A sober­ing as­sess­ment of Blue La­bel

Tele­coms com­pany in­sists Cell C pur­chase was a good idea, writes Mar­cia Klein

Financial Mail - Investors Monthly - - Front Page -

MTN’s lat­est Nige­ria woes, which sliced 23% off its share price in one day, took some of the fo­cus off Blue La­bel Tele­coms, the tele­com sec­tor’s lag­gard.

The MTN di­ver­sion may have mo­men­tar­ily sti­fled some of the neg­a­tive noise around Blue La­bel, but did noth­ing to con­tain the slide in its share price. It has lost two-thirds of its value over the past year and 35% in the past month.

It was once a ris­ing star on the JSE, reach­ing more than R20 in Oc­to­ber 2016. Since then, the trend has been down, and its cur­rent price of R6 is where it was trad­ing in 2012.

It is true that the tele­coms sec­tor has been ham­mered this year — MTN’s share price dropped 42% over a year and 37% over the past month, while Vo­da­com lost 26% over a year and 13% over the past month.

Blue La­bel is a much smaller player, with higher risk, even tak­ing MTN’s Nige­rian trou­bles into con­sid­er­a­tion. But re­cent ac­qui­si­tions, suc­cess­ful fundrais­ing, pos­i­tive re­sults and a new roam­ing deal have done lit­tle to sway in­vestors.

In Au­gust last year Blue La­bel bought 45% of Cell C for R5.5bn and 47.37% of 3G Mo­bile for R900m, fol­lowed in 2018 by the re­main­ing stake in 3G for R1bn and 60% of Air­van­tage, a lo­cal fin­tech com­pany, for R151m.

In its re­sults for the year to end-May, core head­line earn­ings grew 30% to over R1bn, or by 4% to R120.61 on a per­share ba­sis af­ter di­lu­tion from the is­sue of 272-mil­lion shares to partly fund ac­qui­si­tions, a re­sult which saw an im­me­di­ate fall in its share price and about R1bn wiped off its mar­ket cap.

Rev­enue grew marginally to R26.8bn and earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion (ebitda) were 4% up at R1.34bn.

Blue La­bel’s share of Cell C’s prof­its amounted to R569m (trad­ing losses off­set by the recog­ni­tion of a de­ferred tax as­set). Its share of 3G’s prof­its was R157m. Di­rec­tors said rev­enue would have been up 9% if rev­enue from “PIN-less” top­ups were in­cluded. Only gross profit earned on these top-ups are recog­nised.

Blue La­bel said its NAV per share in­creased by 35% to R9.88 — well off its cur­rent share price.

At the in­terim stage, di­rec­tors said the Cell C ac­qui­si­tion was “a com­pelling value propo­si­tion”. By year-end, Cell C had shown some im­prove­ment, but debt was not re­duced to guided lev­els, send­ing Blue La­bel’s price down even be­fore it re­ported its own re­sults.

In­vestors are scep­ti­cal about its ac­qui­si­tions, specif­i­cally the loss-mak­ing and debt-laden Cell C. Joint CEO Mark Levy said ac­qui­si­tions were de­lib­er­ate and cal­cu­lated, and while done at great cost would bring ver­ti­cal in­te­gra­tion and economies of scale.

An­other ac­qui­si­tion was 3G Mo­bile, which dis­trib­utes and fi­nances mo­bile de­vices and hand­sets to re­tail­ers and cel­lu­lar net­work providers, and is to pro­vide value-added ser­vices to Cell C and its own cus­tomer base. Cell C has also an­nounced a roam­ing agree­ment with MTN. All its deals ap­pear to set up Blue La­bel as a di­ver­si­fied tele­coms group with grow­ing economies of scale.

Joint CEO Brett Levy said that in his opin­ion, Cell C is a com­pany that is eight months old, and he could not un­der­stand peo­ple say­ing it was do­ing badly when there was noth­ing to com­pare its per­for­mance to.

Cell C’s ser­vice rev­enue was up 11%, but its net loss was R600m, against R1bn last year. “We are bet­ter by 33%,” he said. Ac­tual losses ex­clud­ing a once-

off for­eign ex­change loss would have been R260m.

Com­ment­ing on lower hand­set sales, he said: “We are down on hand­sets be­cause we are not go­ing to be in the dog­fight,” adding that sub­sidised hand­sets don’t trans­late into profit. Sim­i­larly, with re­duced data sub­scribers, Cell C was not go­ing to fol­low the herd and dis­count.

Net debt of R7.2bn was only marginally higher than the pre­vi­ous year, he said.

De­spite di­rec­tors’ op­ti­mism, the mar­ket is clearly strug­gling to see the ben­e­fits of its ac­qui­si­tions and strat­egy.

The share price re­flects the gen­eral pres­sure on SA mo­bile op­er­a­tors as well as com­pa­nyspe­cific risks, says Mer­gence In­vest­ment Man­agers port­fo­lio man­ager Peter Takaen­desa.

“The pro­posed mo­bile data reg­u­la­tions, de­lays in broad­band spec­trum al­lo­ca­tion and a weaker con­sumer en­vi­ron­ment have dented in­vestor con­fi­dence on the prospects of the SA mo­bile sec­tor,” he says.

Blue La­bel’s share has been on a down­ward trend since it bought Cell C, in­di­cat­ing that the mar­ket may have re­alised the long-term risk of it “be­com­ing a sig­nif­i­cant share­holder in a smaller mo­bile op­er­a­tor that has no clear com­pet­i­tive ad­van­tage in a mar­ket dom­i­nated by well­re­sourced first movers” in the form of Vo­da­com and MTN.

Cell C can gain mar­ket share from time to time as one of the big­ger play­ers is caught nap­ping, “but it will be very dif­fi­cult to sus­tain longer term as the big­ger op­er­a­tors will sim­ply out­spend it on net­work in­vest­ment, dis­tri­bu­tion and com­pet­ing for ta­lent”.

Ni­cola White, head of in­vestor re­la­tions at Blue La­bel, says there “is no fun­da­men­tal news out there” that’s caus­ing pres­sure on the share price.

“Speak­ing to a num­ber of fund man­agers, we un­der­stand that emerg­ing mar­kets are un­der pres­sure and the telcos sec­tor is not the flavour of the month. The sec­tor is viewed as low growth, with reg­u­la­tory un­cer­tainty and gov­ern­ment in­ter­fer­ence.”

She says Vo­da­com and MTN are more liq­uid and there is some un­cer­tainty in the mar­ket over the Cell C in­vest­ment, which adds ad­di­tional risk to an in­vest­ment in Blue La­bel.

“There is some in­vestor con­cern that be­cause Cell C is not listed, they do not have all the fi­nan­cial de­tails or his­tory, and they are con­cerned about debt lev­els and whether Cell C will con­tinue in­creas­ing rev­enue and ebitda,” she says.

“How­ever, Blue La­bel it­self is a sta­ble, re­ally great com­pany which is do­ing well, and we hope to show the po­ten­tial that Cell C has.”

A list­ing for Cell C has been mooted. White says Cell C has great po­ten­tial to turn around, and if list­ing pro­ceeds are used to re­duce debt, it be­comes im­me­di­ately prof­itable.

The list­ing could take time, given the reg­u­la­tory un­cer­tainty and weaker in­vestor sen­ti­ment to­wards the lo­cal mo­bile mar­ket, Takaen­desa says. A good price on list­ing would help Blue La­bel de-risk its in­creased ex­po­sure to the SA mo­bile mar­ket as well as longterm risks as­so­ci­ated with Cell C, he says.

Blue La­bel re­mains con- vinced Cell C was a good deal. White says Cell C was a dis­tressed as­set which the group could ac­quire at a rea­son­able mul­ti­ple, and turn around.

Among in­vestors’ con­cerns is where growth will come from as SA tele­coms com­pa­nies strug­gle to grow rev­enue in an over­traded mar­ket where there is grow­ing pres­sure to bring high data costs down.

Re­cent reg­u­la­tion forc­ing them to roll over un­used data was a vic­tory for cus­tomers, but bad news for com­pa­nies.

White says tele­coms com­pa­nies are look­ing at con­tent, among other things, to in­no­vate and grow. “The real game is go­ing to be about in­no­va­tion and prod­uct de­vel­op­ment and Cell C is fo­cused on that.”

The ques­tion is whether there is enough rea­son to be­lieve this will change the for­tunes of SA telcos, and Blue La­bel specif­i­cally, which is al­ways on the back foot rel­a­tive to its big­ger ri­vals.

The ac­qui­si­tions of Cell C and 3G sig­nif­i­cantly in­creased Blue La­bel’s ex­po­sure to the slow­ing SA mo­bile mar­ket, says Takaen­desa, “so we be­lieve its for­tunes will largely be linked to that mar­ket”.

It car­ries a higher risk rel­a­tive to the larger play­ers, which are also its key sup­pli­ers in the core air­time dis­tri­bu­tion busi­ness, he says.

While Blue La­bel may ex­tract syn­er­gies from com­bin­ing op­er­a­tions, suc­cess over the long term will prove chal­leng­ing. Ad­di­tion­ally, in­ter­na­tional ex­pan­sion has failed to de­liver strong re­turns, he says.

The Ox­i­gen in­vest­ment, pre­vi­ously ac­counted for as in­vest­ments in as­so­ci­ates and joint ven­ture, is now ac­counted for as ven­ture cap­i­tal in­vest­ments at fair value. The net re­sult is that it had a neg­a­tive im­pact on full-year re­sults. From a pos­i­tive R35m con­tri­bu­tion in the prior year, a down­ward fair value move­ment of R173m, de­ferred tax of R3m and a net loan im­pair­ment of R87m re­sulted in a R257m drain on earn­ings. The group’s share of losses in Blue La­bel Mex­ico was R21.9m from R37m a year ago.

White says the Cell C, 3G and Air­van­tage ac­qui­si­tions con­sti­tute dif­fer­ent el­e­ments of an ecosys­tem Blue La­bel is build­ing.

“It is all about the qual­ity of the in­te­gra­tion we can pro­vide.”

In­vestors are not nec­es­sar­ily see­ing this qual­ity. Mer­gence does not hold the stock, pre­fer­ring ex­po­sure “to the high­qual­ity large telcos.”

Brett Levy said that when it comes to sen­ti­ment on the Cell C ac­qui­si­tion, “the pun­ish­ment does not fit the crime”.

Bar­ring Blue La­bel com­ing up with an in­no­va­tion to rock the mo­bile world, it may find it dif­fi­cult to shift sen­ti­ment and it may just con­tinue to get pun­ished.

Among in­vestors’ con­cerns is where growth will come from as tele­coms com­pa­nies strug­gle to grow rev­enue

Pic­ture: TOM SAATER/BLOOMBERG

A man passes an MTN bus-stop ad­ver­tise­ment and road­side kiosk in La­gos, Nige­ria.

Pic­ture: BUSI­NESS DAY

Blue La­bel Tele­coms joint CEOs Mark (left) and Brett Levy.

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