Blue Label Telecoms: Earnings Drop, Cell C Deal Impact

  • Blue Label Telecoms reports over 20% decrease in earnings for FY2023 compared to the previous year.
  • Recapitalization transaction with Cell C attributed to the earnings decline, including credit losses, financial instrument modifications.
  • Despite growth in core businesses, unexpected financial intricacies led to complex financial implications affecting earnings performance.

In a surprising turn of events, Blue Label Telecoms Limited has announced a significant decrease in its earnings for the fiscal year that ended on May 31, 2023. This announcement has sent shockwaves through the industry and raised questions about the factors that led to this unexpected downturn.

The trading statement released by the company reveals a stark contrast in performance compared to the previous fiscal year. Basic, headline, and core headline earnings per share for the stated period are projected to experience a decline of more than 20% when compared to the corresponding figures from the previous fiscal year.

MetricMay 2022 (cents per share)May 2023 (cents per share)Percentage Decrease
Earnings per share117.1384.31 – 89.0072% – 76%
Headline earnings per share117.3473.03 – 77.7262% – 66%
Core headline earnings per share121.0173.04 – 77.8860% – 64%

The implications of this downward trend are concerning, given the consistent growth Blue Label’s core businesses showcased in terms of revenue, gross profit, and core headline earnings per share throughout the fiscal year. Excluding extraneous contributions of R523 million in the current year and non-recurring income of R214 million in the prior year, core headline earnings witnessed a modest increase of R78 million (9%), reaching R925 million. Core headline earnings per share followed suit, experiencing a 9% rise from 96.56 cents per share in the previous year to 104.83 cents per share.

However, when both extraneous contributions and non-recurring income are excluded from both fiscal years, earnings per share and headline earnings per share displayed an 8% increase to 100.35 cents per share and a 9% increase to 101.24 cents per share, respectively.

The core headline earnings for the fiscal year ending May 31, 2023, amounted to R402 million, translating to core headline earnings of 45.55 cents per share. By contrast, in the same period of the previous fiscal year, the core headline earnings amounted to R1.061 billion, equivalent to core headline earnings of 121.01 cents per share.

These unexpected developments can be primarily attributed to a recapitalization transaction involving Cell C, a key player in the telecommunications landscape. This transaction brought about several intricate financial implications, including expected credit losses and fair value movements of R88 million. A loss of R57 million arose from the modification of a financial instrument, primarily due to the renegotiation and reclassification of the CEC deferral amount of R1.1 billion owed by Cell C, shifting it from ‘trade and other receivables’ to ‘loans to associates and joint ventures.’

Moreover, finance costs of R322 million emerged as a direct result of increased borrowings related to airtime sale and repurchase obligations, as well as the issuance of Class A Preference shares. On the flip side, finance income of R238 million stemmed from a loan extended to Cell C to support its debt funding requirements.

One notable highlight amidst the challenges was the partial reversal of R962.5 million in relation to the initial impairment of Blue Label’s investment in Cell C as of May 31, 2019. This reversal aligned with an improvement in the equity valuation of Cell C, signaling a potentially positive shift in the company’s prospects.

However, the challenges persisted as the Group recognized its share of Cell C’s net accumulated losses for the period spanning from June 1, 2019, to May 31, 2023, which was capped at R1.329 billion. This recognition encompassed the aggregate of the partial reversal of the initial impairment of R962.5 million of Blue Label’s investment in Cell C and additional investments totaling R366 million.

Blue Label Telecoms’ leadership addressed the decline in earnings and shed light on the complexities of the situation. The financial information forming the basis of this trading statement has not undergone review or audit by the Group’s auditors at the time of the statement’s release.

This development has generated concerns among shareholders and industry analysts alike, as they grapple with understanding the broader implications of the decrease in earnings. The news has prompted a reevaluation of the telecommunications landscape, particularly in the context of the ongoing transformation and competition within the industry.

The unexpected downturn in earnings serves as a reminder of the volatility and dynamic nature of the business landscape, even for well-established companies like Blue Label Telecoms. As the South African telecommunications sector navigates these challenges, industry participants will be closely watching how Blue Label responds to this situation and what strategies it employs to regain its financial footing.



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