How engaging is Blue Label Telecoms?

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