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Blue Label interim earnings soar, Cell C deal confirmed

Paula Gilbert
By Paula Gilbert, ITWeb telecoms editor.
Johannesburg, 28 Feb 2017
Blue Label joint-CEOs Mark and Brett Levy.
Blue Label joint-CEOs Mark and Brett Levy.

Strong South African distribution helped push Blue Label Telecoms' interim headline earnings per share up 54%, to 81.78c. The group also saw revenue grow by 3% to R13.2 billion for the six months to 30 November 2016, while gross profit rose 25% to R1.1 billion.

This as the company confirmed it is going ahead with plans to invest R5.5 billion to buy a 45% stake in mobile operator Cell C, despite opposition from Cell C's 25% BEE investor CellSAf.

Blue Label says a "binding umbrella restructure agreement" has been entered into by itself, Cell C, debt providers of Cell C and an unnamed third-party investor. The conclusion of relevant transaction agreements is expected to be concluded by no later than 30 June.

In terms of the agreement, Cell C's maximum net borrowings will be reduced to R6 billion, compared to over R20 billion currently. The third-party investor will subscribe for 15% of the share capital of Cell C for R2 billion and Blue Label's subscription for 45% of the share capital of Cell C remains unchanged.

"The board remains positive with regard to the investment in Cell C and other commercial benefits that will follow therefrom," the group said in a results statement this morning.

Growth abounds

After accounting for a negative turnaround in foreign exchange movements of R78 million and an increase in other overheads of R53 million, earnings before interest, tax, depreciation and amortisation increased by R95 million (15%) to R715 million; and earnings per share for the six months rose 56% to 81.78c.

"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 Oxigen Services India being viewed as a venture capital investment," the group says.

South African distribution continued its dominance in contribution to interim group earnings, with its core headline earnings equating to growth of 26%.

The company says continued growth in market share helped contribute to the increase in group revenue, of 3%, with the continuous shift in consumer buying patterns from traditional purchasing of airtime to that of PINless top-ups. Revenue generated on PINless top-ups increased from R1.8 billion to R2.8 billion, equating to effective growth in South African distribution revenue of 9%.

Net commissions earned on the distribution of prepaid electricity continued to increase, escalating by R8 million to R103 million on turnover of R6.9 billion generated on behalf of the utilities.

In SA, gross profit margins improved from 6.29% to 7.84%, resulting in a 28% increase in gross profit from R795 million to over R1 billion.

Going forward, Blue Label believes the demand for low-cost smartphones and tablets will accelerate and in turn enhance revenue and profitability.

"The financing of the mobile device element of postpaid contracts as well as that of providing short-term finance for emergency top-ups are initiatives that are currently under consideration."

International losses

However, the group's international operations did not fare as well as the South African business in the six-month period.

Although Blue Label Mexico continued to incur losses, the group's share thereof declined by 32%, from R32.5 million to R22.1 million. Blue Label says the losses in the Mexican business are expected to continue to decline "with the advent of sustainable improved gross profit margins and increased annuity revenue generated from starter packs".

The group, through its wholly-owned subsidiary, Gold Label Investments, holds a 58.18% interest in Oxigen Services India. For the six months, Blue Label's share of losses in Oxigen amounted to R120 million ? with the major portion of these losses attributable to substantial expenditure incurred on the marketing of the brand and the acquisition of wallets.

The Oxigen investment has historically been accounted for as an investment in an associate but the group is changing this and with effect from 30 November 2016, Oxigen will be viewed as a venture capital investment - this means that going forward, losses incurred by Oxigen will have no impact on group earnings and the investment therein will be measured at fair value.

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