Blue Label in recovery mode after writing down Cell C investment
Cell C chief financial officer Zaf Mahomed said the review of the product portfolio and an increased focus on retail pricing were in pursuit of profitability. “For a long time, we were chasing customers at all costs. What we have discovered is that we ended up with a lot of traffic on our network. We ended up with congestion on our network and bad customer experience. What we have tried to do is to move away from chasing customers at all costs. We are focusing much more on profitable customers,” said Mohamed.
Blue Label wrote down the carrying value of its Cell C investment to zero in May 2019, and Cell C did not have any impact on Blue Label’s earnings for the half-year to December.
Blue Label, which was founded by the Levy brothers, Mark and Brett, in 2001, recorded a 2percent growth in revenue from the continuing operations to R11.5billion last year, from R11.2bn in 2018.
Joint chief executive Brett Levy said the group had been resilient in a difficult economy. “The impact of the economy can be seen in our retail market as growth slows. South Africa had a tough six months until November last year. The next six months are going to be very tricky in South Africa,” Levy said.
Peter Takaendesa, the head of equities at Mergence Investment Managers, said although Blue Label had written off their full equity ownership in Cell C, there was still significant operational links that could cause problems for the company if Cell C reached the point of shutting its doors. “This is unlikely to happen over the near term, given allocated spectrum shortage in South Africa, but one cannot rule out the possibility of such an event after new spectrum becomes available,” Takaendesa said.
Blue Label said it remained committed to its back-to-basics approach, in order to ensure the reduction of debt and improved cash generation. “Traditional airtime and data remain the group’s majority contributors. A determined focus on enhancing our non-telco product portfolio and electricity capability now sees these business lines contributing 43percent of the group’s gross profit,” it said.
Blue Label’s net commissions on the distribution of prepaid electricity were R150m. Revenue generated on behalf of the utilities increased by 14percent to R11.4bn from R10bn a year earlier, as the group continued to drive penetration into its municipal pre-paid utilities market.
Takaendesa said: “While there are still significant risks on the balance sheet, questions on the long-term sustainability of the distribution business model and around the management team having made huge mistakes in the past - such as Cell C and international expansion - we believe they are now moving in the right direction by focusing on their core operations at home and selling non-core assets to strengthen the balance sheet.”
Blue Label shares rose 1.22percent on the JSE to close at R2.48 on Friday.