Blue Label shares take hit on results – sanity will prevail; it’s one of JSE’s most exciting prospects

I first met the brothers Levy of Blue Label Telecoms in late 2007. They floated their business during the JSE’s most recent new listings boom with backing from some of

Johannesburg’s shrewdest financiers, including board chairman Larry Nestadt (whose shares at listing were worth R56m); the late Sidney Ellerine (R118m) and Neil Lazarus (52m). From the funds raised at listing, Mark Levy, then all of 36 years old, banked R92m and his then 32 year old brother Brett a hefty  R67m. There was no worries about them riding off into the sunset. Each of them still owned shares worth over R500m. One of the keys to the listing’s success was a R600m investment by Microsoft for a 12% equity stake. That added the kind of credibility money can’t buy. Potential investors clamoured for the R1bn in stock that was privately placed at 56 times the previous year’s earnings. The hype didn’t last long. After ending its debut session in November 2007 at 860c, the shared climbed to a peak of 925c in January 2008. But when the market later ran out of steam, Blue Label was one of the hardest hit of the newcomers, halving in value by October of that year. Since then it’s been a long hard climb. Earlier this year the price finally got past its first day’s closing level, trading briefly up to 875c. But it’s back below 800c again, hit hard by traders after the release of today’s financial results for the year to end May. At the time Mark and Brett came into the CNBC Africa Studio for Power Lunch, the shares were the biggest loser of the JSE’s three figure stocks (priced 100c of more). By the close, this loss had been trimmed from 7% to 4%. Punters might have been expecting more than the 17% like-for-like earnings improvement and a 25c dividend payment. But for me there’s a lot to like about Blue Label. Microsoft may have sold out in late 2011, but the Levy brothers are very much in the building. And as you’ll see in the video, show no lack of conviction. They’ve got a fabulous platform in the virtual payment world and, as Mark let slip in our interview, are about to announce another big deal (“we’ve signed agreements…….with Visa or Mastercard….big announcement shortly”). The young entrepreneurs have matured. And so has their business.  There’s huge promise in the Indian and Mexican projects. And they keep finding great ideas to exploit in their home base. Like the pinless-top up alternative to prepaid airtime (gross profit 2013: R997m from R177m in 2012) and pre-paid electricity (2013 GP: R113m from 2012’s R28m). There’s also a R1bn damages claim in the lawsuit against MultiLinks to lessen the pain of the failed Nigerian adventure. Few would have believed in November 2007 that six years later you’d be able to buy the stock cheaper. It may have been overvalued back then. But it’s surely offering value now. Despite the traders’ initial view of today’s numbers. – AH  

Watch the video of my CNBC Africa interview with Mark and Brett by clicking here.

ALEC HOGG: It’s quite interesting on that score, that Tumisho has told us about Grand Parade Investments; it’s only five days late, because five days ago Business Day Newspaper had the story that they were going to be looking, or Grand Parade was looking to do a deal with Piermont Global; I guess the pressure on Grand Parade has mounted to the degree that they’ve now come out with an official announcement. Well, maybe they could have come out a little earlier next time, Mr Adams. But joining us now to unpack the numbers on the company that did worst on the JSE this morning are joint CEOs Brett and Mark Levy. The company, of course is Blue Label Telecoms, well-known brothers, about the only joint CEOs who survive nowadays, apart from Standard Bank. It’s okay to be brothers and to be joint CEOs, I guess, but have you seen any other joint CEOs who’ve succeeded?

BRETT LEVY: I haven’t seen it, but for us,  it really works well. I have a specific job and description that I do in Blue Label; Mark does what he does, and I think it’s great working with your brother, and great partnership. We work really well together.

ALEC HOGG: So who gets blamed for the share price decline today? Mark?

MARK LEVY: I was going to say, Brett.

ALEC HOGG: It’s down heavily, nearly 7%. I guess you’ve got to see it in perspective; you’re up 33% in the past year, but it is an indictment on the numbers.

MARK LEVY: You know, if you strip out the once-off that we received (R79m in the previous year’s numbers) and look at our HEPS numbers, it had double-digit growth of 17%. We feel that our results weren’t bad. The market may have expected more. We paid a dividend which was almost 10% up (25c a share). Our cover ratio has improved to 2.5, so everything is in good stead. Our cash reserves are good. We have a zero geared balance sheet, so we’re not quite sure why the market reacted negatively to this.

ALEC HOGG: Maybe I can help you; Mexico?

MARK LEVY: Sure. Mexico is in its building phase. We’re already on 60,000 points of sale. Our intention is to have 140,000 devices. It’s probably equivalent to almost all the banks, the top-tier banks, in terms of points of presence or transacting devices.

ALEC HOGG: Mark, you’ve dropped another R51m in this period (in Mexico). Where does the hockey stick start turning around?

MARK LEVY: Well, we anticipate similar losses for the next financial year, and then the following financial year, you’ll see the hockey stick trend change significantly into a profit scenario.

ALEC HOGG: I guess what would concern, and perhaps Brett, you can come in here, is that there was lots of hype around India; when you moved into India it looked exciting, but nothing seems to be really moving there.

BRETT LEVY: I think it’s a little bit different, and I think it’s taken us a lot longer than in South Africa. Just to put it into perspective. When we launched in South Africa, we had massive margins to play with so it gave us the ability to roll out what we needed to roll out, but at the same time, make profit. That’s why, literally, from the first year, we were profitable in South Africa. In India, we had the same concept, the same vision, which we still do today. The really big difference is, without the same margin. In building these networks in both India and Mexico, I think the one thing that we weren’t ready for is the amount of time it would take us to get to this level. So from a Mexican perspective, all on what we budgeted to lose, and to what we want to roll out. Yes, I think you’re right. It’s definitely taken us longer, but the vision of building a virtual distribution, I can tell you, has never looked better. The world is definitely moving towards prepaid, both from a consumer point of view, and definitely from a supplier point of view.

ALEC HOGG: You say, on budget, yet in the results you talk about Telcel, the dominant player in Mexico, actually cutting your water off for a period of time by saying they’re not going to give you the amount of rebate you would have got before. Was that also planned? Did you anticipate that?

BRETT LEVY: We didn’t anticipate that.

ALEC HOGG: So how can you still be on budget, if you didn’t anticipate that?

BRETT LEVY: Because the losses, when they came in, actually slowed down the rollout. We were meant to be on a bit more than 60,000 for the year;  so we slowed down the rollout in order to meet our budget, so that the losses were in line with what we had planned.

ALEC HOGG: So you adjusted the plan, accordingly?

BRETT LEVY: We adjusted the plan.

MARK LEVY: But just to add to that, Alec, is that we’ve signed agreements with one of the major acquirers in the world, Visa or MasterCard. We’ll make a big press announcement shortly. And with one of the largest banks. So people are looking to utilise our footprint to do a lot more than just airtime. You’ll see in the future, much more financial types of transactioning, debit and credit card processing, coming through those environments.

ALEC HOGG: You’re so well positioned, and you’ve shown that by moving into the prepaid electricity side. The numbers there are very exciting.

MARK LEVY: Very, and we see significant growth in perpetuity. There’s 9 million meters (installed) which we believe can go to 18 million meters. So from that point of view, you’re seeing organic growth, compounded on an annual base. We bought a ticketing company, so the ability to start vending tickets makes it a lot easier, and eliminates that friction point of going out to buy a ticket when it’s not convenient for you. People are commuting to buy a bus ticket, commuting to buy a soccer ticket. If we can eliminate that, and make it as frictionless as we’ve done for electricity and airtime, we’re quite sure that we’re going to stimulate spend.

ALEC HOGG: Another big move was in the pin-less top-ups. What exactly us that?

BRETT LEVY: In electricity, we act as the agent and not the principal, which means we’re really just a throughput from the municipalities to the meter. So we did R7.2 billion turnover, but you won’t see it in our revenue line. You only see the gross profit (R997m). What’s happening now with airtime is that we’ve created a pin-less top-up as well. So what happens is, we act as the agent and not the principal, whereas we top up the phone of the consumer directly, and therefore, we act, once again, as the agent, and don’t bring it into our revenue line.

ALEC HOGG: How do you top it up?

BRETT LEVY: It’s done remotely, directly from the platform of the network into the cell phone itself, so there’s no pin generated for it. What happens is, if you have a look at our revenue, you’ll see only a 1% growth. When you add in the pin-less top-up, because it’s just a different mechanism of how we’re actually distributing it, our revenue growth for the year was 6%.

ALEC HOGG: All right, now you’re talking about numbers, and the big number for me, that scares me as it did with one Gary Porritt, if you recall a company called Tigon is the cash flow statement. Your cash flow statement has a R1 billion reversal from positive R528m to negative R440m; what gives, Mark?

MARK LEVY: I think you’ve got to look at what happens with money in the bank. When we listed, we were getting 12.5% to almost 13% interest. We’re now to around about 5%, 5.5%. So we’d like our money to work better. It’s pure maths. If we can go to an operator, and say, if we buy three months’ worth of stock, we effectively lose 1.5% in the bank. If you say, give me 2% discount, I’m 0.5% better off. So you can’t just look at the cash. You must look at the cash utilisation. So if you look at our debtors, we increased our debtors, affording more credit to our top customers. If you look at our stockholding, it grew by R1.3 billion, and you look at our cash…

ALEC HOGG: So that R1.3 billion, was that the bulk inventory purchase you’re talking about in the commentary?

MARK LEVY: Correct.

ALEC HOGG: Okay, makes sense. I’ve got it. Arbitration. Are you making the lawyers rich? Are you making them rich at your shareholders’ costs?

BRETT LEVY: No, unfortunately, the lawyers are the only ones who get rich, but there’s not much more we can say on it.

ALEC HOGG: What’s the upside?

BRETT LEVY: The upside, for us, is obviously, we started on a process a year, 18 months ago, a process that we believed in. Multi-Links did cancel a contract 18 months into a ten-year contract, and I don’t believe we thought of any upside or downside; we just thought what was right and wrong. So the arbitration is set out for February of next year, and hopefully for both Telkom’s sake and our sake, it will put an end to this, and a way forward for both of us.

ALEC HOGG: The upside in financial terms? How much could you get back?

BRETT LEVY: The claim is large, it’s over $400 million. Blue Label is a shareholder of a consortium – we don’t own it 100%. Without speculating, I don’t know. The courts will decide.