Commentary

Group results

Core headline earnings for the period ended 30 November 2022 amounted to R35 million, equating to core headline earnings of 3.94 cents per share.

The core businesses of the Blue Label Group continued to generate further growth in revenue, gross profit and core headline earnings per share for the six-month period ended 30 November 2022. The predominant extraneous contributions to the November 2022 basic, headline and core headline earnings per share, emanated primarily from the recapitalisation transaction of Cell C.

In the comparative period, core headline earnings amounted to R549 million, of which R548 million related to continuing operations and R1 million to discontinued operations. Core headline earnings amounted to 62.69 cents per share.

Excluding the above extraneous contributions of R421 million in the current period and non-recurring income of R148 million in the prior period, as illustrated in the underlying tables, core headline earnings increased by R55 million (14%) from R400 million to R455 million. Core headline earnings per share increased by 13% from 45.68 cents per share in the prior period to 51.72 cents per share.

Earnings per share amounted to negative 8.74 cents per share. In the prior period, earnings per share amounted to 60.71 cents per share, of which 60.59 cents related to continuing operations and 0.12 cents to discontinued operations. Excluding the extraneous contributions and non-recurring income in both the current and prior periods, earnings per share and headline earnings per share increased by 14% to 49.66 cents per share and 49.86 cents per share, respectively.

Group revenue increased by R710 million (8%) to R9.8 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 R3.1 billion (9%) from R36.2 billion to R39.3 billion.

Gross profit increased by R179 million (13%) from R1.36 billion to R1.54 billion, congruent with an increase in margins from 14.93% to 15.67%.

Group income statement

  Group 
November 
2022 
R'000 
Extraneous 
costs   
November 
2022 
R'000 
Remaining 
November 
2022 
R'000 
Group 
November 
2021 
R'000 
Extraneous 
income     
November 
2021 
R'000 
Remaining 
November 
2021 
R'000 
Growth 
remaining 
R'000 
Growth 
remaining 
Revenue  9 823 143  —  9 823 143  9 112 874  —  9 112 874  710 269 
Gross profit  1 539 635  —  1 539 635  1 360 927  —  1 360 927  178 708  13 
Other income  15 071  —  15 071  323 959  315 132  8 827  6 244  71 
Bad debts, expected credit losses and fair value movements  (124 058) (44 589) (79 469) (149 036) —  (149 036) 69 567  47 
Loss on modification of financial instrument  (64 500) (64 500) —  —  —  —  — 
EBITDA  609 405  (109 089) 718 494  902 499  278 118  624 381  94 113  15 
Finance costs  (247 765) (89 747) (158 018) (68 290) —  (68 290) (89 728) (131)
Finance income  131 402  57 906  73 496  35 542  —  35 542  37 954  107 
Non-controlling interest  (8 759) —  (8 759) (60 350) (52 167) (8 183) (576) (7)
Reversal of impairments in associates  962 531  962 531  —  —  —  —  — 
Share of (losses)/profits from associates and joint ventures  (1 320 127) (1 328 767) 8 640  9 566  —  9 566  (926) (10)
Net (loss)/profit from continuing operations  (76 934) (514 315) 437 381  530 440  147 923  382 517  54 864  14 
Core headline earnings  34 700  (420 784) 455 484  548 831  148 934  399 897  55 587  14 
– from continuing operations  34 700  (420 784) 455 484  547 820  147 923  399 897  55 587  14 
– from discontinued operations  —  —  —  1 011  1 011  —  — 
Gross profit margin  15.67%  15.67%  14.93%  14.93% 
EBITDA margin  6.20%  7.31%  9.90%  6.85% 
Weighted average shares ('000) 880 749  880 749  875 496  875 496 
Share performance from continuing operations 
EPS (cents) (8.74) 49.66  60.59  43.69  5.97  14 
HEPS (cents) 2.09  49.86  60.74  43.85  6.01  14 
Core HEPS (cents) 3.94  51.72  62.57  45.68  6.04  13 

     The extraneous contributions to Group earnings in the current year were primarily attributable to:

  • the accounting treatment relating to the recapitalisation transaction of Cell C(1), emanating from:
    • finance income of R58 million;
    • finance costs of R90 million;
    • expected credit losses and fair value movements of R67 million;
    • loss on modification of a financial instrument of R65 million as a result of the CEC deferral amount of R1.1 billion, owing by Cell C, being renegotiated and reclassified from 'trade and other receivables' to 'loans to associates and joint ventures';
    • a partial reversal of R962.5 million relating to the initial impairment of R2.5 billion of Blue Label's investment in Cell C as at 31 May 2019, congruent with an improvement in its equity valuation; and
    • recognition of the Group's share of Cell C's net accumulated losses amounting to R2.2 billion for the period
      1 June 2019 to 30 November 2022 limited to the extent of R1.328 billion, being the aggregate of the partial reversal of the initial impairment of R962.5 million of Blue Label's investment in Cell C, as well as additional investments therein amounting to R366 million.
  • the accounting implications of the termination of the Airvantage put option obligation for the acquisition of up to 40% of the shares therein, resulted in a fair value gain of R22 million(2).
  Extraneous 
costs   
November 
2022 
R'000 
Recap of   
Cell C(1)
November  
2022  
R'000  
Once-offs(2)
November   
2022   
R'000   
Bad debts, expected credit losses and fair value movements  (44 589) (66 589)  22 000   
Loss on modification of financial instrument  (64 500) (64 500)  —   
EBITDA  (109 089) (131 089)  22 000   
Finance costs  (89 747) (89 747)  —   
Finance income  57 906  57 906   —   
Reversal of impairments in associates  962 531  962 531   —   
Share of losses from associates and joint ventures  (1 328 767) (1 328 767)  —   
Net (loss)/profit from continuing operations  (514 315) (536 315)  22 000   
Core headline earnings from continuing operations  (420 784) (442 784)  22 000   

     The extraneous contributions to Group earnings in the prior period were attributable to:

  • once-off recoupment income of R148 million, comprising the aggregate value of assets either realised by or signed-over to the Group relating to the fraudulent scheme, partially offset by professional fees and other costs incurred, taxation and the non-controlling interest thereon(3); and
  • partial recoupment of losses of R1 million by the Retail division as a result of the closure of the WiConnect stores(4).
Extraneous 
income     
November 
2021 
R'000 
Once-offs(3)
November   
2021   
R'000   
WiConnect(4)
November    
2021    
R'000    
Other income 315 132  315 132    —    
EBITDA 278 118  278 118    —    
Non-controlling interest (52 167) (52 167)   —    
Net profit from continuing operations 147 923  147 923    —    
Core headline earnings 148 934  147 923    1 011    
– from continuing operations 147 923  147 923    —    
– from discontinued operations 1 011  —    1 011    

EBITDA increased by R94 million (15%) from R624 million to R718 million, excluding the extraneous costs of R109 million in the current period and non-recurring income of R278 million in the prior period.

The anticipated increase in overheads, included costs of R70 million attributable to new learnership initiatives in the current period and R25 million in the prior period. The benefit thereof is realised by way of income tax savings as a result of the section 12H allowances being claimed for such learnerships. On exclusion thereof, in both the current and prior periods, EBITDA increased by R139 million (21%).

Segmental report

Africa distribution

November 
2022 
R'000 
Extraneous   
costs(1)
November  
2022  
R'000  
Remaining 
November 
2022 
R'000 
November 
2021 
R'000 
Extraneous      
income (3, 4)
November      
2021      
R'000     
Remaining 
November 
2021 
R'000 
Growth 
remaining 
R'000 
Growth 
remaining 
Revenue  9 677 719  –    9 677 719  8 986 965  –       8 986 965  690 754 
Gross profit  1 495 855  –    1 495 855  1 330 473  –       1 330 473  165 382  12 
Other income  10 553  –    10 553  320 511  315 132      5 379  5 174  96 
Bad debts, expected credit losses and fair value movements  (157 069) (66 589)  (90 480) (148 495) –       (148 495) 58 015  39 
Loss on modification of financial instrument  (64 500) (64 500)  –  –  –       –  – 
EBITDA  614 468  (131 089)  745 557  941 934  278 671      663 263  82 294  12 
Finance costs  (246 763) (89 747)  (157 016) (66 213) –       (66 213) (90 803) (137)
Finance income  129 622  57 906   71 716  35 114  –       35 114  36 602  104 
Non-controlling interest  (5 243) –   (5 243) (56 661) (52 167)     (4 494) (749) (17)
Reversal of impairments in associates  962 531  962 531   –  –  –      –  –  – 
Share of (losses)/profits from associates and joint ventures  (1 321 533) (1 328 767)  7 234  1 613  –      1 613  5 621  348 
Net (loss)/profit from continuing operations  (50 644) (536 315)  485 671  578 271  148 476     429 795  55 876  13 
Core headline earnings  60 988  (442 784)  503 772  596 722  149 487     447 235  56 537  13 
– from continuing operations  60 988  (442 784)  503 772  595 711  148 476     447 235  56 537  13 
– from discontinued operations  –  –    –  1 011  1 011     –  – 
Gross profit margin  15.46%  15.46%  14.80%  14.80% 
EBITDA margin  6.35%  7.70%  10.48%  7.38% 

Revenue generated within the Africa distribution segment increased by R691 million (8%) from R9.0 billion to R9.7 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 R3.1 billion (9%) from R36.1 billion to R39.2 billion.

The Group continues to increase market share and bolster its product and services mix to defend and grow its positions in the market. Gross revenue generated on "PINless top-ups" increased by R423 million from R10.3 billion to R10.7 billion.

Although electricity revenue generated on behalf of the utilities increased by R1.13 billion (7%) from R15.93 billion to R17.06 billion, net commissions earned, calculated on a kW/hour usage basis, declined by R11 million (8%) to R142 million. NERSA electricity tariffs resulted in an increase in gross electricity revenue, however, the decline in commissions was primarily as a result of a decrease in electricity usage, emanating from a higher frequency of loadshedding, as well as margin compression.

Gross gaming revenue increased by R558 million (58%) from R956 million to R1.5 billion, with BluVoucher sales continuing to gain traction. Gross ticketing revenue increased by R285 million (152%) to R473 million, primarily as a result of revenue generated through commuter bus channels.

Gross profit increased by R165 million (12%) from R1.33 billion to R1.50 billion, congruent with an increase in margins from 14.80% to 15.46%.

Excluding the extraneous costs of R131 million relating to the Cell C recapitalisation transaction in the current period, and the once-off income of R279 million in the prior period, which included the non-recurring recoupment income, net of professional fees incurred, EBITDA increased by R82 million (12%) to R746 million. The EBITDA margin increased from 7.38% to 7.70%.

The anticipated increase in overheads, included costs of R64 million attributable to new learnership initiatives in the current period and R16 million in the prior period. On exclusion thereof, in both the current and prior periods, EBITDA increased by R131 million (19%).

Core headline earnings reflected extraneous costs of R443 million in the current period, relating to the recapitalisation transaction of Cell C, and
R149 million in the prior period, pertaining to the net recoupment as a result of the fraudulent scheme.

Excluding the above extraneous costs and non-recurring income in the current and prior periods, core headline earnings increased by R57 million (13%) from R447 million to R504 million.

Solutions

This segment comprises Datacel, Blue Label Data Solutions (BLDS), the data aggregation and lead generation entity in which the Group owns 81%,
a 50% joint venture shareholding owned by BLDS in I Talk Holdings and 37.5% in I Talk Financial Services, both of which are outbound call centre operations.

In addition, the following underlying companies form part of the solutions segment, namely, Blue Train, Blue Label Communications, One World Telecoms and I Talk2U.

November 
2022 
R'000 
November 
2021 
R'000 
Growth 
remaining 
R'000 
Growth 
remaining 
Revenue  145 424  125 909  19 515  15 
EBITDA  21 045  7 584  13 461  177 
Share of profits from associates and joint ventures  1 405  7 953  (6 548) (82)
Core headline earnings  18 077  18 424  (347) (2)
Gross profit margin  30.11%  24.19% 
EBITDA margin  14.47%  6.02% 

Increased demand for aggregated data, lead generations and SMS volumes resulted in an increase in revenue of 15% from R126 million to R145 million.

Gross profit increased by R13 million (44%) from R30 million to R44 million, congruent with the increase in revenue at higher margins from 24.19% to 30.11%.

EBITDA increased by R13 million (177%) from R8 million to R21 million, of which BLDS contributed R13 million. In the prior period, BLDS contributed R7 million and the call centre operations R1 million.

Of the core headline earnings of R18.1 million, BLDS accounted for R16.9 million, I Talk Holdings and I Talk Financial Services generated earnings of R4 million, of which the Group's share amounted to R0.8 million. Blue Label Communications generated earnings of R0.7 million, of which the Group's share amounted to R0.4 million.

Of the core headline earnings of R18.4 million in the prior period, BLDS accounted for R11.7 million. I Talk Holdings and I Talk Financial Services generated earnings of R6.1 million, of which the Group's share amounted to R2.7 million. Blue Train generated earnings of R6.2 million, of which the Group's share amounted to R4 million.

Corporate

November 
2022 
R'000 
Extraneous   
income(2)
November   
2022   
R'000   
Remaining 
November 
2022 
R'000 
November 
2021 
R'000 
Growth 
remaining 
R'000 
Growth 
remaining 
EBITDA  (37 024) 22 000    (59 024) (46 144) (12 880) (28)
Net loss from continuing operations  (52 338) 22 000    (74 338) (65 465) (8 873) (14)
Core headline earnings  (52 334) 22 000    (74 334) (65 519) (8 815) (13)

Excluding the extraneous fair value movement of R22 million in the current period, the negative contribution to Group core headline earnings increased by R9 million (13%) to R74 million.

The extraneous fair value movements of R22 million in the current period related to the accounting implications of the termination of the Airvantage put option obligation for the acquisition of up to 40% of the shares therein.

Depreciation and amortisation

Depreciation, amortisation and impairment charges decreased by R1 million to R90 million. Of the latter amount, R35 million (2021: R32 million) pertained to depreciation on capital expenditure, R15 million (2021: R15 million) to depreciation raised in terms of IFRS 16 - Leases, R4 million (2021: R3 million) to impairments and R36 million (2021: R41 million) to the amortisation of intangible assets of which R22 million (2021: R22 million) emanated from purchase price allocations on historical acquisitions.

Finance costs

Finance costs increased by R180 million from R68 million to R248 million. Of the latter amount, R239 million related to interest paid on borrowed funds and R2 million to the unwinding of the lease liability in terms of IFRS 16. On a comparative basis, R59 million related to interest paid on borrowed funds and R3 million to the unwinding of the lease liability.

The recapitalisation transaction of Cell C, in September 2022, resulted in an additional R90 million incurred on finance costs due to an increase in borrowings relating to the airtime sale and repurchase obligations as well as for the issue of Class A Preference shares.

Excluding the recapitalisation interest above, finance costs increased by an additional R90 million from R68 million to R158 million. Of this increase, R94 million was as a result of Comm Equipment Company Proprietary Limited concluding a working capital financing facility of R1.9 billion in November 2021 with African Bank, which was fully utilised as at 30 November 2022. This increase was offset by a reduction of R5 million primarily attributable to a lower utilisation of the Group's working capital facility compared to the prior period.

Finance income

Finance income increased by R95 million from R36 million to R131 million.

Of the latter amount, R46 million was attributable to interest received on cash resources, R25 million to a loan to Cell C relating to the CEC R1.1 billion deferral amount, R58 million on a loan to Cell C as a result of the Debt Funding required as part of the recapitalisation transaction and R2 million on other loans granted.

In the prior period, interest received on cash resources amounted to R31 million and interest on other loans granted to R5 million.

Statement of financial position

Total assets increased by R1.5 billion to R14.9 billion, of which non-current assets accounted for R2.1 billion offset by a decline in current assets of R522 million.

Non-current assets included increases in loans to associates and joint ventures of R1.9 billion, investments in associates and joint ventures of R9 million, advances to customers of R112 million, deferred taxation assets of R54 million and capital expenditure net of depreciation of R46 million. These increases were offset by decreases of R8 million in right-of-use assets and R2 million of intangible assets and goodwill.

The increase of R1.9 billion in loans to associates and joint ventures primarily related to the recapitalisation of Cell C and comprised the following:

  • Debt Funding of R1.03 billion which was required by Cell C to affect a compromise offer made by it to certain of its secured lenders. Of this amount, R915 million was accounted for as a loan to an associate and R118 million as an investment in Cell C, the latter being congruent with the fair value of the additional 9.53% shareholding acquired as part of the recapitalisation;
  • A loan of R111 million originating from TPC's participation in the Reinvestment Instrument acquired at nominal value; and
  • The CEC deferral amount, whereby an existing claim of R1.1 billion by it against Cell C was renegotiated to be repaid by the latter in 60 equal monthly capital instalments and was reclassified from trade and other receivables to loans to associates and joint ventures at its initial fair value of R1.035 billion. Of this amount, R221 million is accounted for in current assets.

The material net decrease in current assets included decreases in trade and other receivables of R2 billion, cash and cash equivalents of R454 million, offset by increases in inventory of R1.3 billion, advances to customers of R388 million and loans to associates of R221 million.

The decrease in trade and other receivables of R2 billion predominately related to a decline in CEC's trade receivable balances from Cell C. This decrease was attributable to the settlement of the obligation owing to CEC down to an amount of R1.1 billion with such deferral amount being reclassified to loans to associates and joint ventures. Excluding the trade debtors relating to CEC, the debtor's collection period increased to 35 days compared to 28 days for the year ended May 2022.

The increase in inventory of R1.3 billion was primarily attributable to the Group purchasing R1.2 billion of Cell C pre-paid airtime as part of the recapitalisation transaction. This purchase was necessitated in order to assist Cell C with its working capital requirements. The stock turn equated to 55 days. Excluding the inventory purchased to facilitate the recapitalisation transaction, stock turn improved to 25 days compared to 28 days for the financial year ended May 2022.

Net loss attributable to equity holders amounted to R77 million, resulting in accumulated capital and reserves of R4.1 billion.

Non-current liabilities increased by R2.3 billion, comprising an increase in borrowings of R2.3 billion relating to the airtime sale and repurchase obligations of R643 million, issuance of Class A preference shares of R169 million, an increase in the non-current portion of working capital facilities of R1.47 billion, in deferred taxation liabilities of R62 million, and in lease liabilities of R4 million.

Current liabilities decreased by R709 million, comprising a decrease in trade and other payables of R680 million, borrowings of R110 million and lease liabilities of R14 million. This decrease was offset by an increase in financial liabilities at fair value through profit and loss of R68 million and current tax liabilities of R27 million.

The decrease in trade and other payables of R680 million predominantly related to a decline in CEC's trade payable balance owing to Cell C, which occurred simultaneously to the decrease in trade receivables attributable to the settlement of the obligation to CEC to the amount of R1.1 billion. Average credit terms equated to 102 days compared to 124 days for the financial year ended 31 May 2022.

The net decrease of R110 million in current borrowings related to a decline in the current portion of working capital facilities of R742 million, resulting from the extension of the terms thereof and as such being accounted for as non-current borrowings. This decline was offset by the current portion of the airtime sale and repurchase obligations of R632 million.

The increase in financial liabilities held at fair value through profit and loss of R68 million related to the issuance of Class B Preference shares to the lenders and the recognition of the SPV5 derivative liability in terms of the recapitalisation transaction.

Statement of cash flows

Cash utilised in trading operations totalled R155 million. Working capital movements comprised an increase in inventory of R1.3 billion and advances to customers of R500 million, offset by a decreases in trade receivables of R962 million and trade payables of R181 million. After incurring net finance costs of R159 million and taxation of R80 million, net cash utilised in operating activities amounted to R394 million.

The increase in inventory of R1.3 billion was attributable to the Group purchasing R1.2 billion of Cell C pre-paid airtime as part of the recapitalisation transaction. Congruent with this acquisition of airtime, Cell C settled amounts owing to CEC resulting in a significant decrease in trade receivables of R962 million.

Net cash flows utilised in investing activities amounted to R2.2 billion, primarily attributable to the purchase of intangible assets of R758 million, net loans granted to associates of R998 million and an increase in the investment in Cell C of R366 million.

Of the R758 million invested in intangible assets, R383 million related to costs borne by the Group in terms of the subscription income sharing arrangement and R343 million to costs borne by the Group in terms of subscriber acquisition costs.

The net loans granted to associates of R998 million included net loans of R993 million relating to Cell C. This amount comprised the R915 million Debt Funding and the R111 million originating from TPC's participation in the Reinvestment Instrument acquired at nominal value, offset by R33 million of capital repayments by Cell C.

The additional investment of R366 million comprised R25 million of notes acquired in SPV 1 which are secured by shares in Cell C, a loan of R223 million provided to SPV 4 which is secured by shares in Cell C and R118 million of the new money loan attributed to the acquisition of a further 9.53% of the issued share capital of Cell C.

Cash flows generated from financing activities amounted to R2.14 billion, of which R2.16 billion related to the net increase in borrowings and R67 million to the issue of class B preference shares, the proceeds of which were applied to the Cell C recapitalisation transaction. These amounts were offset by R20 million to lease payments, and R66 million to the purchase of treasury shares.

Cash and cash equivalents accumulated to R2.3 billion at 30 November 2022.

Forfeitable share scheme

Forfeitable shares totalling 10 470 826 (2021: Nil) were issued to qualifying employees. During the year, 1 104 557 (2021: 3 972 259) shares were forfeited and 16 764 722 (2021: Nil) shares vested.

No forfeitable shares were awarded or vested to qualifying employees during the prior period under review, due to the Group being in a closed period.

Events after the reporting date

An announcement was released on 6 February 2023, stating that SNG Grant Thornton ("SNG") replaced PwC as the external auditors of Blue Label, with Mr A Philippou as the designated individual audit partner. The change in external auditors is in alignment with the principles of good governance and early adoption of mandatory audit firm rotation, whereby audit firms shall not serve as the appointed auditor of a public interest entity for more than
10 consecutive years, with effect from 1 April 2023. The acceleration of the mandatory audit firm rotation was prudent in order to achieve future cost savings and efficiencies, as SNG are Cell C's auditors, and to ensure alignment with them relating to the audit of the recapitalisation transaction of Cell C from inception thereof.

Appreciation

The Board of Blue Label wishes to express its appreciation to its staff, 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

23 February 2023

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