Blue Label Telecoms might soon have its moment in the sun. There seems to be a lot more investor interest in the prepaid specialist after the recapitalisation of its biggest investment, Cell C.
As Cell C’s largest shareholder, Blue Label completed the long-awaited recapitalisation of the troubled mobile company in September 2022. South Africa’s fourth-largest mobile network operator has struggled to make a profit since it opened for business in 2001.
“It’s taken a while for Blue Label to clean up Cell C as well as its own balance sheet,” says Philip Short, senior equity analyst at Flagship Asset Management.
He says Blue Label has gone back to basics and simplified its business. “I think the trajectory on which Cell C has now embarked gives potential investors a better line of sight in determining whether it can be successful or not.”
Blue Label’s insistence on standing by the mobile operator, in which it bought a 45% stake in 2017, is the key reason many investors abandoned the once promising provider of prepaid airtime, electricity and ticketing. Blue Label’s shares peaked at R21 in October 2016 but now languish at 325c. Over the past five years, the shares have returned a negative 33.8%.
Before the 2022 recap, Cell C had long-term debt of R8.7bn, prompting Blue Label and Lesaka Technologies (formerly Net1), which previously had a 15% stake, to write down their combined R7.5bn investment to nil.
Cell C’s new CEO, Jorge Mendes, who took over on July 1, understands what this has done to Blue Label’s investment case.
“There’s been significant value erosion and destruction,” he tells IM. “Can I say it’s all attributed to Cell C? No. Can I say that it’s largely attributed to Cell C? Definitely. They [Blue Label] really believe in Cell C, and hence the recap — twice … taking on a bigger chunk [of Cell C], more debt and so on.
“From a financial perspective, there’s no question that if we fix Cell C, and we will, the Blue Label share will improve significantly.”
Four years after the writedown, Blue Label positively revalued the Cell C investment on its books to R962.5m, as it reported in its interim results in February. Consequently, investors appear to have a little more faith.
According to the group’s annual report, released at the end of September, Blue Label’s top shareholders include Allan Gray (13.75%), Shotput Investments (10.94%), Brett Levy (9.56%), Mark Levy (8.75%), Zarclear Securities Lending (5.62%), Sanlam Investment Management (4.93%) and Metal Industries Benefit Funds Administrators (Mibfa) (2.91%).
Mibfa has since upped its stake to 5.3% and Sanlam to 5%.
Even co-CEO Mark Levy has taken out his chequebook, buying an additional 950,000 shares in mid-September.
From a financial perspective, there’s no question that if we fix Cell C, and we will, the Blue Label share will improve significantly
— Jorge Mendes
For three years, the Levy brothers — who founded Blue Label in 2001 — were under pressure to complete the recap. They often argued that such action would finally give investors the chance to recognise Blue Label’s core business performance instead of being “punished” for Cell C.
The prepaid company is now gearing up to take control of the cellphone provider. Since the recapitalisation, Blue Label has increased its shareholding to 49.53%, with plans to push beyond 50% by year-end.
“Blue Label can’t remain in this position,” Brett Levy said as the group reported full-year earnings in August.
“It either has to sell down or it has to move into a position where it can actually get involved in the day-to-day and on the strategy. It’s not our intention to sell down. It’s our intention to get control.”
The group reported that revenue rose by R1.1bn to R18.9bn for the year to end-May 2023, amounting to growth of 6% for the past financial year. Including PIN-less top-ups, prepaid electricity, ticketing and gaming, the effective growth in revenue was R4.5bn, taking it to R76.8bn.
Blue Label said core headline earnings for the period were R402m, translating to 45.55c per share. In the previous comparable period, core headline earnings were R1.061bn, and the drop was largely due to the recapitalisation of Cell C.
Because Blue Label has written up the value of Cell C, it has had to recognise losses incurred by the mobile operator in the period since the writedown in 2019. These losses had gone unrecognised because the value of Cell C was zero.
Short says the bottom line is that Blue Label makes for a compelling investment in a market where most other companies are struggling.
He notes that within the core Blue Label business, gross gaming revenue is growing 72% year on year, while gross ticketing revenue is expanding 156%.
“These businesses are higher margin than the traditional prepaid airtime and electricity. So, you’re seeing a positive shift in business mix that will support earnings growth.
“On top of that, you have a strategic partnership between Cell C and Capitec as Capitec looks to defend itself from MTN and Vodacom moving into financial services, so Capitec is moving into the telco space; a trend we’re seeing globally where banks and telcos are offering a combined set of services.”
Short believes Capitec will be a strong partner for Cell C, giving the mobile operator access to banking clients via Capitec Connect, its mobile virtual network operator unit.
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