Net profit/(loss) from continuing operations | 364 229 | (162 101) | (133 465) | (492 640) | 464 004 | (99 775) | (22%) |
Core headline earnings | 419 570 | (124 212) | (123 056) | (492 640) | 491 484 | (71 914) | (15%) |
– from continuing operations | 373 498 | (163 759) | (123 056) | (492 640) | 451 937 | (78 439) | (17%) |
– from discontinued operations | 46 072 | 39 547 | – | – | 39 547 | 6 525 | 16% |
The financial results of the handset division of 3G Mobile and Airvantage have been classified as discontinued operations and are not included in revenue, gross profit, EBITDA or net profit/(loss) after taxation.
Revenue generated by the continuing operations within the segment increased by 2% from R11.2 billion to R11.4 billion. As only the gross profit earned on "PINless top-ups", prepaid electricity, ticketing and gaming are accounted for, on imputing the gross revenue generated thereon, the effective growth in revenue equated to 12% from R27.0 billion to R30.2 billion.
SA Distribution continues to expand its product and services portfolio to further differentiate ourselves from competitors and ensure we remain a distinctive magnet for foot traffic. We continue to bed down the new operational structure to improve customer services and efficiency. Our dedicated call centre has improved our analysis of trading patterns and refined our targeting leading to further market share gains.
Net commissions earned on the distribution of prepaid electricity amounted to R150 million. Revenue generated on behalf of the utilities increased by 14% from R10.0 billion to R11.4 billion.
We continue to drive penetration into our municipal pre-paid utilities market. We have added to our revenue collection services through the development of a comprehensive revenue assurance product suite which we expect will enhance traction and margins in this market.
Gross profit increased by 10% from R1.07 billion to R1.17 billion, underpinned by an increase in margins from 9.54% to 10.32%.
On exclusion of the fair value losses of R493 million relating to SPV1 and SPV2 incurred in the comparative period, EBITDA increased by R16 million to R763 million.
As at 31 May 2019, the carrying value of Blue Label's investment in Cell C was fully impaired. Consequently, its financial results did not have an impact on Blue Label's earnings for the current reporting period.
The comparative period reflects the negative contribution by Cell C and the fair value losses of the exposure relating to SPV1 and SPV2. On exclusion thereof, core headline earnings amounted to R491 million compared to R419 million in the current period. Of the latter amount, R373 million related to continuing operations and R46 million to discontinued operations.
Of the R72 million decline in core headline earnings, R51 million pertained to extraneous expenditure within the retail division. The remaining R21 million was primarily attributable to additional depreciation in line with an increase in capital expenditure as well as an increase in net finance costs.
International
Reviewed November 2019 R’000 |
Unaudited November 2018 R’000 |
Growth R’000 |
Growth % |
|
EBITDA | 372 | 11 914 | (11 542) | (97%) |
---|---|---|---|---|
Share of losses from associates and joint ventures | (564) | (23 199) | 22 635 | 98% |
– Oxigen Services India | – | (10 197) | 10 197 | 100% |
– Blue Label Mexico | (564) | (13 002) | 12 438 | 96% |
Net profit/(loss) from continuing operations | 42 | (9 061) | 9 103 | 100% |
Core headline earnings | 8 137 | (1 195) | 9 332 | 781% |
– from continuing operations | 897 | (8 394) | 9 291 | 111% |
– from discontinued operations | 7 240 | 7 199 | 41 | 1% |
The financial results of AV Technology and Airvantage Brazil have been classified as discontinued operations.
The decline in EBITDA of R11.5 million was primarily attributable to negative foreign exchange movements relating to loans provided to Oxigen Services India and 2DFine Holdings Mauritius, accounted for in the comparative period. As these loans were fully impaired as at 31 May 2019, no further income in this regard was accounted for in the current reporting period.
As at 31 May 2019, the carrying value of Blue Label's investment in the Oxigen India Group was fully impaired. Consequently, its financial results did not have an impact on Blue Label's earnings for the current reporting period.
Blue Label Mexico generated a profit of R0.6 million, of which the Group's share amounted to a loss of R0.6 million after the amortisation of intangible assets. In the comparative period it incurred losses of R25 million, of which the Group's share amounted to R13 million.
The positive turnaround was attributable to various initiatives that were implemented in the last quarter of the previous financial year which perpetuated in the current period.
Although its revenue declined by R130 million (7%) from R1.81 billion to R1.68 billion, gross profit increased by R3 million (5%), underpinned by an increase in gross profit margins from 4.04% to 4.55%.
Operational expenditure declined by 16%, through the implementation of significant cost saving initiatives. The resultant EBITDA increased by R17 million from a negative R9 million to a positive R8 million.
Depreciation declined by R9 million (48%), primarily attributable to the expiry of the tenure of certain POS terminals.
The resultant contributions by the International segment to Group core headline earnings amounted to R8 million, of which continuing operations accounted for R1 million and discontinued operations for R7 million.
Solutions
This segment comprises Datacel, Blue Label Data Solutions (BLDS), the data aggregation and lead generation entity in which the Group owns 81%, and a 50% joint venture shareholding owned by BLDS in United Call Centre Solutions, an outbound call centre operation.
Reviewed November 2019 R’000 |
Unaudited November 2018 R’000 |
Growth R’000 |
Growth % |
|
Revenue | 107 239 | 105 416 | 1 823 | 2% |
---|---|---|---|---|
Gross profit | 33 444 | 33 425 | 19 | 0% |
EBITDA | 23 855 | 21 980 | 1 875 | 9% |
Share of profits from associates and joint ventures | 11 557 | 13 852 | (2 295) | (17%) |
Net profit from continuing operations | 23 199 | 25 159 | (1 960) | (8%) |
Core headline earnings | 23 199 | 25 159 | (1 960) | (8%) |
– from continuing operations | 23 199 | 25 159 | (1 960) | (8%) |
– from discontinued operations | – | – | – | |
The growth in revenue of 2% to R107 million was attributable to increased demand for aggregated data and lead generations. A marginal decline in gross profit margins from 31.71% to 31.19% resulted in a nominal movement in gross profit. After an overhead decline of 12%, EBITDA increased by R2 million (9%) to R24 million. This segment prides itself on its adherence to compliance with the POPI and CPA Acts.
Of the core headline earnings of R23 million, BLDS accounted for R13.7 million. United Call Centre Solutions generated earnings of R23.1 million, of which BLDS' share amounted to R11.6 million. After accounting for a minority shareholding of 19%, the Group's share thereof amounted to R9.4 million.
Corporate
Reviewed November 2019 R’000 |
Unaudited November 2018 R’000 |
Growth R’000 |
Growth % |
|
EBITDA | (64 114) | (49 405) | (14 709) | (30%) |
---|---|---|---|---|
Net loss from continuing operations | (74 082) | (55 139) | (18 943) | (34%) |
Core headline earnings | (74 082) | (55 139) | (18 943) | (34%) |
– from continuing operations | (74 082) | (55 139) | (18 943) | (34%) |
– from discontinued operations | – | – | – | |
Core headline losses increased by R19 million, attributable to an increase of R21 million relating to the put-option liability for the acquisition of the remaining 40% minority share of Airvantage and AV Technology and R10 million to negative foreign exchange movements. These negative movements were offset by a loan impairment of R13 million pertaining to 2DFine Holdings Mauritius emanating from a fair value adjustment in the Oxigen group in the comparative period.
Depreciation and amortisation
Depreciation, amortisation and impairment charges increased by R38 million to R118 million. Of this increase, R14 million pertained to depreciation on additional capital expenditure incurred during the period, impairments of R3 million and R1 million relating to the amortisation of intangible assets. A further increase of R21 million was due to depreciation raised in terms of IFRS 16 – Leases. In terms of this statement, leases that were previously recognised as operating leases under IAS 17 are accounted for in line with the requirements of IFRS 16. A right-of-use asset has been raised equivalent to these finance lease liabilities and amortised over the remaining lease term. This has given rise to a depreciation charge that previously would have been included in other expenses as part of the lease rental expense.
Net finance costs
Finance costs totalled R121 million, relating to interest paid on borrowed funds. On a comparative basis, interest paid on borrowed funds amounted to R109 million and the imputed IFRS interest adjustment equated to R7 million.
The increase of R12 million was attributable to additional borrowings utilised from existing facilities.
Finance income totalled R36 million, of which R35 million was for interest received on cash resources and R1 million for imputed IFRS interest adjustments on credit afforded to customers. In the prior year, interest received on cash resources amounted to R70 million and the imputed IFRS interest adjustment to R1 million.
Statement of financial position
Total assets increased by R0.7 billion to R12.8 billion of which non-current assets accounted for a decrease of R724 million, current assets a decrease of R299 million, offset by an increase in assets classified as held-for-sale of R1.8 billion relating to the reclassification of the assets of Blue Label Mobile and the handset division of 3G Mobile in line with the contemplated disposals thereof.
Non-current assets included decreases in investments in and loans to associates and joint ventures of R22 million, advances to customers of R52 million, intangible assets and goodwill of R0.8 billion, and in other receivables of R13 million. These decreases were offset by increases in capital expenditure net of depreciation of R5 million, in financial asset at fair value through profit or loss of R29 million and right-of-use assets of R123 million.
The net decrease of R22 million in investments in and loans to associates and joint ventures comprised the Group's net share of profits totalling R12 million, offset by loan repayments by associates of R9.3 million, reclassification to assets held-for-sale amounting to R18 million, dividends received of R4.6 million and other movements amounting to R2.1 million.
Of the net decrease in intangible assets and goodwill of R0.8 billion, R53 million related to the write down to fair value less cost to sell for the disposal of the handset division of 3G Mobile and Blue Label Mobile as well as R638 million reclassified to asset held-for-sale with regard to the above. Amortisation of intangibles amounted to R101 million and disposals to R22 million. These decreases were offset by additional intangible assets of R22 million.
The material net decline in current assets included decreases in inventory of R474 million and trade and other receivables of R266 million, offset by increases in cash and cash equivalents of R255 million and advances to customers of R210 million.
The stock turn equated to 20 days compared to 24 days for the financial year ended 31 May 2019.
The debtor's collection period increased to 78 days compared to 68 days for the financial year ended 31 May 2019.
Net profit attributable to equity holders amounted to R315 million, contributing to accumulated capital and reserves of R2.84 billion.
Net borrowings increased by R409 million, in which The Prepaid Company Proprietary Limited (The Prepaid Company) utilised an additional R634 million of its bank facilities, offset by a reduction in Comm Equipment Company's interest-bearing debt by R199 million.
Liabilities classified as held-for-sale amounted to R676 million, relating to the reclassification of the liabilities of Blue Label Mobile and the handset division of 3G Mobile in line with the contemplated disposals thereof.
Trade and other payables decreased by R692 million, with average credit terms equating to 78 days compared to 83 days for the financial year ended 31 May 2019.
Statement of cash flows
Cash generated from trading operations totalled R390 million. Working capital movements comprised an increase in trade receivables of R711 million and a decrease in trade payables of R61 million, offset by a decrease in inventory of R304 million. After incurring net finance costs and taxation, net cash generated amounted to R110 million.
Although inventory holdings declined, the remaining balance of R1.04 billion is a highly liquid asset, capable of significant reduction within any given month.
Net cash flows utilised in investing activities amounted to R49 million, mainly attributable to the purchase of intangible assets of R17 million and R72 million on capital expenditure, offset by loans repaid of R31 million.
Cash flows from financing activities amounted to R376 million, of which R422 million related to additional borrowings, R34 million from the dilution of shares in a subsidiary, offset by a dividend payment of R58 million to non-controlling interests and lease payments of R23 million.
Cash on hand accumulated to R1.8 billion.
Forfeitable share scheme
Forfeitable shares totalling 18 405 894 (2019: 6 387 930) were issued to qualifying employees. During the period 919 706 (2018: 224 545) shares were forfeited and 490 649 (2018: 2 245 445) shares vested.
Subsequent events
Agreements for the disposal of Blue Label's interests in Blue Label Mobile and the handset division of 3G Mobile were entered into on 25 September 2019 and approved by Blue Label shareholders on 4 December 2019.
With regard to the disposal of 3G Mobile's trading operations all suspensive conditions have been fulfilled and the purchase price of R544 million was received on 14 February 2020.
In relation to the disposal of Blue Label Mobile, certain conditions precedent remain outstanding, the completion of which is at an advanced stage. Upon fulfilment thereof, R350 million of the selling price of R450 million as well as all monies paid by Blue Label Mobile towards the acquisition of Hyve Mobile Proprietary Limited and Mobile Content Africa Limited amounting to approximately R81 million will be received. The remaining R100 million plus interest thereon is contingent on the terms of the conditions contained in the circular to shareholders published on 6 November 2019.
As at the date of publication of the 31 May 2019 financial statements, The Prepaid Company's Investec banking facilities had been extended to 29 November 2019. On 29 November 2019, these banking facilities totalling R2.176 billion were successfully renewed, of which R1.5 billion was extended for a period of 12 months and R676 million for nine months. Of the latter amount, R131 million has been paid to date, with the remaining balance of R545 million to be repaid by 31 August 2020.
In February 2020, The Prepaid Company renegotiated a further extension of the R1.5 billion facility to 31 March 2021, at which date the exposure to Investec is required to be no more than R1 billion.
As at 30 November 2019 the Investec facilities were disclosed as current borrowings amounting to R2.1 billion, as the extension to 31 March 2021 was only granted in February 2020.
The Board of Directors have evaluated the going concern assumption as at 30 November 2019 and considered it to be appropriate in the preparation of these interim financial statements.
Independent review
These condensed Group financial statements for the half-year ended 30 November 2019 have been reviewed by PricewaterhouseCoopers Inc.
A copy of the auditor's unmodified review report on the condensed Group financial statements is available for inspection at the Company's registered office, together with the condensed Group financial statements identified in the respective auditor's reports.
Strategic focus
The Group remains committed to its back-to-basics approach in order to ensure the reduction of debt and improved cash generation. Traditional airtime and data remain the Group's majority contributors. A determined focus on enhancing our non-telco product portfolio and electricity capability now sees these business lines contributing 43% of the Group's gross profit. We will continue to develop our technology stack together with new products to drive future growth.
Appreciation
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
27 February 2020
* Supervised the preparation of the reviewed condensed Group interim results.