Commentary

Headline earnings per share of 37,15 cents equated to a growth of 7%. In spite of a decline in revenue, EBITDA increased by 16% primarily due to an increase in gross profit by R66 million (10%) and the containment of growth in overheads to 3%. Revenue generated on “pin-less top ups” increased by R310 million. As only the commission thereon is reflected, the effective decline in Group revenue was confined to 1%.

The increase in gross profit, supported by a growth in margins from 6,80% to 7,82%, was achieved through the efficient application of cash resources to inventory purchases at favourable discounts, growth in commissions earned on the distribution of prepaid electricity and compounding annuity revenue. The South African distribution segment remains the predominant contributor to Group earnings. It has achieved this by fortifying its foundation, thereby facilitating its ability to expand its offering into its key distribution channels. It is a reliable aggregator of several suppliers, backed up by a responsive service. Its reputation is one of trust, convenience and clear product leadership.

On the international front, Ukash continued to increase profitability, whilst Oxigen Services India (“OSI”) and Blue Label Mexico (“BLM”) incurred losses. Cash resources accumulated to R1,3 billion of which R742 million was generated from operating activities.

Basis of preparation

The condensed consolidated interim financial information has been prepared in accordance with the JSE Limited Listings Requirements, the presentation and disclosure requirements of IAS 34 – Interim Financial Reporting and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council. The condensed consolidated interim financial information has been prepared in accordance with International Financial Reporting Standards (“IFRS”) and the requirements of the Companies Act of South Africa.

This interim financial information has been prepared in accordance with the going concern principle, under the historical cost convention, except for certain financial and equity investments which have been measured at fair value. The accounting policies and methods of computation are consistent with those applied in the annual financial statements for the year ended 31 May 2013, with the exception of the standards that are effective for the first time in the current period. These have been disclosed in note 1 to the annual financial statements for the year ended 31 May 2013. These standards have not had a significant impact on the interim financial information.

In addition, the Group applies core net profit as a non-IFRS measure in evaluating the Group’s performance. This supplements the IFRS measures. Core net profit is calculated by adjusting net profit for the year with the amortisation of intangible assets that arise as a consequence of the purchase price allocations completed in terms of IFRS 3(R): Business Combinations.

The results have not been reviewed or audited for the period ended 30 November 2013.

Segmental report
South African distribution

      Unaudited
2013
R’000
  Unaudited
2012
R'000
  Growth
R'000
  Growth  
Revenue     8 923 465   9 321 467   (398 002)   (4%)  
Gross profit     621 463   563 041   58 422   10%  
EBITDA     448 264   399 198   49 066   12%  
Core net profit     307 835   285 716   22 119   8%  
Gross profit margin     6,96%   6,04%          
EBITDA margin     5,02%   4,28%          

In the comparative year, the technology segment was reported on separately. As the bulk of its function and services are interdependent in the distribution of airtime, electricity and starter packs, it is more appropriate to house its expenditure in the South African distribution segment. Accordingly, the technology segment has been included in the South African distribution segment and the comparative segmental results in this regard have been restated in accordance with IFRS 8 “Operating Segments”.

The decline in revenue by 4% in an increasingly competitive environment was compensated for by an increase in gross profit by 10%. This achievement is consistent with the strategy of focussing on opportunities yielding superior gross marginal returns. The continued shift in consumer behaviour patterns from traditional airtime purchasing to “pin-less top ups”, accounted for 3% of the reduction in revenue. The effective decline in revenue equated to 1%.

Commissions earned on the distribution of prepaid electricity increased by R14 million to R67 million (26%) on revenue of R4,4 billion generated on behalf of the utilities.

After an overhead increase of 5%, the resultant EBITDA of R448 million equated to a 12% growth. These earnings were inclusive of extraneous costs of R19 million that were incurred in the settlement of a contractual dispute and the early termination of a profit share agreement.

Core net profit increased by 8% after a decline in net finance income by R7,8 million net of taxation, congruent with the application of an element of cash resources to bulk purchasing transactions and early settlement discounts. On exclusion of the extraneous settlement costs net of taxation, the core net profit growth would have equated to 13%.

International distribution

      Unaudited
2013
R’000
  Unaudited
2012
R'000
  Growth
R'000
  Growth  
Revenue            
Gross profit            
EBITDA     (9 790)   (19 727)   9 937   50%  
Share of (losses)/profits from associates and joint ventures     (30 285)   (23 122)   (7 163)   (31%)  
– Ukash     6 937   4 362   2 575   59%  
– Oxigen Services India     (3 537)   (2 455)   (1 082)   (44%)  
– Blue Label Mexico     (30 709)   (22 894)   (7 815)   (34%)  
– Other     (2 976)   (2 135)   (841)   (39%)  
Core net loss     (37 809)   (36 730)   (1 079)   (3%)  
– Equity holders of the parent     (30 132)   (22 896)   (7 236)   (32%)  
– Non-controlling interests     (7 677)   (13 834)   6 157   45%  

The negative EBITDA of R9,8 million was mainly attributable to legal fees incurred in Africa Prepaid Services Nigeria (“APSN”). These fees in the comparative
period amounted to R19 million.

The share of net losses comprised the following:

Ukash

The Group’s share of profits in Ukash, after the amortisation of intangible assets, increased by 59% from R4,4 million to R6,9 million. Of this growth, R1,2 million was attributable to foreign exchange gains. The balance of the growth of R1,4 million was achieved through an increase in profitability by 30%. These results were achieved organically on a revenue increase by 26%, resulting in an increase in gross profit by 38% and EBITDA by 35%, all reported in their local currency.

Oxigen Services India

Blue Label’s share of losses increased by R1,1 million to R3,5 million. Although revenue increased by 30%, the Group’s share of EBITDA declined by R2,2 million directly attributable to an increase in payroll and other expenses.

The increase in expenditure was congruent with a defined strategy to focus on the growth of financial services transactions facilitated by its vast network of points of presence. Implementation of this process required the deployment of additional personnel and other resources.

The defined strategy follows OSI’s aim of becoming India’s first non banked mobile wallet that empowers the unbanked masses to instantly transfer and receive cash across the entire country.

Its money transfer services are currently transacting at $1,2 million per day, increasing exponentially through Oxigen’s connectivity with the National Payment Corporation of India. This facilitates the ability to offer instantaneous services to Oxigen’s retail network in India.

Blue Label Mexico

In the comparative period, BLM incurred losses to the equivalent of R52 million of which the Group’s 45% share equated to R23 million after the amortisation of intangible assets. In the current period, BLM’s losses increased to an equivalent of R67 million, of which R12 million was attributable to negative foreign exchange movements.The Group’s share of losses equated to R31 million of which R6 million pertained to these foreign exchange movements.

In spite of revenue increasing by 77%, the main reasons for the increase in losses were continued margin compression and an increase in overhead costs. The increase in overhead costs was necessitated by the aggressive roll out of point of sale devices and ancillary support services. At the end of the reporting period the number of point of sale devices increased to 51 579 net of churn.

The objective will be to continue establishing additional points of presence. The ability to enhance the product offering with the advent of the transactional revenue-producing alliances with Visa and Banamex, will result in additional revenue being generated from the enhanced point of sale base.

Mobile

      Unaudited
2013
R’000
  Unaudited
2012
R'000
  Growth
R'000
  Growth  
Revenue     80 749   76 588   4 161   5%  
Gross profit     56 436   49 157   7 279   15%  
EBITDA     18 927   21 075   (2 148)   (10%)  
Core net profit     14 172   14 410   (238)   (2%)  

This segment comprises Cellfind, Panacea Mobile, Blue Label Engage and Blue Label One. Of the revenue growth of R4 million, Panacea, Blue Label Engage and Cellfind contributed R22 million. This was offset by a decline of R14 million in revenue generated by the projects and media divisions of Blue Label One. A further R4 million was attributable to the disposal of Content Connect Africa during the comparative period.

The negative performance of Blue Label One manifested itself in the decline in this segment’s contribution to core net profit. A positive growth of R8 million in contribution to core net profit by the other companies comprising this segment was entirely offset by movement in losses incurred by Blue Label One of R8 million. As a result, the latter company has been restructured in order to avoid repetition of its negative performance.

Solutions

      Unaudited
2013
R’000
  Unaudited
2012
R'000
  Growth
R'000
  Growth  
Revenue     74 808   68 119   6 689   10%  
Gross profit     32 166   31 540   626   2%  
EBITDA     17 264   14 391   2 873   20%  
Core net profit     9 257   8 051   1 206   15%  

The Solutions segment houses Blue Label Data Solutions (“BLDS”), Velociti and CNS Call Centres. BLDS contributed R14 million to EBITDA translating to R8 million at core net profit level.

Corporate

      Unaudited
2013
R’000
  Unaudited
2012
R'000
  Growth
R'000
  Growth  
EBITDA     (43 201)   (42 731)   (470)   (1%)  
Core net loss     (50 054)   (49 428)   (626)   (1%)  

Although growth in net expenditure was confined to 1%, the negative contribution to core net profit amounted to R50 million.

Depreciation, amortisation and impairment charges

Depreciation, amortisation and impairment charges increased by R0,8 million. The amortisation of intangible assets in terms of purchase price allocations declined by R2,9 million in line with the expiration of useful tenure. This was offset by an increase in depreciation and impairment charges to the remainder of the Group’s assets by R3,7 million.

Net finance income

Finance costs

Finance costs totalled R81 million, of which R7 million related to interest paid on borrowed funds and R74 million to imputed IFRS interest adjustments on credit received from suppliers. On a comparative basis, interest paid on borrowed funds was R8 million and the imputed IFRS interest adjustment equated to R83 million. Interest paid on borrowed funds was attributable to bulk inventory purchase transactions in which facilities were utilised and repaid during the current period.

Finance income

Finance income totalled R70 million, of which R16 million was attributable to interest received on cash resources and R54 million to IFRS interest adjustments. On a comparative basis, interest received on cash resources amounted to R26 million and the imputed IFRS interest adjustment to R65 million. The decline in interest received on cash resources was attributable to the partial utilisation of funds on hand for bulk inventory purchase transactions.

Statement of financial position

Total assets increased by R468 million, of which growth in non-current assets accounted for R102 million and current assets R366 million.

The increase in non-current assets was mainly attributable to a net growth in intangible assets and goodwill by R36 million, capital expenditure net of depreciation by R10 million  and to investment in associates and joint ventures by R60 million.

In June 2013 the Group secured a distribution agreement with a leading reseller for a purchase consideration of R84 million. This, together with other acquisitions totalling R3 million, was offset by the amortisation of intangible assets by R51 million resulting in a net movement of R36 million in intangible assets and goodwill. The increase in investment in associates and joint ventures was predominantly due to an additional R86 million investment in Blue Label Mexico and the positive impact of R6 million in foreign currency translation reserves, off-set by net losses of R30 million incurred by associates and joint ventures.

The movement in current assets was supported by a growth in cash resources by R359 million, an increase in accounts receivable by R351 million, offset by a decline in inventories by R336 million.

The debtors collection period increased from 27 days to 38 days congruent with the granting of extended credit to selected customers. In line with the decline in inventory, the stock turn improved from 38 days to 33 days.

The net profit attributable to equity holders of R246 million, less a dividend of R169 million, off-set by an increase in non-controlling interests of R11 million, were the main contributors to the net growth in capital and reserves.

Trade and other payables increased by R431 million due to the utilisation of additional credit afforded by suppliers. Accordingly, the payment period to creditors increased from 46 days to 62 days.

Statement of cash flows

Cash flows from operating activities totalling R742 million were applied to the purchase of intangible assets to the extent of R87 million, acquisitions of R16 million, additional funding of R86 million to Blue Label Mexico and capital expenditure of R28 million.

Treasury shares acquired for R11 million, dividends paid of R169 million, less dividends received of R11 million, resulted in a net increase in cash and cash equivalents of R359 million.

Cash resources accumulated to R1,3 billion.

Forfeitable share scheme

Forfeitable shares totalling 3 014 847 (2012: 3 881 276) were issued to qualifying employees. During the period 462 283 (2012: 434 061) shares were forfeited and 3 629 922 (2012: 2 700 512) shares vested.

Litigation update

The disputes between Telkom and Multi-Links, on the one hand, and Blue Label and the other defendants, on the other are pending before the High Court. It is anticipated that a trial date will be allocated shortly. Blue Label’s subsidiary, APSN, is proceeding with its claim against Multi-Links arising out of Multi-Links’ wrongful repudiation of the super dealer agreement between Multi-Links and APSN. APSN has also instituted a claim against Telkom arising out of Telkom’s wrongful interference with APSN’s contractual rights against Multi-Links. Blue Label and the other defendants vehemently deny the allegations made against them by Telkom and Multi-Links and maintain that they are not liable. Reference is made to the litigation update in the May 2013 Group integrated annual report.

Prospects

For the remainder of the financial year we expect revenue generated from airtime to be under pressure with the added probability of margin compression.

The recently acquired Ticketpros, a ticketing provider, is a proud partner of premium sporting events in South Africa. Its state-of-the-art technology, allowing it to become the first ticketing engine to launch ticketing purchases on an NFC card or till slip, will enhance the product offerings of the Group through its extensive merchant base to include transport, entertainment and expos.

Acquiring, which is the ability to process credit and debit card payments for products and services on behalf of a merchant, has become a reality through the successful alliance established with MasterCard and Visa. This will enable consumers to transact at store level through the multitude of point of sale devices that Blue Label has deployed both locally and internationally.

The recent announcement of the acquisition of Retail Mobile Credit Specialists (“RMCS”), an enhanced service provider of cellular products and services engaged in the supply of telecommunication products and services, content, data and allied activities, will provide the Group access to new channels for the distribution of both RMCS and Blue Label products and services. The acquisition remains subject to Competition Authority approval.

Oxigen Services India is expected to continue to grow the volume of the financial services transactions it facilitates, as it continues to implement strategies of it becoming India’s first non-banked mobile wallet.

Blue Label Mexico will continue to grow its points of presence network in pursuit of its strategy of enhancing its products and service offerings, including transactional revenue.

The conclusion of alliances with MasterCard and Absa in South Africa and with Visa and Banamex in Mexico, will enable financial inclusion in communities where consumers have historically been unable to use formal payment products.

Appreciation

The board of Blue Label Telecoms 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 BM Levy and MS Levy DA Suntup* CA(SA)
Chairman Joint Chief Executive Officers Financial Director
18 February 2014    

*Supervised the preparation and review of the Group’s interim results.