Most important thing to look for in Blue Label’s financial results – MyBroadband

Blue Label Telecoms’ 2024 annual financial statements were so complicated that investors would be well-advised to focus on only one thing—dividends.

The results showed that Blue Label’s revenue declined from R18.9 billion to R14.6 billion and gross profit declined from R3.5 billion to R3.3 billion.

Despite the lower revenue and gross profit, its net profit after tax increased from R269 million to R647 million.

Earnings per share (EPS), headline earnings per share (HEPS), and core headline earnings per share (HEPS) also significantly increased.

As if that were not enough, Blue Label’s finance costs increased significantly, as did finance income.

Blue Label’s statement of cash flows is easier to understand and gives a better overview of the company’s performance.

The cash received from customers declined from R19.2 billion to R15.4 billion over the last financial year.

Between 1 June 2023 and 31 May 2024, Blue Label Telecoms had negative cash flow from operations of R300.6 million.

Simply put, it means its day-to-day business operations burned more cash in the period than what it generated.

It also had total net negative cashflows for the period after accounting for all financing, including debt and investing inflows and outflows and investing activities.

The total net negative cashflows brought Blue Label’s total cash balance down by R406.6 million from the previous period.

Therefore, Blue Label’s cash and cash equivalents fell from R1.3 billion in 2023 to R896 million in 2024.

Blue Label’s finances since acquiring a 45% stake in Cell C through its wholly-owned subsidiary, The Prepaid Company, do not look good.

Revenue declined from R26 billion to R14 billion and the company’s net income was highly erratic due to Cell C.

Blue Label’s very complicated financial statements

Blue Label’s financial statements and reports are notoriously complicated, convoluted, and difficult to understand.

After the Cell C acquisition, matters became worse. Blue Label created various special purpose vehicles (SPVs) with different functions.

The main aim of the numerous SPVs is to reduce Cell C’s credit risk, increase its liquidity, and restructure its financing. 

The sheer vastness and complexity of these SPVs make following Cell C and Blue Label’s performance overly complex and difficult.

The creation of these SPVs caused additional complexity related to the many inter-group transactions that take place between Blue Label, Cell C, and the SPVs.

These complex agreements and restructurings frequently result in additional line items regarding deferred revenues, finance income, and costs from various sources.

Investors must also keep track of the gains and losses from complex financial instruments related to Blue Label and Cell C, which is nearly impossible.

Wayne McCurrie from FNB Wealth and Investments said it is difficult to understand Blue Label’s results, even for financial professionals.

He joked that it would take a chartered accountant two years to understand the loans, special purpose vehicles, and guarantees related to Cell C.

David Shapiro from Sasfin Securities echoed McCurrie’s views, saying he does not fully understand Blue Label’s results.

He said the old Blue Label Telecoms, which bought and sold airtime bundles, was a good business. “The Levy brothers did a fantastic job,” he said.

However, when they decided to buy Cell C, the business deteriorated rapidly. “It drained the kitty, and continues to drain the kitty,” he said.

Smaller telecommunications players struggle to make money as they face numerous headwinds, including declining prices and increased competition.

“People are using more data. However, prices are coming down, which means revenue remains flat,” he said.

Cell C’s results clearly showed this. Its revenue declined from R11.9 billion to R11.3 billion over the last year.

The difficulty in understanding Blue Label’s results and its relationship with Cell C raises the question of what investors should look for.

Here, super-investor Warren Buffett’s comments that the only numbers you can trust in financial statements are page numbers and dividends paid out come to mind.

Two years ago, Blue Label co-CEO Brett Levy said when Cell C’s recapitalisation is concluded, it will free them to resume dividend payments and share buybacks.

Cell C’s recapitalisation is concluded, and investors should, therefore, assess Blue Label’s performance on this promise.

In its latest annual results, Blue Label announced that its board of directors has elected not to declare a dividend.