Dual-listed Net1 UEPS Technologies says a US probe into its tender to provide payments to about 15 million social grant beneficiaries has affected its reputation and ability to execute its growth strategy, which includes an empowerment deal.
The group is under investigation by the US Securities and Exchange Commission and Department of Justice's Criminal Division to determine whether there was bribery involved in the R10 billion contract with the South African Social Security Agency (SASSA).
The probe follows a legal battle after AllPay alleged Net1's win of the deal to distribute social security grants was unlawful. The North Gauteng High Court ruled, in August, that, while the deal was illegal and invalid, it would remain in place so that payments could continue.
Net1 is appealing the decision, which will be heard this Friday and, in the meantime, while it continues to roll out the solution, is suing rival AllPay for R478 million for allegedly injuring its reputation.
However, the group's stock took a hammering after it notified shareholders it was being probed. Although Net1's stock has recovered somewhat to R53, the day after it announced it was being investigated by US authorities, its share plummeted 47.84% to a new five-year low.
Adverse impact
Chairman and CEO Serge Belamant says, while the group is cooperating with the US authorities, "as a result of these investigations, we are experiencing some adverse impact from the damage caused to our reputation, including our ability to execute certain aspects of our strategic plan".
In a frequently-asked questions document on its Web site, the company explains it entered into a black economic empowerment (BEE) deal in 2012 and granted the consortium an option to purchase 8.96 million shares at a price of $8.96 per share. The option expires on 17 April.
"We entered into the BEE transaction to facilitate sustainable economic growth and social development in SA by adhering to the principles of broad-based BEE, to strengthen the development of our business plan, and to comply with South African regulation and business practice.
"The exercise of the option by the BEE consortium would also substantially improve our BEE rating. As a result, we would anticipate a significant enhancement of our ability to execute our longer-term strategy in SA and elsewhere in Africa, as well as a strengthening of our business credentials that we believe are essential to maintain and accelerate the growth of our business," says Net1.
However, the group says, at the current share price levels, it believes it is unlikely the option will be exercised before it expires. "If the option expires unexercised, unless we were to extend the exercise period of the option, we would not achieve the potential benefits or BEE objectives and compliance that we anticipated when we entered into the BEE transaction."
Spending more
Net1 says in its quarterly results update that the strengthening of the dollar against the rand has also affected the costs of implementing the SASSA deal. During the second quarter, to December, it incurred additional implementation and staff costs related to the contract.
"We enrolled 12 million citizens by the end of January as part of our SASSA implementation and remain on track to complete bulk enrolment by the end of March 2013," says Belamant.
While the number of grant recipients on a national basis has been quantified by SASSA as 9.4 million people, the number of beneficiaries is continually being revised by SASSA and has grown from an estimate of about 15.5 million to around 21.6 million.
To wrap up the second phase, Net1 grew temporary staff from 2 500 to around 5 500. In the second quarter, it incurred direct implementation expenses of R157.1 million, which was higher than expected, it adds.
Net1 also spent R26.6 million on smart cards and expects total capital expenditure to come in at $30 million - about R266.3 million. Its total cash outlay is expected to be between $100 million and $105 million (R887.5 million to R932 million) by March.
"The successful implementation for SASSA is a once-off event and integral for the smooth transition and operation of SA's social welfare programme. Given the critical importance of this rollout, and the higher number of beneficiaries required to be enrolled in the same time frame, our implementation costs are materially but proportionally higher than anticipated," says CFO Herman Kotz'e.
As a result, for the full year, the group expects fundamental earnings per share to be at least $0.95, assuming a constant currency base of R7.72 to the dollar.
For the second quarter, Net1 reported revenue of $111.4 million, up from last year's $92 million, and net income was lower, at $8 million, compared with $25 million. Fundamental earnings per share were $0.18, lower than 2011's $0.39.
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