Financial Mail - Investors Monthly
A sobering assessment of Blue Label
Telecoms company insists Cell C purchase was a good idea, writes Marcia Klein
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