Commentary

INTRODUCTION

In maintaining its position as the major distributor of prepaid electronic tokens of value in South Africa, the group once again delivered a robust performance in its trading operations. This achievement, together with contributions by the international segment, resulted in growth in EBITDA of 21%. Cash flows generated from trading operations equated to R516 million.

An improved trading performance by Oxigen India resulted in the decline of the group’s share of losses in this associate company from R26 million to R7 million.

These growth contributors were negated by a substantial differentiation in comparative interest rates impacting on interest earned, the reversal of certain deferred tax assets, the impairment of goodwill relating to the negative performance of CNS call centre and the impairment of intangibles pertaining to technology.

The impact of the above equated to a decline in core earnings per share of 6%.

The foundations for the startup operations in Mexico and Nigeria have been established, thereby providing the group with a sound platform for expansion in those regions.

In light of the group’s strong trading performance and the resultant growth in cash on hand, the board has elected to accelerate the declaration of a maiden dividend to shareholders.

BASIS OF PREPARATION

The condensed group financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), IAS 34 – Interim Financial Reporting, the listing requirements of the JSE Limited and the South African Companies Act 61 of 1973, as amended.

These financial statements are prepared in accordance with the going concern basis, under the historical cost convention, as modified by the revaluation of certain assets and liabilities where required or elected in terms of IFRS. The accounting policies and methods of computation are consistent with those used in the comparative financial information for the year ended 31 May 2009.

In addition, the group uses core net profit as a non-IFRS measure in evaluating the group 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: Business Combinations.

FINANCIAL OVERVIEW

• Revenues increased from R15,28 billion to R17,03 billion (11%).
• EBITDA of R689 million represented an increase of R121 million (21%).
• EBITDA margins increased by 0,33% to 4,05%.
• Share of losses in Oxigen India declined from R26 million to R7 million.
• Net finance income declined by R55 million (59%).
• Impairments of goodwill and intangibles totalled R20,7 million.
• Headline earnings per share declined by 7% from 51,63 cents to 48,27 cents.

The underlying report has been prepared on a segmental basis in order to provide shareholders with an enhanced insight into the contributions of each segment.

REVENUE

South African distribution

This segment distributes prepaid electronic tokens of value, including airtime, electricity, Ukash payment vouchers, lotto tickets and bus tickets, on a national basis.

Commission earned on the distribution of prepaid electricity increased 143% from R14 million to R34 million. This was achieved through a hybrid of the expansion of consumer demand of this payment facility and the establishment of additional contracts with a wider spectrum of municipalities.

The overall growth in South African distribution of 9% was entirely organic.

International distribution

International distribution encompasses the group’s operations in Nigeria, Mexico, India and the United Kingdom. Interests in Mozambique and the Democratic Republic of Congo were disposed of in November 2009 and December 2009 respectively.

Revenue generated by Africa Prepaid Services and Blue Label Mexico increased by R826 million. Trading operations in Cyprus and the United States of America were disposed of in March 2009 and July 2009 respectively. The non-repetition of the comparative revenues of these entities totalled R302 million, resulting in a net growth in international distribution revenue of R524 million (72%).

African Prepaid Services Nigeria commenced operations in May 2009 and Blue Label Mexico in June 2008. The latter continued its steady roll out of point of sale devices during the year, accumulating its points of presence to in excess of 3 000 at year end.

International revenue does not include the turnover of the associate companies, Oxigen India and Ukash. These operations are equity accounted for, in line with the significant influence held therein.

Value added services

The telemarketing of cellular and financial services products, inbound customer care and technical support are provided by the call centres operated by the group. Revenue generated by these call centres declined by R69 million, primarily due to the negative impact on outbound sales, caused by adverse market conditions. This in turn necessitated the impairment of goodwill of R12,1 million.

A further decline in revenue of R47 million pertained to e-Voucha, a subsidiary company which was disposed of prior to the commencement of the financial year.

Technology

The technology segment is the in-house technical support and product development enhancement operation. Its revenue of R20 million related to sales and services to third parties.

EBITDA

EBITDA of R689 million equated to growth of R121 million (21%) on the comparative year. The segmental analysis distinguishes contributions from trading operations and technical and corporate support.

South African distribution

EBITDA growth of R61 million was achieved through increased revenues and a reduction in operational expenditure. This growth was achieved in spite of a decline in gross profit margins by 0,15% impacted by the introduction of RICA.

International distribution

The growth of R131 million included a profit of R29 million on the sale of African Prepaid Services Mozambique. The net trading growth of R102 million was primarily contributed by Africa Prepaid Services Nigeria.

Value added services

The decline in EBITDA of R50 million in this segment, was primarily due to the negative performance of the call centres including closure costs of R13 million pertaining to CNS and Blue Label Call Centre.

Technology and Corporate

In-house technical support and managerial skills played an essential role in the contribution to EBITDA growth of R142 million (20%) achieved by the trading operations.

Congruent with an expanding group, ongoing expenditure on technology is required at both maintenance and personnel levels. The need to focus on in-house support resulted in both a reduction in revenue on services provided to third parties and an increase in overheads in the technology segment. The resultant negative contribution to EBITDA was R76 million.

Corporate administrative and managerial costs were contained, resulting in a decline of R7 million.

NET FINANCE INCOME

Of the R162 million finance income earned, R84 million was attributable to interest generated from cash resources. Imputed interest receivable on debtor balances in terms of IFRS requirements amounted to R78 million.

Finance income earned in the comparative year was R205 million, of which R47 million related to imputed interest receivable on debtor balances in terms of IFRS requirements and R158 million earned from cash resources.

The effective decline in finance income, net of the above IFRS adjustments, equated to R74 million, as a direct result of the reduction in interest rates of 550 basis points since November 2008.

Of the R124 million finance cost, R119 million related to imputed interest payable on creditor balances in terms of IFRS requirements. On a comparative basis, R108 million of R113 million was applicable to IFRS adjustments. The net increase of R11 million was directly IFRS related.

TAXATION

The non-deductibility of impairment charges to goodwill, offset by unrecognised deferred tax assets in loss making subsidiaries and a five year Pioneer tax status in Nigeria, resulted in a group effective tax rate of 27%.

SHARE OF LOSSES FROM ASSOCIATES AND JOINT VENTURES

Oxigen India

The decline in the group’s share of losses in Oxigen India from R26 million to R7 million (73%) was attributed to increased revenues of 25% and reduced overheads of 40%, for their financial year ended 31 March 2010, reported in local currency. The growth in revenue emanated through the expansion of point of sale distribution sites and product innovation, which increased the bouquet of services available to consumers.

Ukash

The group’s share of this associate company’s losses was R8 million after the amortisation of intangible assets amounting to R1,4 million. Of these losses, R3,7 million related to the reversal of a deferred tax asset and R4,3 million to trading losses. The comparative share of losses of R2,3 million was for an eight month period, as equity in Ukash was purchased in October 2008.

CORE NET PROFIT

In computing core earnings per share, basic earnings are augmented by the amortisation of intangible assets amounting to R32 million.

DIVIDENDS

On 23 August 2010, the board approved a dividend of 12 cents per ordinary share. The dividend in respect of ordinary shares for the year ended 31 May 2010 of R91,288,072 has not been recognised in the summarised financial information as it was declared after this date. The salient dates are as follows:

Share certificates may not be dematerialised or rematerialised between Monday, 13 September 2010 and Friday, 17 September 2010, both days inclusive.

BALANCE SHEET

ASSETS

Total assets have accumulated to R4,45 billion, representing an increase of R568 million (15%).

Non-current assets

Current assets

Trade and other receivables increased by R89 million, maintaining collections at an average of 21 days. Inventory increased by R176 million equating to an average inventory turn of 13 days.

Cash on hand increased by R296 million and other current assets by R26 million.

CAPITAL AND RESERVES

Capital and reserves increased by the net profit for the year of R365 million and by the increase of R71 million in minorities interest. The purchase of treasury shares for R26 million, in line with the group’s share incentive scheme, confined the growth in reserves to R411 million.

LIABILITIES

Trade and other payables increased in tandem with volume growth by R200 million, with creditor terms averaging 40 days. The decline in taxation owing of R7 million, repayment of interest bearing debt of R18 million and the reduction in deferred taxation of R17 million, equated to a net increase in liabilities of R157 million.

CASH FLOW

Cash on hand increased by R298 million for the year.

Net cash flows generated from operations amounted to R623 million. On a comparative basis, this represented a decline of R123 million due to the application of cash to early settlement discounts in lieu of interest receivable at lower rates than the discounts earned.

The comparative reduction in interest rates and its consequent impact on net interest receivable, resulted in a further decline in comparative cash generation of R75 million, offset by a reduction in taxation paid of R47 million.

Of the resultant net cash flows generated from operating activities of R516 million, R91 million was expended on intangible assets and R104 million on property, plant and equipment.

A further R26 million was applied to the acquisition of the treasury shares. The net generation of cash of R298 million compounded the accumulation of cash resources at year end to R2,0 billion.

PROSPECTS

The establishment of Mobile Merchant Solutions will facilitate a new extension to the group’s point of sale footprint by securely integrating mobile channels into its core switch for the sale of prepaid products. This approach will provide pervasive, 24/7 capabilities to smaller merchants via mobile devices across a number of mobile channels, including USSD, WAP and On-Device applications. A seamless online offline experience will ensure continuity of service in areas of poor GPRS coverage.

The group has concluded a reseller agreement with Symantec, for the introduction of a protection product for Smartphones by utilising unique antivirus technology, advanced firewall and SMS anti-spam protection.

Africa Prepaid Services Nigeria has concluded distribution contracts with multiple networks in Nigeria, the benefits of which are anticipated to be derived in the forthcoming financial year.

The group intends to capitalise on its vast “real estate” of printed vouchers, by generating advertising revenue thereon. Oxigen India will roll out kiosk banking and mobile wallets via its web enabled retailers, in terms of an agreement with The State Bank of India. This will essentially facilitate virtual banking to the vast unbanked population.

SUBSEQUENT EVENTS

Subsequent to year end, a dividend has been declared and approved by the board.

AUDIT OPINION

The results for the year ended 31 May 2010 have been audited by PricewaterhouseCoopers Inc. and the unqualified audit opinion is available for inspection at the company’s registered office.

ANNUAL GENERAL MEETING

The annual general meeting will be held in Johannesburg on 12 October 2010. Further details will be included in Blue Label Telecoms’ annual report.

APPRECIATION

The Board of Directors of Blue Label Telecoms once again expresses its’ appreciation to its suppliers, customers, business partners and staff for their ongoing support and loyalty.

For and on behalf of the Board

Directors:

LM Nestadt (Chairman)*, BM Levy, MS Levy, K Ellerine*, GD Harlow*, NN Lazarus sc*, JS Mthimunye*, MV Pamensky, DB Rivkind, LM Tyalimpi*, P Mansour*# (*Non-Executive) (#American)