Commentary

Core headline earnings for the period ended 30 November 2023 amounted to R420 million, equating to core headline earnings of 47.15 cents per share.

In the comparative period, core headline earnings amounted to R35 million, equating to core headline earnings of 3.94 cents per share. The predominant negative contributions to the November 2022 basic, headline and core headline earnings per share are primarily associated with the recapitalisation transaction of Cell C.

Excluding the positive contributions of R65 million in the current period and the negative contributions of R421 million in the prior period, as illustrated in the underlying tables, core headline earnings declined by R100 million (22%) from R455 million to R355 million and core headline earnings per share declined by 23% from 51.72 cents per share in the prior period to 39.90 cents per share. This decline in core headline earnings was attributable to a decrease of R119 million in Comm Equipment Company, while the remaining entities within the Group increased by R19 million compared to the prior period.

The anticipated decline in CEC’s core headline earnings was a result of a decline in gross profit stemming from increased expenditure related to the distribution agreement, as well as a significant increase in the expected credit loss compared to the previous period. This increase aligns with the expansion of CEC’s book and the deteriorating macroeconomic environment in South Africa, marked by rising interest rates, power outages and a depreciating rand. CEC has increased its ECLs in anticipation of heightened future losses, aligning with the approach taken by other consumer lenders.

Earnings per share for the current and prior periods amounted to 45.67 cents and negative 8.74 cents respectively. On the exclusion of the contributions resulting primarily from the recapitalisation transaction of Cell C from both the current and prior periods, earnings per share declined by 23% to 38.42 cents per share and headline earnings per share declined by 22% to 38.66 cents per share.

Group revenue declined by R2.2 billion (23%) to R7.6 billion. However, as only the gross profit earned on “PINless top-ups”, prepaid electricity, ticketing and universal vouchers is recognised as revenue, on imputing the gross revenue generated from these sources, the effective growth in revenue equated to R4.5 billion (12%), resulting in a total revenue of R43.8 billion compared to the prior period of R39.3 billion.

Gross profit increased by R58 million (4%) from R1.540 billion to R1.598 billion, corresponding to an increase in margins from 15.67% to 21.08%. This increase in margins can be partially attributed to the growth in “PINless top-ups”, prepaid electricity, ticketing and universal vouchers, where only the gross profit earned thereon is recognised as revenue.

The Group remains vigilant in managing its total overhead costs.

Furthermore, load shedding continues to be a significant challenge faced by our organisation. It has negatively impacted the sale of prepaid electricity, prepaid airtime, starter packs and our call centre operations, all of which are significant revenue streams for the Group.

EBITDA declined by R30 million (4%) from R718 million to R689 million, excluding the positive contributions of R8 million in the current period and negative contributions of R109 million in the prior period. Of this decline, CEC showed a negative impact of R186 million, while the remaining Group operations contributed an additional R156 million compared to the previous period.

Excluding the R55 million costs attributable to learnership initiatives in the current period and R70 million in the prior period, EBITDA declined by R44 million (6%) from R788 million to R744 million. The benefit thereof is realised through income tax savings resulting from the section 12H allowances claimed for these learnerships.

Africa distribution

Refer to footnote (1) and footnote (2) on group income statement.

Revenue generated within the Africa distribution segment declined by R2.2 billion (23%) from R9.7 billion to R7.4 billion. As only the gross profit earned on “PINless top-ups”, prepaid electricity, ticketing and universal vouchers is recognised as revenue, on imputing the gross revenue generated thereon, the effective growth in revenue equated to R4.5 billion (12%) from R39.2 billion to R43.7 billion.

Gross revenue generated on “PINless top-ups” increased by R115 million from R10.7 billion to R10.8 billion.

Electricity revenue generated on behalf of the utilities increased by R1.8 billion (11%) from R17.1 billion to R18.9 billion and the net commission earned, mainly calculated based on a kW/hour usage, increased by R4 million (3%) from R142 million to R146 million. The limited growth in commissions was primarily due to inflationary increases based on kW/hour usage offset by a marginal decrease in electricity usage resulting from a higher frequency of load shedding and margin compression, despite an increase in gross electricity revenue driven by NERSA electricity tariffs.

The gross revenue generated from universal vouchers increased by R4.7 billion (311%) from R1.5 billion to R6.2 billion, driven by the continued traction of BluVoucher sales as well as the onboarding of a new financial institution onto the platform. Additionally, gross ticketing revenue increased by R208 million (44%) to R681 million, primarily from revenue generated through commuter bus channels.

Gross profit increased by R56 million (4%) from R1.496 billion to R1.552 billion, congruent with an increase in margins from 15.46% to 20.87%.

Excluding the positive contribution of R8 million in the current period and the negative contributions of R131 million in the prior period, resulting from the recapitalisation transaction of Cell C, EBITDA declined by R2 million to R743 million. Of this decline, CEC showed a negative impact of R186 million, while the remaining Africa operations contributed an additional R184 million compared to the previous period.

The anticipated decline in CEC’s EBITDA of R186 million was mainly a result of a decline in gross profit of R155 million stemming from increased expenditure related to the distribution agreement, as well as a significant increase of R49 million in the expected credit loss compared to the previous period. This increase aligns with the expansion of CEC’s book and the deteriorating macroeconomic environment in South Africa, marked by rising interest rates, power outages and a depreciating rand. CEC has increased its ECLs in anticipation of heightened future losses, aligning with the approach taken by other consumer lenders.

The positive movement in EBITDA for the remaining Africa operations, amounting to R184 million, includes costs of R47 million attributed to learnership initiatives in the current period, compared to R64 million in the prior period. Excluding the reduction in costs of R17 million associated with the learnership initiatives, EBITDA in the remaining Africa distribution segment increased by R167 million (44%) to reach R547 million.

Excluding the positive contributions of R65 million in the current period and the negative contributions of R443 million in the prior period, resulting from the recapitalisation transaction of Cell C, core headline earnings decreased by R91 million (18%) from R504 million to R413 million. This decrease in core headline earnings was attributable to a decrease of R119 million in CEC, while the remaining entities in the Africa distribution segment increased by R28 million compared to the prior period.

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.

A decline in SMS volumes resulted in a decrease in revenue of R2 million (1%) from R145 million to R143 million.

Gross profit increased by R2 million (5%) from R44 million to R46 million, consistent with the increase in margins from 30.11% to 32.01%, despite a decrease in revenue.

EBITDA declined by R2 million (8%) from R21 million to R19 million. Excluding the R9 million costs attributable to learnership initiatives in the current period and R5 million in the prior period, EBITDA increased by R2 million (6%) from R26 million to R28 million.

Of the core headline earnings of R22 million, BLDS accounted for R17.7 million, I Talk Holdings and I Talk Financial Services generated earnings of R5 million, of which the Group’s share amounted to R2 million. Blue Label Communications and BluTrain generated earnings of R1 million and R5 million, of which the Group’s share amounted to R0.6 million and R1.7 million, respectively.

Of the core headline earnings of R18.1 million in the prior period, BLDS accounted for R16.9 million. I Talk Holdings and I Talk Financial Services generated earnings of R4.0 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.

Excluding the extraneous income of R22 million in the prior period, the negative contribution to Group core headline earnings increased by R2 million (3%) to R77 million.

The extraneous fair value movement of R22 million in the prior 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, amortisation and impairment charges decreased by R18 million to R72 million. Of the latter amount, R35 million (2022: R35 million) pertained to depreciation on capital expenditure, R5 million (2022: R15 million) to depreciation raised in terms of IFRS 16 – Leases, R2 million (2022: R4 million) to impairments and R30 million (2022: R36 million) to the amortisation of intangible assets of which R15 million (2022: R22 million) emanated from purchase price allocations on historical acquisitions.

Finance costs increased by R211 million from R248 million to R459 million. Of the latter amount, R431 million was associated with interest paid on borrowed funds, R2 million with the unwinding of the lease liability in accordance with IFRS 16 and R26 million with other finance costs. In comparison, R239 million was related to interest paid on borrowed funds, R2 million to the unwinding of the lease liability and R7 million to other finance costs.

The recapitalisation transaction of Cell C in September 2022 resulted in an additional R164 million (2022: R87 million) in finance costs, incurred due to increased borrowings related to airtime sale and repurchase obligations, as well as R13 million (2022: R3 million) for the issue of Class A Preference shares in the current period.

Excluding the aforementioned recapitalisation interest, finance costs increased by an additional R124 million from R158 million to R282 million. Of this increase, R102 million primarily stemmed from higher finance costs due to the expansion of the Group’s working capital facility from R1.15 billion to R1.4 billion on the recapitalisation date, as well as the granting of additional short-term working capital facilities for bulk inventory purchases at favourable rebates, along with elevated interest rates compared to the previous period. Furthermore, of the remaining increase of R22 million, R3 million resulted from Comm Equipment Company Proprietary Limited working capital financing facility of R1.9 billion from African Bank and R19 million was attributed to other finance costs.

Finance income increased by R221 million from R131 million to R352 million. Of the latter amount, R16 million was attributable to interest received on cash resources, R54 million to the loan provided to Cell C in connection with the CEC R1.1 billion deferral amount, R273 million from the loan extended to Cell C as a component of the Debt Funding required as part of the recapitalisation transaction and R9 million from other loans advanced.

In the prior period, R46 million was attributable to interest received on cash resources, R25 million to the loan to Cell C relating to the CEC R1.1 billion deferral amount, R54 million from the loan extended to Cell C and R6 million from other loans advanced.

Total assets decreased by R230 million to R14.5 billion, of which non-current assets accounted for R117 million and current assets for R113 million.

The decline in non-current assets included decreases of R148 million in advances to customers, R73 million in intangible assets primarily relating to the subscription income‑sharing arrangement in CEC, R22 million in capital expenditure net of depreciation and financial assets at fair value through profit and loss of R17 million. These declines were offset by increases in loans to associates and joint ventures, totalling R138 million and investments in associates and joint ventures by R6 million.

The net reduction in current assets included decreases in advances to customers amounting to R333 million, cash and cash equivalents amounting to R169 million, financial assets at fair value through profit and loss amounting to R29 million, financial assets at fair value through other comprehensive income of R13 million, current tax assets of R8 million and inventory of R6 million. These decreases were offset by an increase in trade and other receivables amounting to R436 million and loans to associates and joint ventures by R7 million.

In August 2023, CEC concluded a financing transaction with African Bank, allowing CEC to sell device receivables to African Bank. From August 2023 to November 2023, CEC sold device receivables with a gross value of R577 million. The equivalent value on 30 November 2023 would have amounted to R544 million, had those receivables not been disposed of. CEC’s advances to customers decreased by R481 million from R2.26 billion on 31 May 2023, to R1.78 billion on 30 November 2023. When combined with the equivalent value sold to African Bank at 30 November 2023, CEC’s advances to customers increased by R63 million over that period.

The increase of R145 million in loans to associates and joint ventures is primarily attributable to the interest accrued of R273 million from the loan extended to Cell C as a component of the Debt Funding and reinvestment instrument and R54 million related to the loan extended on the CEC deferral amount, less repayments received thereon of R182 million.

Inventory remained consistent at R2.8 billion, with the Group having purchased R1.2 billion of Cell C prepaid airtime in the previous period as part of the recapitalisation transaction.

Net profit attributable to equity holders amounted to R406 million, resulting in accumulated capital and reserves of R4.9 billion.

Non-current liabilities decreased by R1.44 billion, comprising a decrease in non-current borrowings of R1.45 billion, financial liabilities at fair value through profit and loss of R4 million and lease liabilities of R4 million, offset by an increase in deferred taxation liabilities of R15 million.

Current liabilities increased by R805 million, mainly due to an increase in current borrowings of R1.45 billion, offset by a reduction in trade and other payables totalling R568 million, deferred revenue by R50 million and current tax liabilities by R30 million.

Cash generated from trading operations amounted to R288 million. Working capital movements included an increase in trade receivables of R436 million and a decrease in trade and other payables, including deferred revenue, of R644 million offset by decreases in advances to customers of R481 million and inventory of R3 million. After incurring net finance costs of R347 million and taxation of R119 million, net cash utilised in operating activities amounted to R177 million.

Net cash flows generated from investing activities amounted to R47 million, primarily attributable to the net repayment of loans to associates and joint ventures of R120 million and the repayment of loans receivable carried at fair value of R45 million, offset by the purchase of intangible assets amounting to R99 million and property, plant and equipment amounting to R30 million.

Included in net loan repayments by associates and joint ventures of R120 million are capital repayments by Cell C of R128 million offset by net loans granted to other associates and joint ventures of R8 million.

Cash flows utilised in financing activities amounted to R39 million, of which R18 million related to the net decrease in borrowings, R15 million to dividends paid to a minority shareholder of a subsidiary company and R6 million to lease repayments.

Cash and cash equivalents accumulated to R1.13 billion at 30 November 2023.

Forfeitable shares totalling 17 336 415 (2022: 10 470 826) were issued to qualifying employees. During the period, 511 995 (2022: 1 104 557) shares were forfeited and 12 694 462 (2022: 16 764 722) shares vested.

In December 2023, Comm Equipment Company (CEC) concluded a new facility arrangement with African Bank Limited for an amount of up to R1.9 billion (The Facility). The Facility was utilised to repay the total amount owed to African Bank Limited as at 30 November 2023 amounting to R1.327 billion. The Facility is structured as a revolving facility for the first 12 months until 30 November 2024, followed by 36 equal monthly instalments commencing on 1 December 2024, with a final instalment of R215 million payable on 30 November 2027. The Facility attracts a floating interest rate at prime plus 3% and is collateralised by a portion of CEC’s subscriber receivables. The parent guarantee of R250 million provided by Blue Label Telecoms remains intact.

The Blue Label Board would like to extend its gratitude to the staff, suppliers, customers and business partners for their ongoing support and dedication 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

21 February 2024