| Tue 27 May 2008, 11:07 | | HUG - Huge Group - Reviewed results of the huge group limited for the year |
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HUG
HUG
HUG - Huge Group - Reviewed results of the huge group limited for the year
ended 29 February 2008
HUGE GROUP LIMITED
(Incorporated in the Republic of South Africa)
(Formerly Vanquish Fund Managers Limited)
(Registration number 2006/023587/06)
Share code: HUG & ISIN: ZAE000102042
("Huge" or "the Company")
REVIEWED RESULTS OF THE HUGE GROUP LIMITED FOR THE YEAR ENDED 29 FEBRUARY 2008
Highlights
* Huge successfully listed on the Alternative Exchange of the JSE Limited`s
stock exchange on 8 August 2007;
* Huge operates through its subsidiary companies, Huge Telecom (Proprietary)
Limited ("Huge Telecom") (formerly TelePassport (Proprietary) Limited) and
CentraCell (Proprietary) Limited ("CentraCell");
* On 15 February 2008 Huge completed its acquisition of CentraCell;
* The results reflect seven months of trading from Huge Telecom, and one
month of trading from CentraCell;
* The results do not incorporate the acquisition of 25% of Eyeballs Mobile
Advertising (Proprietary) Limited ("Eyeballs") or the impending acquisition
of 59% of iTalk Cellular (Proprietary) Limited ("iTalk");
* Revenue generated of R243 million and operating profit before taxation of
R26 million at an operating profit margin before taxation of 10.35%
translates to annual revenue of R540 million and operating profit before
taxation of R55.89 million;
* Huge generated earnings per share of 44.17 cents and headline earnings per
share of 44.15 cents;
* Huge Telecom has grown revenue by 26% over the comparative period in the
prior year;
* Return on equity on an annualized basis was 21.74%;
* Cashflow generated from operations of R26 million enhanced the quality of
earnings;
* The group generates negative working capital with creditors` days exceeding
the combination of debtors and inventory days;
* The directors have proposed a maiden dividend of 12 cents per share;
* The addition of Eyeballs and iTalk is expected to further augment the
revenues and profitability of the group with annual revenues expected to
exceed R1.2 billion.
REVIEWED RESULTS FOR THE YEAR ENDED 29 FEBRUARY 2008
Consolidated Income Statement Reviewed Reviewed Audited
29 February 31 August 28 February
2008 2007 2007
(12 months) (6 months) (12 months)
R R R
Revenue 243 543 948 30 613 105 -
Gross profit 54 179 156 6 165 118 -
Other income 2 163 315 187 503 -
Operating costs (31 115 254) (4 206 631) -
Earnings before interest and
taxation 25 227 217 2 145 990 -
Finance costs (6 266 900) (774 981) -
Interest income 10 841 183 1 473 535 -
Income from equity accounted
Investments 915 213 146 024 -
Net income before taxation 30 716 713 2 990 568 -
Taxation (4 464 696) (926 715) -
Attributable earnings 26 252 017 2 063 853 -
Basic earnings per share (cents) 44.17 3.49 -
Headline earnings per share
(cents) 44.15 3.48 -
Dividends - - -
Total number of shares in
issue (`000) 106 760 100 000 1 000
Weighted number of shares in
issue (`000) 59 436 59 178 1 000
Consolidated Balance Sheet Reviewed Reviewed Audited
29 February 31 August 28 February
2008 2007 2007
R R R
Asset
Property, plant and equipment 57 286 740 22 568 831 -
Goodwill 226 592 379 100 364 554 -
Intangible assets 1 101 654 218 737 -
Deferred tax 375 544 - -
Investment in joint venture 136 249 152 837 -
Investments in associate 1 669 884 615 804 -
Inventories 3 674 728 - -
Trade and other receivables 73 341 887 51 017 130 -
Other financial assets 7 350 459 82 801 921 -
Cash and cash equivalents 19 878 646 6 757 931 -
Total assets 391 408 170 264 497 745 -
Equity and liabilities
Issued share capital 221 588 412 200 562 392 100
Non Distributable Reserves 224 046 27 486 -
Retained income 26 252 017 2 063 853 -
Other financial liabilities 12 114 420 2 559 396 -
Deferred taxation 1 535 125 1 435 167 -
Other current financial
Liabilities 35 256 953 222 486 -
Trade and other payables 88 909 910 51 865 753 -
Current tax payable 5 393 068 5 227 879 -
Provisions 134 219 533 333 -
Total equity and liabilities 391 408 170 264 497 745 100
Number of shares in issue (`000) 10 676 10 000 1 000
Net asset value per share (cents) 366.62 264.50 0.01
Net tangible asset value per
share (cents) 153.35 163.91 0.01
Consolidated statement of changes
in equity Reviewed Reviewed Audited
29 February 31 August 28 February
2008 2007 2007
R R R
Balance at incorporation 100 100 100
Profit for the 6 month period
ended 31 August 2006 - - -
Balance at 31 August 2006 100 100 100
Profit for the 6 month period
ended 28 February 2007 - - -
Balance at 28 February 2007 100 100 100
Shares issued 200 935 692 200 935 692 -
Share issue expenses (373 400) (373 400) -
Profit for the 6 month period
ended 31 August 2007 2 063 853 2 063 853 -
Revaluation of land and buildings 27 486 27 486 -
Balance at 31 August 2007 202 653 731 202 653 731 -
Shares issued 21 631 324 - -
Share issue expenses (605 304) - -
Profit for the 6 month period
ended 29 February 2008 24 188 164 - -
Revaluation of land and buildings 196 560 - -
Balance at 29 February 2008 248 064 475 - -
Consolidated cash flow statement Reviewed Reviewed Audited
29 February 31 August 28 February
2008 2007 2007
(12 months) (6 months) (12 months)
R R R
Cash flows from operating
Activities 29 295 853 1 325 375 -
Cash flows from investing
Activities (134 322 100) (121 568 778) -
Cash flows from financing
Activities 124 904 793 127 001 234 -
Net cash movement for the period 19 878 546 6 757 831 -
Cash at the beginning of the
Period 100 100 100
Total cash at the end of the
Period 19 878 646 6 757 931 100
Commentary
The board of directors of Huge is pleased to present the maiden financial
statements of the group for the year ended 29 February 2008. The financial
statements have been prepared in accordance with IFRS and the accounting
policies of the company. These financial statements have been reviewed by the
auditors of the company and their audit opinion will be available at the
registered office of the company in due course.
Huge successfully listed on the Alternative Exchange ("ALTx")of the JSE Limited
on 8 August 2007 and the profit forecast included in the prospectus issued at
that time forecast earnings per share for the year ending on 29 February 2008 of
16.42 cents per share. Actual earnings per share of 44.17 cents exceeded this
forecast by 169%. On 12 September 2007 the board of directors revised the
profit forecast included in the prospectus by 112% to 34.77 cents per share.
Actual earnings per share of 44.17 cents exceeded this revised forecast by a
further 27%.
Huge currently operates through its subsidiary companies, Huge Telecom and
CentraCell. Huge Telecom is a leading managed telecommunications company and
one of four similar companies that dominate this segment of telecommunications
industry, which is estimated to total R3 billion per annum. Huge Telecom is the
second largest of these players measured by revenue with a market share of 18%.
The directors believe that there exists a new and unique opportunity in the
market to create a service orientated company focused on adding measurable value
to its clients in a variety of ways and by delivering a suite of value added
products and services that exceed client expectations.
The vision of Huge is the unlocking of value for all stakeholders of the
company. This value creation is led by the strategy of building the Huge brand
across a wider corporate and consumer market and by focusing on a service ethic
of the highest standard. The objectives of the company for the coming year
include improving service delivery, increasing operational efficiencies and
generating higher operating margins. The directors intend achieving these
objectives by leveraging the technology platforms and intellectual property
owned by the company. The technology platform that has been developed over the
last fifteen years, which incorporates full real-time data feeds and real-time
analysis of data from all our services is a core competency of the company.
With this technology platform Huge is capable of delivering value added managed
telecommunications services. Without this technology platform the company would
be reduced to one of many alternative telecommunications companies operating in
South Africa. Huge intends to strengthen its position in the layer above the
network operators: the value-added layer which should over the longer term
generate higher returns.
The company completed its acquisition of CentraCell on 15 February 2008 after
having received Competition Commission approval for the implementation of the
transaction. These results therefore represent only a seven-month and one-month
trading period for Huge Telecom and CentraCell respectively and do not
incorporate the acquisition of 25% of Eyeballs Mobile Advertising or the
impending acquisition of 59% of iTalk.
This result, being the trading performance for a period less than one year,
reflects positively on the estimated revenues of Huge Telecom and CentraCell for
a rolling twelve-month period. Huge Telecom has organically grown its revenue
base by 26% over the comparable corresponding period in the previous year. The
five year organic growth rate of revenue in Huge Telecom is 19%.
The impetus created through the listing has been remarkable and the full
contribution from Huge Telecom and CentraCell as well as the addition of
Eyeballs and iTalk is expected to further augment the revenues and profitability
of the group with annual revenues expected to shortly exceed R1.2 billion.
The CentraCell acquisition has allowed the Group to build critical mass and has
substantially improved its purchasing power with its suppliers, its presence and
its market share in the managed telecommunications industry. The directors
believe that this acquisition should enable the company to increase the
discounts it receives from its suppliers, which discounts currently average 21%.
Improvements in this regard have already been achieved.
The directors are however cognizant of diluting the effective interests of
existing shareholders in an effort to increase the revenue base of the company
in excess of the critical mass achieved by the acquisition of CentraCell. The
pursuit of increasing revenues by acquisition when the company has already
achieved a level of critical mass is viewed negatively by the directors. The
board will therefore focus its future efforts on acquiring revenue by organic
means rather than by corporate acquisition. Future acquisitions will thus be
driven by a variety of other reasons that bring far more synergistic value to
the business.
Huge Telecom is an entirely annuity-based business where products and services
are supplied to over 10 000 corporate clients on a monthly contracted
subscription basis. Contracts signed usually cover an initial term of 24 months
and are renewed thereafter for further terms of 24 months. These contracts hold
substantial value and this underpins the value of Huge and its intangible assets
(which includes goodwill). The monthly annuity "book value" of the contracts
held by Huge Telecom exceeds R47 million at the date of release of these
results. This monthly revenue generates annual turnover of R540 million and at
a gross profit margin of 22.2% can contribute approximately R120 million to the
bottom line of an existing competitor.
Actual revenue generated of R243 million and operating profit before taxation
generated of R25 million at an operating profit margin before taxation of 10.35%
translates to annual revenue of R540 million and operating profit before
taxation of R55.89 million. Return on equity on an annualized basis was 21.74%.
The effective rate of taxation was 14.54% and an additional R42 million in
assessable losses acquired as part of the CentraCell acquisition is available as
a set off against future taxable income.
Cashflow generated from operations of R26 million enhanced the quality of
earnings. The group generates negative working capital with creditors` days
exceeding the combination of debtors and inventory days and this allows the
company to adopt a lower than normal dividend cover. The board has resolved
that a dividend cover of two times earnings is suitable for the company in the
light of its working capital requirements and its need to finance future
acquisitions out of a combination of cash and debt. In light of this the board
of directors has proposed a maiden dividend of 12 cents per share.
Nature of the business and products and services sold
Huge Telecom is a national "Managed Telecommunications" company with offices in
Johannesburg, Durban, Cape Town, Port Elizabeth and Swakopmund. It offers
corporate customers in South Africa and Namibia the management of mainstream
voice, data, video and mobility services ("quadruple play"), as well as the
efficient outsourced management of the (global and local) telecommunications
companies that provide them.
The management of voice, data, video and mobility services incorporates the
concept of a managed telecommunications service. Huge`s managed
telecommunications service includes but is not limited to the elimination of
business waste from the misuse of client company resources by using proprietary
private call prediction technology, the introduction of alternative cheaper
forms of communication, like short message services (SMS), and finally the
elimination of cross-network telephone calls (which incorporate inter-connection
fees or termination charges) with the introduction of intelligent, technology-
based, cost-savings orientated, on-net routing of remaining telecommunications
(including international, national, mobile and local telephone calls).
The number of network operators both globally and locally have substantially
increased in the last decade, even in the face of some significant
consolidation; These increases in the number of network operators has had a
concomitant effect on the increased prevalence of cross-network telephone calls
or communications. The use of two network operators in a communication
introduces the concept of a termination charge/fee otherwise known as an inter-
connection charge/fee/rate which is a fee that arises as a result of the
originating network having to pay the receiving network for the use of its
network. In layman`s terms the use of two networks will always exceed the cost
of using one network; or explained differently: originating and terminating a
communication on the same network - that is, an on-network communication - will
always be more cost effective. These concepts are some of the concepts at the
centre of a managed telecommunications service.
Another concept that management has placed under serious consideration since
listing is the concept of Voice over Internet Protocol or VoIP as it is also
referred and the importance placed by certain commentators on the inclusion of a
"VoIP product" in the product suite of a telecommunications company. The
executive management of Huge is of the view that VoIP is not a substitute for
the current incumbent (being Telkom) but merely a transmission protocol used by
a network operator (which includes Telkom) to carry voice and data in a far more
cost effective and efficient manner than the traditional time division
multiplexing (TDM) used by traditional public switched telephone networks
(PSTN`s) (which also includes Telkom). As Huge is not a network operator and
does not own its own network, VoIP presents neither a potential threat nor a
potential opportunity for the company.
The number of alternative telecommunications companies operating in South Africa
using different methods of communication (fixed line, radio and satellite) is
increasing; so too are the technologies being used (cellular, WiFi, Wimax), as
well as the standards (CDMA, GSM or VoIP for cellular) being adopted. The
number of on-network as well as cross-network routing possibilities is
increasing exponentially and this is expected to have a significant positive
impact on the future growth prospects of the company.
The executive management of Huge is very aware of the importance of positioning
and differentiation relative to the competitors in the market place.
Significant time and resources have been expended to define positioning and
differentiation in the last nine months.
The network operators (Internet Solutions, Neotel, Telkom and Verizon for fixed
line services, and CellC, MTN and Vodacom for mobile-cellular and WiMax
services) are not seen as competitors of Huge but are simply suppliers of
communication products that are ultimately used by the customers of Huge. No
direct relationship exists between the network operators and the clients of Huge
Telecom. Huge Telecom represents one of the larger single customers of any of
the network operators and a direct relationship only exists between the network
operators and Huge Telecom. Huge Telecom will continue to acquire products and
services from the network operators but the focus of its involvement with its
clients continues to be the adding of value by effectively managing the use of
these network products.
The alternative telecommunications companies, including ECN and Vox Telecom,
will remain competitors so long as they continue to provide some form of managed
telecommunications services. Their transition to alternative telecommunications
operators should limit their ability to operate as trusted intermediaries
because of the inherent conflict of interest arising from owning one`s own
network/product.
The inclusion of Autopage and Nashua as distributors to the network operators is
seen as being limited to the supply of network products, but they are still
regarded as meaningful competitors.
Huge Telecom (with a leading position) and its competitors Du Pont Telecom,
TeleMasters and Orion Telecom are seen as the suppliers of a managed
Telecommunications service in South Africa.
Financial review
The company converted to a public company on 5 July 2007 and subsequently listed
on the ALTx of the JSE Limited on 8 August 2007.
Although the effective date of the change in control of Huge Telecom was the
date of listing of Huge, namely 8 August 2007, the deemed date for the change in
control has been assumed as 1 August 2007 on the basis that it is impractical to
compile trading results for a period shorter than one month.
Although the effective date of the change in control of CentraCell was the date
that the Competition Commission granted approval for the implementation of the
transaction, the deemed date for the change in control has been assumed as 1
February 2008 on the basis that it is impractical to compile trading results for
a period shorter than one month.
Headline earnings per share Unaudited Unaudited Audited
29 February 31 August 28
February
2008 2007 2007
(12 months) (6 months) (12 months)
R R R
Net profit attributable to
ordinary shareholders 26 252 017 2 063 853 -
Profit on disposal of property,
plant and equipment (8 432) (5 563) -
Headline earnings attributable
to ordinary shareholders 26 243 585 2 058 290 -
Weighted average number of
ordinary shares in issue (`000) 59 436 59 178 1 000
Headline earnings per share (cents) 44.15 3.48 -
Revenue
Revenue includes the telecommunications products and services procured by Huge
from the network operators and sold to the clients of the respective group
companies at the retail rates regulated by ICASA (Independent Communications
Authority in South Africa), as well as the fees charged by Huge for value-added,
managed telecommunications products and services.
Gross profit margin
The gross profit margin of 22.2% generated from revenue is calculated after
deducting the cost of goods procured from the various network operators, as well
as the cost of the other value-added, managed telecommunications products and
services sold by the group.
Other income
Other income was generated from management fees charged to the Namibian
associate, rental income charged on spare capacity of owned buildings as well as
the recoupment of certain operational costs.
Operating expenses
The two principal operating costs of the company are equipment costs and staff
costs; these two costs account for approximately 75% of total operating costs.
Investment income
Interest was received on the advance payment for the CentraCell acquisition,
interest charged on customer accounts as well as the imputed interest on debtors
balances calculated in accordance with IFRS 7.
Finance costs
Interest was paid on subscription monies received from investors subscribing for
ordinary shares in Huge at the time of listing, interest charged on the use of
finance leases as well as the imputed interest on creditors balances calculated
in accordance with IFRS 7.
Taxation
The effective tax rate is 14.54% after the utilization of R15.3 million of
assessed and assessable tax losses. An additional R42 million in assessable tax
losses arising from the CentraCell acquisition are still available to be set off
against future taxable income.
Property, plant and equipment
The group capitalizes the equipment utilized in the provision of its managed
telecommunications services. 81% of property, plant and equipment consist of
more than 25 000 units of customer premises equipment (CPE) that are depreciated
over 4 years.
Goodwill
Goodwill represents the excess of the purchase price paid by Huge over the
tangible net asset value acquired on the date of acquisition of TelePassport
(which was subsequently renamed Huge Telecom) and CentraCell. Huge Telecom and
CentraCell are entirely annuity-based businesses where products and services are
supplied to over 10 000 corporate clients on a monthly contracted subscription
basis. Contracts signed usually cover an initial term of 24 months and are
renewed thereafter for further terms of 24 months. These contracts hold
substantial value and this underpins the value of Huge and its intangible assets
consisting of goodwill. The monthly annuity "book value" of the contracts held
by Huge Telecom exceeds R47 million at the date of release of these results.
This monthly revenue generates annual turnover of R540 million and at a gross
profit margin of 22.2% can contribute approximately R120 million to the bottom
line of an existing competitor.
Intangible assets
Intangible assets consist of capitalized development costs incurred in the
ongoing development of the billing, operational and CRM platforms of the
company.
Investment in joint venture
Huge has a 50% joint venture with Gonondo Telecom (Proprietary) Limited, the
company that holds the intellectual property rights in respect of the private
call prediction software that is proprietary to Huge.
Investments in associates
TelePassport Communications (Proprietary) Limited is a 49% held associate
operating in Namibia, supplying products and services similar to those of Huge
Telecom.
Other financial assets
Other financial assets consist of deposits held for the acquisition of iTalk and
prepayments made for ongoing proprietary technology development. Various
proprietary technology projects were in progress at the end of the year.
Share capital
The group restructured its equity by sub-dividing the issued share capital and
issuing additional share capital. At the end of February 2008 there were
106 760 000 ordinary shares in issue.
Reserves
Huge Telecom owns the offices from which it operates in Cape Town and these
offices are re-valued annually.
Other long term financial liabilities
Other long term financial liabilities include finance lease obligations.
Other current financial liabilities
Other current financial liabilities include deferred income, deposits, finance
lease obligations and short terms loans from the directors of the company used
to finance the deposit paid in respect of the iTalk acquisition.
Prospects
The SA telecommunications market for mobile voice traffic is growing at around
22% per annum according to research reports written by leading investment
banking and equity research companies in South Africa,
Mobile-to-mobile on-network telephone calls managed throughout SA today is
around 2.4 billion minutes per annum. Taking into account that total fixed-line
to mobile cross-network voice traffic originated by Telkom and terminated on the
mobile network operators (MNOs) is around 4.1 billion minutes per annum, the
scope for organic growth in managed telecommunications is capable of exceeding
the growth rates of the broader mobile telecommunications market. Earnings
growth rates in excess of 20% should therefore be achievable for the foreseeable
future.
The African telecommunications market, and particularly the advent of VoIP
technology, represents the latest trend towards an increase in telecommunication
routing alternatives and this increases the growth opportunity for
communications services companies involved in managing telecommunications both
domestically and abroad.
Huge Telecom has calculated that the cost of organic acquisition of customers is
less than R2 500 per corporate subscriber based on a corporate subscription
package supplied by CellC, MTN or Vodacom. Consolidation of industry
participants will be measured against this benchmark and adjusted for variables
related to the time taken to procure customers of the magnitude in question.
Huge Telecom is not an infrastructure player and does not face any competitive
infrastructural risks.
Revenue generated is by nature recurring or annuity based and the monthly
annuity book has a value in excess of R47mn (including the revenues of
CentraCell) per month representing corporate customers, and this represents the
embedded/in-force/book value of the company.
The company is well positioned to increase its market share in managed
telecommunications above the current 18% level. Furthermore increased
subscriber numbers have historically lead to greater margins given the economics
of the industry and as such these should improve by at least a further 3% this
year.
Corporate governance
The group subscribes to the principles of, and implements where possible, the
recommendations of the King II Code on Corporate Governance.
Dividends
A dividend of 12 cents per share has been proposed by the board of directors and
the declaration and payment dates will be advised in due course.
Johannesburg
27 May 2008
Anton Potgieter
Group CEO
Auditors
Horwath Leveton Boner
Corporate Advisor
Manhattan Equity Corporate Finance (Proprietary) Limited
Designated Advisor
Arcay Moela Sponsors (Proprietary) Limited
Registered office:
Block 2, Woodlands Drive Office Park, 5 Woodlands Drive, Woodmead, Johannesburg,
2191 (PO Box 16376, Dowerglen, 1610)
Transfer secretaries
Computershare Limited, Ground Floor, 70 Marshall Street, Johannesburg
Directors:
EF Lediga*, BA McQueen*, AD Potgieter (CEO), JC Herbst (FD), VM Mokholo, JA
Morelis, M Pillay, SP Tredoux
*Non-executive
Date: 27/05/2008 11:07:21 Produced by the JSE SENS Department.
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