Commentary

The performance of the Blue Label Group remains resilient in an adverse economic environment. In spite of the Covid-19 pandemic, the Group has continued to deliver essential services, including electricity, airtime, data and other digital services, as well as providing financial transactional services, which have not been negatively impacted. The Group's ticketing and call centre operations have been negatively impacted as a result of the Covid-19 pandemic. Cash flow generated by the Group strengthened, with cash generated from operating activities amounting to R970 million in the current period.

Despite the impact of Covid-19 and general economic challenges, core headline earnings for the period ended 30 November 2020 amounted to R376 million, equating to core headline earnings of 42.70 cents per share, of which R351 million related to continuing operations and R25 million to discontinued operations. On exclusion of non-recurring income pertaining to foreign exchange gains of R22 million, core headline earnings from continuing operations amounted to R329 million, equating to core headline earnings of 37.35 cents per share.

Core headline earnings for the comparative period amounted to R390 million, equating to 43.18 cents per share, of which R387 million related to continuing operations and R3 million to discontinued operations. On exclusion of non-recurring income of R1 million, core headline earnings from continuing operations amounted to R386 million, resulting in core headline earnings of 42.70 cents per share.

Earnings per share and headline earnings per share increased from 34.83 and 39.98 cents per share in the comparative period to 49.92 and 40.96 cents per share respectively in the current period.

The increase in basic earnings per share was primarily attributable to the disposal of the Group's 47.56% interest in Blue Label Mexico as well as a positive movement from a negative contribution by the Retail division of the WiConnect stores in the comparative period to a partial recoupment of losses in the current period. A decision was made to cease the operations of the WiConnect retail stores in the prior financial year.

The financial results of WiConnect in the current period of R25 million as well as those of Blue Label Mobile, the Handset division of 3G Mobile and WiConnect, totalling R3 million in the comparative period, are disclosed in core headline earnings from discontinued operations and are not included in the continuing operations' revenue, gross profit, EBITDA and net profit after taxation.

Revenue generated by the continuing operations within the Group declined by 15% to R9.6 billion. As only the gross profit earned on PINless top-ups, prepaid electricity, ticketing and gaming are recognised as revenue, on imputing the gross revenue generated thereon, the effective growth in revenue equated to 7% from R30.2 billion to R32.4 billion.

Gross profit declined by 3% from R1.17 billion to R1.14 billion, partially limited due to an increase in margins from 10.33% to 11.87%.

EBITDA declined by R45 million from R749 million in the prior period to R703 million. The latter amount was inclusive of non-recurring income of R101 million, of which R79 million related to the disposal of the Group's interest in Blue Label Mexico and R22 million pertained to foreign exchange gains primarily attributable to the USD20 million liquidity support provided to SPV2. On exclusion of these amounts, EBITDA for the current period amounted to R602 million, at a margin of 6.28%.

The anticipated increase in overheads, which included costs attributable to additional headcount and expenditure incurred in order to enhance IT Infrastructure, escalate the quantum of distribution channels, enhance capacity in the Customer Interaction Centre and implement VAS and financial service strategies, contributed to the decline in EBITDA.

The Blue Label Group generated positive cash flows from its trading operations for the period ended 30 November 2020.

Revenue generated by the continuing operations within the segment declined by 15% from R11.2 billion to R9.5 billion. As only the gross profit earned on PINless top-ups, prepaid electricity, ticketing and gaming are recognised as revenue, on imputing the gross revenue generated thereon, the effective growth in revenue equated to 8% from R30.1 billion to R32.3 billion.

The Group continues to increase market share and bolster its product and services mix in order to defend and expand its positions in the market. Gross revenue generated on PINless top-ups increased by R2.2 billion from R6.9 billion to R9.0 billion.

Net commissions earned on the distribution of prepaid electricity amounted to R154 million. Revenue generated on behalf of the utilities increased by 16% from R11.4 billion to R13.2 billion.

Gross profit declined by 2% from R1.14 billion to R1.11 billion, limited due to an increase in margins from 10.13% to 11.73%.

EBITDA declined by R125 million from R788 million to R663 million. The increase in overheads of R89 million, which included costs attributable to additional headcount and expenditure incurred in order to enhance IT Infrastructure, escalate the quantum of distribution channels, enhance capacity in the Customer Interaction Centre and implement VAS and financial service strategies, had a direct impact on the decline in EBITDA.

Core headline earnings from continuing operations, both in the current and comparative periods, reflected non-recurring income of R16 million and R9 million respectively pertaining to foreign exchange gains on the USD20 million liquidity support provided to SPV2. On exclusion of this non-recurring income, core headline earnings from continuing operations declined by R37 million (9%) from R429 million to R392 million.

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 I Talk Holdings, an outbound call centre operation.

The decline in revenue of 17% to R89 million was attributable to lower demand for aggregated data and lead generations as a result of Covid-19, impacting negatively on the call centre operations.

Gross profit decreased by R9 million (27%) from R33 million to R24 million, congruent with the decline in revenue and margins from 31.19% to 27.28%. EBITDA declined by R10 million to R13 million.

Of the core headline earnings of R13 million, BLDS accounted for R9 million. I Talk Holdings generated earnings of R10 million, of which the Group's share thereof amounted to R4 million. Of the core headline earnings of R23 million in the comparative period, BLDS accounted for R14 million. I Talk Holdings generated earnings of R23 million, of which the Group's share thereof amounted to R9 million.

On exclusion of the non-recurring income of R6 million pertaining to the foreign exchange movements in the Oxigen India Group in the current period and extraneous costs of R11 million pertaining to the accounting implications of the put option for the acquisition of the remaining 40% minority share of Airvantage and AV Technology in the comparative period, the negative contribution to Group core headline earnings declined by R1 million to R63 million.

Depreciation, amortisation and impairment charges on continuing operations decreased by R8 million to R93 million . Of this amount, R15 million related to depreciation raised in terms of IFRS 16 - Leases and R18 million to the amortisation of intangible assets resulting from the purchase price allocations on historical acquisitions.

Of the decline of R8 million, R7 million related to the amortisation of intangible assets.

Finance costs totalled R72 million, comprising interest paid on borrowed funds of R67 million and R5 million on the unwinding of the lease liability in terms of IFRS 16. On a comparative basis, interest paid on borrowed funds amounted to R114 million and R5 million on the unwinding of the lease liability. The decline of R47 million was as a result of the reduction in the Group's interest-bearing borrowings from R3.6 billion to R2.3 billion as well as a decrease in the prime overdraft rate.

Finance income decreased by R9 million, from R36 million to R28 million resulting from the decline in the prime interest rate.

Total assets increased by R0.3 billion to R10.6 billion, of which current assets accounted for R0.5 billion of the increase offset by a decrease in non-current assets of R0.2 billion.

Non-current assets included decreases in investments in and loans to associates and joint ventures of R140 million, advances to customers of R17 million, right-of-use assets of R14 million and other receivables of R23 million. These decreases were offset by increases in intangible assets and goodwill of R6 million and increases in capital expenditure net of depreciation of R8 million.

The net decrease of R140 million in investments in and loans to associates and joint ventures comprised the Group's net share of profits totalling R1.5 million, net loan increases of R2 million, acquisition of an associate of R5.5 million offset by disposals of R127 million primarily relating to Blue Label Mexico, its share of the movements in the foreign currency translation reserve amounting to R8 million and dividends received of R14 million.

Of the net increase in intangible assets and goodwill of R6 million, additions to intangible assets amounted to R81 million offset by amortisation of R75 million.

The material net increase in current assets included increases in inventory of R137 million, advances to customers of R76 million and increases in cash and cash equivalents of R619 million, offset by decreases in trade and other receivables of R366 million.

The stock turn from continuing operations equated to 16 days compared to 11 days for the financial year ended 31 May 2020.

The debtor's collection period from continuing operations remained at 57 days.

Net profit attributable to equity holders amounted to R440 million, contributing to accumulated capital and reserves of R2.9 billion.

Current liabilities declined by R49 million comprising decreases in financial liabilities at fair value of R350 million and financial guarantee contracts of R69 million. These declines were offset by an increase in trade and other payables of R402 million, with average credit terms from continuing operations equating to 94 days compared to 80 days for the financial year ended 31 May 2020.

The decrease in financial liabilities at fair value was due to the liquidity support payment of R331 million (USD20 million) to SPV2 and a foreign exchange movement of R19 million thereon. The decrease in financial guarantee contracts of R69 million was primarily due to a settlement of a corporate guarantee of R54 million on behalf of Oxigen Services India and foreign exchange movements of R6 million thereon.

Cash generated from trading operations totalled R1.1 billion. Working capital movements comprised a decrease in trade receivables of R361 million, an increase in trade payables of R332 million offset by an increase in inventory of R137 million and increases in advances to customers of R59 million. After paying out net finance costs and taxation, cash generated from operating activities amounted to R970 million.

Net cash flows utilised in investing activities amounted to R207 million, primarily attributable to the liquidity support payment of R331 million (USD20 million) to SPV2, the purchase of intangible assets of R20 million, capital expenditure of R45 million and net loans granted of R19 million. This was offset by cash inflows from the proceeds on disposal of Blue Label Mexico of R191 million, proceeds on disposal of capital assets of R3 million and dividends received from a joint venture of R14 million.

Cash flows utilised in financing activities amounted to R146 million, of which R13 million related to dividend payments to non-controlling interests, R31 million to lease payments, R62 million to settlement of financial guarantees and R44 million to treasury shares acquired, offset by R5 million from the net increase in borrowings.

Cash and cash equivalents accumulated to R2.6 billion at 30 November 2020.

Forfeitable shares totalling 15 565 697 (2019: 18 405 894) were issued to qualifying employees. During the period, 983 768 (2019: 919 706) shares were forfeited and 682 748 (2019: 490 649) shares vested.

Banking facilities

In February 2021, The Prepaid Company renegotiated a further extension of its Investec facility to 31 March 2022, whereby the facility will remain at R1.5 billion until the end of April 2021, at which date the exposure to Investec is required to be reduced by R50 million per month to 28 February 2022. The exposure to Investec is required to be no more than R1 billion as at 31 March 2022.

As at 30 November 2020 the Investec facility is disclosed as current borrowings, as the extension to 31 March 2022 was only granted in February 2021.

Airvantage and AV Technology put obligations

In October 2020, the minority shareholders of Airvantage Proprietary Limited ("Airvantage") and AV Technology Limited ("AV Tech") exercised their rights to put their 40% shareholding therein to Blue Label Telecoms ("BLT"), in line with the initial agreements that were concluded between the parties in 2017. The purchase consideration under the put options, as determined by the parties in December 2020, for the 40% shareholdings in Airvantage and AV Tech, amounted to R152 million and USD4.6 million respectively ("Purchase Price").

In February 2021, the parties concluded an agreement legislating for a deferral of the Purchase Price payable to the minority shareholders of Airvantage and AV Tech from 31 December 2020 to 31 March 2021, payable in six equal monthly instalments, inclusive of interest, commencing on 31 March 2021.

If Cell C Limited's board is able to pass a solvency and liquidity test, the primary obligation in respect of the put options can be transferred to Digital Ecosystems Proprietary Limited "(DE"), formerly Blue Label Mobile Proprietary Limited, in terms of the agreement concluded with it in September 2019.

A subsequent agreement has been reached between BLT and DE, whereby the parties agreed that BLT's primary obligations to the minority shareholders will be transferred to DE ahead of any Cell C test in respect of its solvency and liquidity.

A formal agreement legislating for the above will be concluded imminently. If, however, Cell C is unable to pass the solvency and liquidity test in the future, the primary obligation in respect of the put options may revert back to BLT.

We are thankful to all our staff members who have adapted to new ways of working during these unprecedented times and continue to contribute to the Group's performance. We are proud of the role that we have played as an essential goods provider, while always ensuring a safe environment. We are also thankful to the Board, suppliers, customers and business partners for their continued support and commitment to the Group.

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

25 February 2021

* Supervised the preparation of the Group's unaudited six-month period ended results.