Financial Director's report

DEAN SUNTUP
Financial Director

The Group continues to increase market share and bolster its product and services mix to defend and grow its positions in the market.

Revenue of R17.8 billion*

Headline earnings of 117.34 centsper share
(2021: 86.16 cents per share)

Increase in gross profit margin from 12.66% to 16.46%

Increase in gross profit of 23% to R2.93 billion
(2021: R2.38 billion)

Core headline earnings of 121.01 cents per share**
(2021: 89.65 cents per share)

*	On inclusion of the gross amount generated on “PINless top-ups”, prepaid electricity, ticketing and gaming, the effective increase in revenue equated to 10% from R66.0 billion to R72.3 billion.
**	On exclusion of non-recurring income of R214 million in the current year and R47 million in the prior year, core headline earnings per share from continuing operations increased by 18% to 96.56 cents per share compared to 81.50 cents per share in the prior year.

Group results

Core headline earnings for the year ended 31 May 2022 amounted to R1.06 billion, equating to core headline earnings of 121.01 cents per share.

In the comparative year, core headline earnings amounted to R788 million, of which R763 million related to continuing operations and R25 million to discontinued operations. Core headline earnings amounted to 89.65 cents per share.

On exclusion of the non-recurring income of R214 million in the current year and R47 million in the prior year, as illustrated in the underlying tables, core headline earnings from continuing operations increased by R131 million from R716 million to R847 million (18%) and core headline earnings from continuing operations increased by 18% from 81.50 cents per share in the prior year to 96.56 cents per share. This growth was indicative of a robust trading performance by the Group during the year.

The non-recurring income of R214 million emanated from:

A net once-off recoupment of R123 million as a result of the previously reported fraudulent scheme. This recoupment income of R315 million comprised the aggregate value of assets either realised by or signed over to the Group. This amount was partially offset by professional fees and other costs incurred, taxation and the minority share thereon, totalling R192 million.
The accounting effects of the settlement of the contingent consideration relating to the disposal of the VAS operations to DNI 4PL Contracts Proprietary Limited (DNI) in April 2020. Of the sale proceeds of R450 million, R100 million was contingent upon Cell C passing the solvency and liquidity test. Given the prior uncertainty relating to the solvency and liquidity of Cell C, the fair value of the contingent consideration was determined to be R72 million. During May 2022, DNI waived the condition precedent relating to solvency and liquidity and accordingly settled the contingent consideration owing, inclusive of interest, totalling R118 million. This resulted in a gain of R46 million accounted for in other income.
The accounting implications of the put option obligation for the acquisition of up to 40% of the shares in Airvantage. Congruent with the favourable progress made regarding Cell C's recapitalisation and the impact on its going concern assumption as well as the unlikely event of the Airvantage put option being exercised against Blue Label, management has revised the estimate of the potential exposure from R68 million to R22 million, resulting in a fair value gain of R46 million.

On exclusion of the non-recurring income in the current and prior years, earnings per share and headline earnings per share from continuing operations increased by 20% to 92.68 cents per share and by 19% to 92.89 cents per share, respectively.

The financial results of WiConnect in the prior year of R25 million are disclosed in core headline earnings from discontinued operations, and is not included in the continuing operations' revenue, gross profit, earnings before interest, taxation, depreciation and amortisation (EBITDA), and net profit after taxation.

Revenue generated by the continuing operations within the Group declined by 5% to R17.8 billion. As only the gross profit earned on PINless top-ups, prepaid electricity, ticketing and gaming are recognised as revenue, on imputing the gross revenue generated thereon, the effective growth in revenue equated to 10% from R66.0 billion to R72.3 billion.

Gross profit increased by R548 million (23%) to R2.93 billion, congruent with an increase in margins from 12.66% to 16.46%.

Group income statement



	Group May 2022 R'000	Extraneous income* May 2022 R'000	Remaining May 2022 R'000	Group May 2021 R'000	Extraneous costs** May 2021 R'000	Remaining May 2021 R'000	Growth remaining R'000	Growth remaining %
Revenue	17 806 262	—	17 806 262	18 821 290	—	18 821 290	(1 015 028)	(5)
Gross profit	2 930 974	—	2 930 974	2 383 254	—	2 383 254	547 719	23
Other income	390 851	360 955	29 896	103 684	88 093	15 591	14 305	92
EBITDA	1 698 494	326 301	1 372 193	1 360 273	131 777	1 228 496	143 697	12
Non-controlling interest	(64 918)	(43 203)	(21 715)	(47 409)	—	(47 409)	25 694	54
Net profit from continuing operations	1 027 079	214 410	812 669	805 286	126 175	679 111	133 558	20
Core headline earnings	1 061 080	214 410	846 670	787 580	71 663	715 917	130 753	18
– From continuing operations	1 061 080	214 410	846 670	762 599	46 682	715 917	130 753	18
– From discontinued operations	—	—	—	24 981	24 981	—	—
Gross profit margin (%)	16.46		16.46	12.66		12.66
EBITDA margin (%)	9.54		7.71	7.23		6.23
Weighted average shares ('000)	876 857		876 857	878 463		878 463
Share performance from continuing operations
EPS (cents)	117.13		92.68	91.67		77.31	15.37	20
HEPS (cents)	117.34		92.89	83.32		78.01	14.88	19
Core HEPS (cents)	121.01		96.56	86.81		81.50	15.06	18

The extraneous contributions to Group earnings in the current year were attributable to once-off income(1), including:

−	once-off recoupment income, comprising the aggregate value of assets either realised by or signed over to the Group relating to the previously reported fraudulent scheme. This income was partially offset by professional fees and other costs incurred, taxation and the minority share thereon;
−	the accounting effects of the settlement of the contingent consideration relating to the disposal of the VAS operations in April 2020; and
−	the accounting implications of the put option obligation for the acquisition of up to 40% of the shares in Airvantage.


	Extraneous income* May 2022 R'000	Once-offs⁽¹⁾ May 2022 R'000
Other income	360 955	360 955
EBITDA	326 301	326 301
Non-controlling interest	(43 203)	(43 203)
Net profit from continuing operations	214 410	214 410
Core headline earnings from continuing operations	214 410	214 410

The extraneous contributions to Group earnings in the prior year were attributable to:

−	realised foreign exchange gains on the USD20 million liquidity support provided to SPV2⁽²⁾;
−	once-off income, including the disposal of the Group’s interest in Blue Label Mexico⁽³⁾; and
−	partial recoupment of losses by the Retail division as a result of the closure of the WiConnect stores⁽⁴⁾.

	Extraneous income** May 2021 R'000	Fair value movements⁽²⁾ May 2021 R'000	Once-offs⁽³⁾ May 2021 R'000	WiConnect⁽⁴⁾ May 2021 R'000
Other income	88 093	—	88 093	—
EBITDA	131 777	16 009	115 768	—
Net profit from continuing operations	126 175	16 961	109 214	—
Core headline earnings	71 663	16 961	29 721	24 981
– From continuing operations	46 382	16 961	29 721	—
– From discontinued operations	24 981	—	—	24 981

On exclusion of the R326 million relating to the non-recurring income in the current year and R132 million in the prior year, EBITDA increased by R144 million (12%) from R1.23 billion to R1.37 billion.

The anticipated increase in overheads included costs of R65 million attributable to new learnership initiatives in the current year and R10 million in the prior year. The benefit thereof is realised by way of income tax savings as a result of the section 12H allowances being claimed for such learnerships. On exclusion thereof in both the current and prior years, EBITDA increased by R199 million (16%).

Segmental report

Africa distribution


	May 2022 R'000	Extraneous income⁽¹⁾ May 2022 R'000	Remaining May 2022 R'000	May 2021 R'000	Extraneous costs ^{(2, 4)} May 2021 R'000	Remaining May 2021 R'000	Growth remaining R'000	Growth remaining %
Revenue	17 552 603	—	17 552 603	18 641 531	—	18 641 531	(1 088 928)	(6)
Gross profit	2 866 324	—	2 866 324	2 333 768	—	2 333 768	532 556	23
Other income	337 153	315 132	22 021	10 708	—	10 708	11 313	106
EBITDA	1 700 844	234 852	1 465 992	1 374 735	16 009	1 358 726	107 266	8
Non-controlling interest	(59 001)	(43 203)	(15 798)	(42 006)	—	(42 006)	26 205	62
Net profit from continuing operations	1 058 951	122 961	935 990	820 819	16 961	803 858	132 132	16
Core headline earnings	1 092 828	122 961	969 867	880 662	41 942	838 720	131 147	16
– From continuing operations	1 092 828	122 961	969 867	855 681	16 961	838 720	131 147	16
– From discontinued operations	—	—	—	24 981	24 981	—	—
Gross profit margin (%)	16.33		16.33	12.52		12.52
EBITDA margin (%)	9.69		8.35	7.37		7.29

Refer to above table for footnote⁽¹⁾, for footnotes⁽²⁾ and ⁽⁴⁾.

Revenue generated by the continuing operations within this segment declined by 6% from R18.6 billion to R17.6 billion. As only the gross profit earned on “PINless top-ups”, prepaid electricity, ticketing and gaming are recognised as revenue, on imputing the gross revenue generated thereon, the effective growth in revenue equated to 9% from R65.8 billion to R72.1 billion.

The Group continues to increase market share and bolster its product and services mix to defend and grow its positions in the market. Gross revenue generated on “PINless top-ups” increased by R1.7 billion (9%) from R19.3 billion to R21.0 billion.

Net commissions earned on the distribution of prepaid electricity increased by R18 million (7%) to R298 million. Revenue generated on behalf of the utilities increased by 18% from R26.7 billion to R31.5 billion.

Gross profit increased by R533 million (23%) to R2.87 billion, congruent with an increase in margins from 12.52% to 16.33%.

EBITDA in the current year included the non-recurring recoupment income, net of professional fees and other costs incurred, of R235 million attributable to the fraudulent scheme. Non‑recurring income in the prior year of R16 million pertained to foreign exchange gains on the USD20 million liquidity support provided to SPV2.

On exclusion of the non-recurring income in both the current and prior years, and despite an anticipated increase in overheads, EBITDA increased by R107 million (8%) from R1.36 billion to R1.47 billion.

The anticipated increase in overheads included costs of R53 million attributable to new learnership initiatives in the current year, whereby the benefit thereof is realised by way of income tax savings as a result of the section 12H allowances being claimed for such learnerships. On exclusion thereof, EBITDA increased by R160 million (12%).

Core headline earnings from continuing operations reflected non-recurring income of R123 million in the current year relating to the net recoupment as a result of the fraudulent scheme and R16 million in the prior year pertaining to the foreign exchange gains on the USD20 million SPV2 liquidity support.

On exclusion of the above non-recurring income in the current and prior years, core headline earnings from continuing operations increased by R131 million (16%) from R839 million to R970 million.

Solutions

This segment comprises Datacel, Blue Label Data Solutions (BLDS), the data aggregation and lead generation entity in which the Group owns 81%, and a 50% joint venture shareholding owned by BLDS in iTalk Holdings and an effective 37.5% in iTalk Financial Services (joint venture), both of which are outbound call centre operations.

As at 1 June 2021, the Group incorporated the following additional companies, namely Blue Train, Blue Label Communications, One World Telecoms and iTalk2U.



	May 2022 R'000	May 2021 R'000	Growth remaining R'000	Growth remaining %
Revenue	253 659	179 759	73 900	41
Gross profit	64 649	49 486	15 163	31
EBITDA	27 503	16 746	10 757	64
Share of profits from associates and joint ventures	6 364	5 722	642	11
Core headline earnings	29 487	21.411	8 076	38
Gross profit margin (%)	25.49	27.53
EBITDA margin (%)	10.84	9.32

Escalating demand for aggregated data and lead generations resulted in an increase in revenue of 41% from R180 million to R254 million.

Gross profit increased by R15 million (31%) from R49 million to R65 million, congruent with the increase in revenue albeit at lower margins from 27.53% to 25.49%.

EBITDA increased by R11 million (64%) from R17 million to R28 million, of which BLDS contributed R26 million, and the call centre operations R2 million. BLDS contributed R16 million, and the call centre operations R1 million in the prior year.

Contribution to Group core headline earnings increased by R8 million (38%) from R21 million to R29 million. Of the latter amount, BLDS accounted for R23 million. iTalk Holdings and iTalk Financial Services generated earnings of R12.1 million, of which the Group’s share thereof amounted to R5.1 million. Of the core headline earnings of R21 million in the prior year, BLDS accounted for R16 million. iTalk Holdings and iTalk Financial Services generated earnings of R11.5 million, of which the Group’s share thereof amounted to R4.6 million.

Corporate


	May 2022 R'000	Extraneous income May 2022 R'000	Remaining May 2022 R'000	May 2021 R'000	Extraneous costs May 2021 R'000	Remaining May 2021 R'000	Growth remaining R'000	Growth remaining %
Other income	51 565	45 823	5 742	11 436	8 600	2 836	(2 906)	102
EBITDA	(41 621)	92 002	(133 626)	(82 033)	43 151	(125 184)	(8 439)	(7)
Net loss from continuing operations	(70 580)	92 002	(162 582)	(104 965)	43 151	(148 116)	(14 466)	(10)
Core headline earnings	(70 884)	92 002	(162 886)	(103 021)	43 151	(146 172)	(16 714)	(11)

On exclusion of the extraneous income in the current and prior years, the negative contribution to Group core headline earnings increased by R17 million (11%) to R163 million.

The extraneous income of R92 million in the current year related to the accounting effects of the settlement of the contingent consideration relating to the disposal of the VAS operations in April 2020 and the accounting implications of the put option obligation for the acquisition of up to 40% of the shares in Airvantage.

Depreciation and amortisation

Depreciation, amortisation and impairment charges decreased by R15 million to R174 million. Of the latter amount, R65 million (2021: R65 million) pertained to depreciation on capital expenditure; R29 million (2021: R29 million) to depreciation raised in terms of IFRS 16 - Leases; R4 million (2021: R6 million) to impairments; and R76 million (2021: R88 million) to the amortisation of intangible assets, of which R43 million (2021: R43 million) emanated from purchase price allocations on historical acquisitions.

Net finance costs

Finance costs totalled R201 million, of which interest paid on borrowed funds amounted to R187 million and R6 million to the unwinding on the lease liability in terms of IFRS 16. On a comparative basis, finance costs amounted to R132 million, comprising interest paid on borrowed funds of R117 million and R9 million on the unwinding on the lease liability.

Comm Equipment Company Proprietary Limited concluded a working capital financing facility with African Bank of R1.9 billion during the current financial year, of which R1.6 billion was utilised at year-end. This resulted in an increase in finance costs of R80 million, offset by a reduction in finance costs attributable to a decline in the Investec Bank facility.

Finance income totalled R81 million, of which R70 million was for interest received on cash resources and R6 million on loans granted. In the prior year, interest received on cash resources amounted to R51 million and interest on loans granted amounted to R4 million.

Statement of financial position

Total assets increased by R1.9 billion to R13.3 billion, of which non-current assets accounted for R0.7 billion and current assets for R1.2 billion.

Non-current assets included increases in intangible assets and goodwill of R614 million; investments in and loans to associates and joint ventures of R36 million; financial assets at fair value through profit or loss of R58 million; deferred tax assets of R8 million; loans receivable of R5 million; capital expenditure net of depreciation of R1 million; and financial assets at fair value through other comprehensive income of R2 million. These increases were offset by decreases in advances to customers of R23 million and right-of-use assets of R22 million.

Of the net increase in intangible assets and goodwill of R614 million, additions to intangible assets amounted to R952 million offset by amortisation of R338 million. Of the total additions to intangible assets, R693 million relates to costs borne by the Group in terms of a subscription income-sharing arrangement and R212 million to subscriber acquisition costs.

The net increase of R46.4 million in investments and loans to associates and joint ventures comprised the Group's net share of profits totalling R8 million, acquisition of further shares in an associate of R17.7 million, net loan increases of R25.8 million and its share of the movements in the foreign currency translation reserve amounting to R1.3 million, offset by a dilution of its holding in a joint venture of R0.5 million and dividends received of R5.8 million.

The material net increase in current assets included increases in trade and other receivables of R991 million, cash and cash equivalents of R306 million and inventory of R177 million, offset by decreases in advances to customers of R122 million and financial assets at fair value through profit and loss of R130 million.

The stock turn equated to 28 days compared to 22 days for the financial year ended 31 May 2021.

The debtor's collection period increased to 79 days compared to 59 days for the financial year ended 31 May 2021. On exclusion of the trade debtors relating to CEC, the debtor's collection period remained unchanged at 28 days. CEC's trade debtors predominantly related to amounts due from Cell C, which will be settled down to an amount of R1.1 billion on the recapitalisation of Cell C.

Net profit attributable to equity holders amounted to R1.03 billion, contributing to accumulated capital and reserves of R4.2 billion.

Non-current liabilities increased by R546 million, comprising an increase in borrowings of R472 million and deferred taxation liabilities of R105 million, offset by a decrease in lease liabilities of R31 million.

Current liabilities increased by R378 million, including increases in trade and other payables of R94 million, deferred revenue of R36 million, and borrowings of R390 million. This increase was offset by a decrease in financial guarantee contracts of R106 million and financial liabilities at fair value through profit and loss of R47 million. Average credit terms from continuing operations equating to 124 days (2021: 116 days).

The decrease in financial guarantee contracts of R106 million was due to the settlement of an amount owing by Glocell Proprietary Limited to Investec Bank Limited that was guaranteed by Glocell Distribution Proprietary Limited, congruent with the buyout of the latter's non-controlling interest in the current year.

Statement of cash flows

Cash generated from trading operations totalled R935 million. Working capital movements comprised an increase in trade payables of R45 million and a decrease in advances to customers of R145 million, offset by an increase in trade receivables of R847 million and an increase in inventory of R181 million. After incurring net finance costs and taxation, net cash generated from operating activities amounted to R649 million.

Net cash flows utilised in investing activities amounted to R1.0 billion, primarily attributable to the purchase of intangible assets of R1.0 billion, capital expenditure of R78 million, the acquisition of further shares in an associate of R15 million and net loans granted of R38 million, offset by the receipt of R117 million contingent consideration relating to the disposal of the VAS operations in April 2020. Of the R1.0 billion invested in intangible assets, R928 million related to costs borne by the Group in terms of the subscription income-sharing arrangement.

Cash flows generated from financing activities amounted to R668 million, of which R756 million related to the net increase in borrowings, offset by R38 million to lease payments, R30 million to dividend payments to non-controlling interests, R11 million to the acquisition of non-controlling interest and R9 million to the purchase of treasury shares.

Cash and cash equivalents accumulated to R2.7 billion at 31 May 2022.

Dividend

The Board of Directors has elected not to declare a dividend.

Directors interest

There were no changes to the number of shares held directly or indirectly by the Directors between the end of the financial period and the date of approval of the annual financial statements.

Appreciation

We wish to express our appreciation to our staff, suppliers, customers and business partners for their continued support and commitment to the Group.

DA Suntup CA(SA)
Financial Director

30 September 2022