Blue Label Telecoms' : earnings continue to escalate

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Blue Label Telecoms' earnings continue to escalate

24 August 2017

Overview:
Group earnings continued to escalate, comprising a hybrid of organic growth in local operations augmented by the impact of a fair value gain resulting from the Indian operations being viewed as venture capital investments. South African distribution perpetuated its dominance in its contribution to Group earnings, with its core headline earnings equating to a growth of 19%.

At Blue Label Mexico losses continue to decline, with the Group's share thereof reducing by 42%, from R63 million to R37 million.

The continuous shift in consumer buying patterns from traditional purchasing of airtime to that of 'PINless top-ups' resulted in limited growth in Group revenue. Only the gross profit earned thereon is accounted for in Group revenue as opposed to the gross amount generated from transactions of this nature. On imputing such revenue, the effective growth would have equated to 7%. Gross profit escalated by R343 million (19%) to R2.2 billion congruent with an increase in margins from 6.98% to 8.26%. After accounting for a negative turnaround in foreign exchange movements of R125.7 million, a net negative movement of R37.9 million relating to a release of a contingent portion of deferred purchase considerations and an increase in overheads of R90 million, the resultant EBITDA increased by R91 million (7%) to R1.33 billion.

The investments in Oxigen Services India, Oxigen Online Services India, collectively ('Oxigen Services India'), and 2DFine Holdings Mauritius ('2DFine') were historically accounted for as investments in associates and joint venture, applying the equity method up until 30 November 2016. From that date these entities are viewed as venture capital investments, which, in accordance with IAS 28 - Investments in Associates and Joint Ventures, have been accounted for at fair value. The differential between the carrying value of the investments and their fair value is reflected as a gain on associates and joint venture measured at fair value. A fair value gain of R160 million and the Group's share of losses for the year under review of R125 million, equated to a net positive contribution of R35 million to Group earnings. On exclusion of this positive contribution, headline earnings would have amounted to R752 million and core headline earnings to R766 million, equating to 112.74 cents and 114.85 cents per share respectively. Capital and reserves accumulated to R5 billion, net of accumulated dividends paid to date totalling R1.16 billion, further strengthening the Group's balance sheet. The net asset value increased by 11% to R7.32 per share.

South African Distribution perpetuated its dominance in contribution to group earnings with its core headline earnings impacting thereon by a growth of 26%.
Prospects:
Blue Label is one of the primary distribution channels for Cell C's products and services. The acquisition therein provides a compelling value proposition to the Group, to Cell C and its customers through vertical integration that will afford both companies the opportunity to realise synergies in product distribution. Cell C now has a sustainable capital structure to deliver on their strategic objectives.

3G Mobile is one of Africa's largest distributors and financiers of mobile devices and handsets to major retailers and cellular network providers. It has distribution rights for all major tier one and tier two mobile devices and allied products from the manufacturers thereof. Through its wholly owned subsidiary, Comm Equipment Company Proprietary Limited, it provides the financing of the mobile handset component of post-paid and hybrid contracts to Cell C, with the capability of extending such services to other networks and channels. These functions supplement Blue Label's strategic objectives to provide value added services to both Cell C and its own customer base. 3G Mobile provides the ideal platform to combine Blue Label's low cost and certified pre-owned mobile handset divisions into a consolidated group. The acquisition thereof is both earnings accretive and provides a solid foundation for distribution into the burgeoning low cost smartphone market.

Blue Label Mexico is expected to provide a positive contribution to Group profitability, given their consistent growth in revenue generation at sustainable improved gross profit margins and compounding annuity revenue generated from starter packs.

'Big Data' creates the opportunity to upsell and cross sell various bouquets of products and services that Blue Label has to offer through its distribution channels, by intelligently understanding consumer behaviour.

Value added services, including the provision of short-term finance for products and services required by consumers, are initiatives that are currently under consideration.