Material risks

The Group has identified the material risks that may have an impact on its operations. Each risk is detailed below, including its relevant strategic focus area and mitigation methodology.

execution and delivery of Cell C and 3G Mobile strategy

The Board and management are extremely disappointed in the performance of Cell C and, as at 31 May 2019, our entire investment into Cell C and our exposure in the SPV1 and 2 structures, was written down to zero.

We remain confident that Cell C will continue to operate. However, should this not be the case, it is anticipated that the loss in revenue from trading with Cell C ordinary business with the Group would equate to approximately a 25% reduction in net profit after tax. This business would however revert to the other mobile operators, in which case Blue Label is likely to be able to recover some of this business, albeit at a lower margin.

The transactions currently being considered by Cell C regarding the extended roaming agreement and recapitalisation are progressing well.

The 3G Group performed well for the year ending 31 May 2019, increasing revenue to R2.2 billion and core net profit by 42% to R278 million. TPC has taken a decision to dispose of the handset division of the 3G Group for a purchase consideration of R544 million. This transaction is subject to shareholder approval. The proceeds will be applied to reduce interest-bearing debt.

The remainder of the 3G Group, namely the Comm Equipment Company (CEC), will be retained by Blue Label by way of a dividend in specie. As at 31 May 2019 the CEC finance book totalled R3.1 billion. A major portion of this book will be unwound on a piecemeal basis, and the proceeds of which will be applied to further reduce Blue Label's interest-bearing debt.

CEC will focus on securing alternative funding initiatives through opportunities that avail themselves within the Blue Label Group.

Going concern and extension of bank facilities

The Board of Directors has evaluated the going concern assumption as at 31 May 2019 and considered it to be appropriate in the preparation of the financial statements.

The Prepaid Company's Investec banking facilities, which would have expired on 30 September 2019, have been extended to 29 November 2019 and discussions are in progress for a further extension beyond that date.

As at the date of the 31 May 2019 financial statements, the renegotiation of these facilities had not yet been completed, and although the directors are of the opinion that the facilities would be extended beyond November 2019, material uncertainty exists should these facilities not be extended.

In this event, certain liabilities within the Group would not be settled in the normal course of business. The directors are confident that the successful completion of the disposals of the handset division of the 3G Group and the Blue Label Mobile Group, as well as the unwinding of the material portion of the finance book of Comm Equipment Company will result in a significant reduction in interest-bearing debt and in turn the strengthening of the Group's balance sheet.

Increased threat of cybercrime

As a majority of the Group's inventory is of a virtual nature, defence against cybercrime will remain a top priority. The Group is dependent on the systems and platforms that it utilises to deliver its products and services, as well as manage its merchant base. In recent years, technology spend has been increasing in recognition of this key imperative to support not only organic and acquisitive growth in the business (and the concomitant rise in the number and type of transactions processed), but also to improve system availability and resilience. This invariably includes a major focus on the security of all systems, both production and enterprise, in order to suitably detect and manage security threats, as well as the ability to recover from damages due to cybersecurity breaches.

Independent third parties continue to conduct vulnerability scans and penetration tests to ensure that the systems are as secure as possible and that new threats are appropriately addressed.

Inadequate disaster recovery

The Group has developed proprietary technology supporting the roll out of its bouquet of products and services. Its infrastructure connects into some of South Africa's major banks, public and private utility companies and telecommunication operators. In addition, the Group switches both debit and credit cards, electronic funds transfer transactions and e-token products on behalf of the country's leading retailers and forecourt companies. The effective and continuous operation of these platforms is critical to the Group's service delivery.

The Group's business continuity, business recovery plans and IT disaster recovery plans provide guidance for emergency and crisis management, business recovery and disaster recovery including the restoration of IT facilities. Continuity and activation processes are catered for in accordance with the Group's business continuity plans.

The major goals of the recovery plans are to:

• minimise interruptions and limit damage to normal operations;
• minimise the economic impact of any interruptions;
• establish alternative means of operation in advance;
• train personnel on emergency procedures;
• provide for rapid restoration of service, ensuring availability/continuity of critical business operations; and
• communicate appropriately to relevant stakeholders.

Failure to implement business continuity

Business continuity plans (BCPs) are essential to ensure that the business is prepared for severe interruptions and that business processes can continue during a time of emergency or disaster with minimum downtime. BCPs need to be comprehensive, well-documented, readily available and tested periodically to ensure that they are relevant and up-to-date.

A lack of understanding and proper planning and implementation of business continuity can bring critical business processes to a halt and severely affect the business' reputation among our key stakeholders.

A business continuity management steering committee has been formed to ensure appropriate governance of business continuity. BCPs have been developed and we have begun conducting simulation exercises to validate the plans and to ensure that all staff are aware of their roles and responsibilities in the event of a disaster and other disruptive events like loadshedding.

Group-wide reconciliation and settlement process

The business processes large transaction volumes among multiple vendors and across various systems.

In order to prevent loss of revenue and minimise any customer dissatisfaction, we need to ensure that our reconciliation and settlement process is efficiently run.

All main reconciliations have been automated across the Group (Blue Label Distribution, The Prepaid Company, Cigicell and TicketPro) with the finance department daily resolving any partially matched and unmatched files. We continue to extend this capability across the Group.

Unethical behaviour and fraud

BLT has a zero tolerance towards fraud and irregularities with a requirement for all incidents to be investigated irrespective of the amount involved. In addition to cybercrime risk, the Group is susceptible to fraudulent activities.

The business has been targeted with a few incidents involving internal and external perpetrators. This was due to relaxed operational controls which have since been improved upon.

Plans are in place for the appointment of an internal fraud manager to build a more stringent and proactive approach to managing fraud. Fraud and ethics is reported on at the Group's Social, Ethics and Transformation Committee as well as the Audit, Risk and Compliance Committee which feeds into the Board Committee. The KPMG hotline remains available for the anonymous reporting of any suspicions of fraud.

Optimisation of B-BBEE Compliance

The challenge is to maintain and continuously improve on the B-BBEE contributor status level and scoring for the Group and all its subsidiaries. Our objective is to meet the procurement requirements and market demands of our customers so that we are able to remain competitive, especially where our trading or business-facing subsidiaries are concerned. Furthermore, we are exposed to ongoing and unforeseen changes in the B-BBEE legislation. We have appointed a dedicated resource to head up Group transformation and to take ownership of Group B-BBEE.

Potential theft of e-tokens of value

Our business has been strengthened by the high-volume, low-margin distribution and sale of e-tokens of value. E-tokens are a form of electronic cash used for secure transactions.

The potential theft of e-tokens of value and the increased threat of cybercrime need to be closely managed to ensure that virtual stock is not susceptible to theft or corruption of voucher pins. Confidentiality, integrity and availability of the virtual stock is managed through role-based access control, secure transfer of supplier/customer files and encryption with Hardware Security Modules (HSMs).

Supplier relationships (Network operators and utilities) including Cell C

Each subsidiary is highly dependent on its respective suppliers to achieve its business objectives.

There is a risk of customers (aggregators) with significant footprint in market dealing directly with the utilities. This can result in a loss of revenue as our customers become competitors.

In addition, there is a potential for network operators to launch applications whereby consumers are granted direct access to airtime purchases.

Top management continues to maintain a good track record with existing suppliers and to strengthen relationships.

Long-term contracts remain in place with suppliers, ensuring sustainable business.