How en­gag­ing is Blue La­bel Tele­coms?

Financial Mail - Investors Monthly - - Front Page - Larry Claasen

Though Blue La­bel Tele­coms is listed on the JSE as a Wire­less Tele­com Ser­vice, it is not like its com­pan­ions in the sec­tor, MTN and Vo­da­com.

It sells air­time and other elec­tronic prod­ucts such as pre­paid elec­tric­ity — but a closer look might sug­gest a bet­ter com­par­i­son with US rail­road com­pa­nies of the 1860s, when rail­way ty­coons were rac­ing to lay tracks across a con­ti­nent.

Blue La­bel is try­ing to do some­thing sim­i­lar. But in­stead of lay­ing rail­way tracks, it is rolling out a vast net­work of point-of-sale (POS) de­vices that al­low peo­ple to buy pre­paid air­time, elec­tric­ity and so forth.

In SA, Blue La­bel has set up a net­work of 150,000 of th­ese de­vices, the bulk of them in the in­for­mal mar­ket (ac­count­ing for 87% of rev­enue).

Its lat­est num­bers show that rev­enue rose 24% to R12.6bn and gross profit jumped 14% to R795m for its SA op­er­a­tion for the half year to end Novem­ber.

The net­work is clearly pay­ing off for Blue La­bel, and it has an ad­van­tage over its rail ty­coon pre­de­ces­sors — no com­pe­ti­tion.

Mo­bile op­er­a­tors have the op­tion of set­ting up their own air­time distri­bu­tion net­work, but do­ing so would be ex­pen­sive and time con­sum­ing.

They have been happy to lever­age off Blue La­bel’s net­work. And hav­ing all the tele­com op­er­a­tors on its net­work works well for Blue La­bel, as it means it gets a bet­ter re­turn on its as­sets.

This happy ar­range­ment, how­ever, could be un­der threat. Late last year Blue La­bel sur­prised many by say­ing it was look­ing to take a 35% hold­ing in Cell C in a R4bn deal. If the Cell C deal went ahead, it would make Blue La­bel a share­holder in a com­pany that is a di­rect com­peti­tor to some of its big­gest clients — Vo­da­com and MTN.

The ques­tion is now whether the pair would be com­fort­able with such an ar­range­ment.

Al­phaWealth fund man­ager Keith McLach­lan says given Blue La­bel’s po­si­tion in the mar­ket, he does not think Vo­da­com and MTN could sink the deal even if they wanted to.

The deal could be a good one for both Cell C and Blue La­bel be­cause Blue La­bel’s founders and joint CEOs, broth­ers Brett and Mark Levy, have ex­ten­sive knowl­edge of SA and could play a telling role in pro­vid­ing strate­gic in­put for Cell C.

In the mean­time, Blue La­bel is try­ing to repli­cate its net­works in In­dia and Mex­ico.

In In­dia, it has rolled out 200,000 POS de­vices since it went into part­ner­ship with Ox­i­gen Ser­vices In­dia in 2003.

In com­par­i­son with its SA oper­a­tions, its In­dian divi­sion has leapt ahead. McLach­lan says the ques­tion for the group is whether it should de­clare it­self big enough, stop its roll-out of POS de­vices and just profit from its oper­a­tions there.

The poser for Blue La­bel is that if it stops rolling out de­vices now, it would save a lot of money but also walk away from an op­por­tu­nity to be­come dom­i­nant in elec­tronic distri­bu­tion in the way Visa and Mastercard are when it comes to pay­ments, says McLach­lan.

The way he views it, Blue La­bel is do­ing a land grab — but it will take an­other five to 10 years to see it pay off.

McLach­lan notes that air­time sales make up a smaller part of its busi­ness in In­dia than in SA. The frac­tured na­ture of the In­dian mo­bile phone mar­ket has made it dif­fi­cult for Blue La­bel to dom­i­nate air­time distri­bu­tion in the way it does in SA.

The real driver of its growth has been its fi­nan­cial ser­vices, such as money trans­fer. Blue La­bel’s an­nual re­port points out: “Ox­i­gen Ser­vices In­dia con­tin­ues to ben­e­fit from the coun­try’s ex­po­nen­tial growth in e-com­merce and m-com­merce, as the busi­ness cap­i­talises on its strate­gic shift into fi­nan­cial ser­vices. In this dy­namic mar­ket, re­cent M&A deals have re­in­forced the value of Ox­i­gen’s distri­bu­tion net­work and bank­ing-en­abled in­fra­struc­ture.”

PwC backs this view. It says the e-com­merce mar­ket has dou­bled from US$9.5bn in 2012 to an es­ti­mated $21.3bn in 2015.

Just as the In­dian op­er­a­tion, Blue La­bel’s Mex­i­can op­er­a­tion has been built up with con­sid­er­able pa­tience.

It was started there in 2008, has 640,000 POS de­vices set up — and a fur­ther 50,000 are ready to roll out — but has yet to turn a profit. The po­ten­tial of the Mex­i­can mar­ket is ex­cit­ing, con­sid­er­ing that the coun­try has a cell­phone pen­e­tra­tion of about 67% in a mar­ket serv­ing a pop­u­la­tion of about 121m peo­ple.

McLach­lan says that once it has a dom­i­nant foot­print, it will no longer have roll-out cost and will pro­duce “a hockey stick growth” curve.

There is lot to like about Blue La­bel — it gen­er­ates heaps of cash and has found new growth ar­eas in SA while main­tain­ing fo­cus on grow­ing for­eign oper­a­tions. At R16.40/share and a for­ward p:e of 17 there might not be much up­side left. But for those look­ing to buy and hold a stake in a com­pany of­fer­ing a ser­vice that could be­come as ubiq­ui­tous as card pay­ments, now could be the time to en­gage.

Just as the In­dian op­er­a­tion, Blue La­bel’s Mex­i­can op­er­a­tion has been built up with con­sid­er­able pa­tience

Source: IRESS

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