Cell C-THE SOUTH AFRICAN INVESTOR

THE SOUTH AFRICAN INVESTOR

I Still Know What You Did Last Summer

by Neo Tema
 

"The statement by Blue Label Telecoms that it will return to profitability is far from the truth.

This article shows how smart-accounting can mislead and miss the point of a fair presentation."
 

BLU and Cell C

Telecoms operator-Cell C’s 45% shareholder, Blue Label Telecoms (JSE: BLU),

Announced through a JSE-SENS release on the 23rd of January that it expected earnings per share for the six months ended 30 November 2019 to increase by more than 20% from the previous corresponding reporting period (30 November 2018).

BLU has seen its stock hammered on the back of Cell C’s financial woes in the past 2 years.

Chart: BLU Stock price history (30 January 2015- 24 January 2020)
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Source: Google

 

A brief history on BLU and Cell C

BLU purchased 45% of Cell C on 2 August 2017 for a price of R5.5 billion.

As of 31 December 2016, Cell C had interest bearing debt of R17.7 billion.

The R5.5 billion paid by BLU was applied to reduce the Cell C debt.

 

Table: Cell C debt through the years:

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Accounting for Cell C

As BLU owned 45% and did not out-rightly control Cell C,

It could not consolidate the financial results of in its group financial statements.
 

BLU instead had to apply “Associate accounting”.

Associate accounting is applied by an investor that does not have control, but has a lot of influence over the running of a company.


Under Associate accounting,

An investor must record its proportionate share of the investee’s profits (losses) and other comprehensive as an income (expense) and an adjustment on the cost of its investment.

So for BLU

If Cell C made a loss of say R50 million;

As they owned 45% of Cell C (proportionate share),
 

BLU would recognise a R22.5 million (45% of R50 million) expense and decrease the cost of its investment by the same amount.

 

For the financial year ended 31 May 2019

Cell C made a lossof R8 billion.

BLU had to record an expense of R3.6 billion as required by “Associate accounting”.
 

On top of that;

BLU also wrote-off the remaining value of its investment in Cell C from its accounting records amounting to R2.5 billion by processing another expense.


By writing off its investment in Cell C in 2019,

BLU does not have to applyAssociate accounting should Cell C continue to make losses.


The below graphic illustrates how Cell C's results have affected BLU's profit for 2019-2018.


Graphic: Profit before tax of BLU including and excluding Cell C (2018-2019)
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That BLU expects to make a profit is far from the truth.


BLU still owns 45% of Cell C and has shown no intention to dispose of its stake.

The decision to write-off the cost of the investment in Cell C;

And to subsequently not record part of the losses from Cell C as part of its own profit measurement is correct as per the accounting rules.


However,


This is far from economic reality.


Extract from BLU 2019 financial statements
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A SENS release on the 28th of January 2020 indicated that Cell C had defaulted on its December debt repayments.


As a guarantor of part of Cell C’s debt;

BLU has to pay a part of those missed payment in instalment as set in the previous page,

R1.25 billion to be exact!


From the above,
 

BLU is to report a profit in 2020 because of writing-off its investment in Cell C and not having to apply Associate accounting.
 

The writing-off of the investment suggests that BLU will have nothing more to do with Cell C.

This is incorrect.


BLU has not announced any plans to sell their 45% stake.

There has been no change in the nature of the relationship between BLU and Cell C,


BLU is still guaranteeing Cell C’s debt obligations.


Whether BLU has to pay these debts is inextricably linked to the financial performance of Cell C.

,Because of the above,


We (The South African Investor) think that it is unwise to analyse the profitability of BLU without also considering that of Cell C.

We will suggest that analysts also take into account Cell C’s results in assessing the performance of BLU.

TSAI