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HUG - Huge Limited - Unaudited Interim Results Of The Huge Limited For The

Release Date: 08/10/2008 10:20
Code(s): HUG
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HUG - Huge Limited - Unaudited Interim Results Of The Huge Limited For The Six Months Ended 31 August 2008 HUGE LIMITED (Formerly Vanquish Fund Managers Limited) (Registration number 2006/023587/06) Share code: HUG ISIN: ZAE000102042 ("Huge" or "the Group" or "the company") UNAUDITED INTERIM RESULTS OF THE HUGE LIMITED FOR THE SIX MONTHS ENDED 31 AUGUST 2008 HIGHLIGHTS FOR THE PERIOD UNDER REVIEW - An industry growth rate currently averaging 18% per annum - An increase in the market share of Huge Telecom in cellular least cost routing (CLCR) services from 18% to 20.5% - A 25% increase in revenue when compared to the comparative six months to 31 August 2007 - An increase in headline gross profit margins maintained from 22.2% to 23.8% - Operating profit margins before tax increased from 10.35%, for the 12 months to 29 February 2008 to 14.24% for the 6 months to 31 August 2008 - Earnings per share and headline earnings per share of 26.18 cents for the 6 month interim period ended 31 August 2008 - Cash flow generated from operations for the period under review of R19.5 million - The acquisition of 25% plus 1 share in Eyeballs Mobile Advertising (Proprietary) Limited - The appointment of Don Tredoux, the previous co-founder of Orion Telecom (Proprietary) Limited, now a wholly-owned subsidiary of Vox Telecom Limited, as a non-executive director - The appointment of Kenneth Delroy Jarvis, the previous Chief Information Officer of the South African Revenue Service, as a non-executive director - The appointment of Amil De Moura as CIO: Huge Telecom - The appointment of Eugene Volschenk as Regional Director: Huge Telecom: Gauteng - The appointment of Phillip Stier as Regional Director: Huge Telecom: Cape - The appointment of Geovanna Sutherland as Regional Director: Huge Telecom: KZN - The appointment of Justin Hammett as Regional Director: Huge Telecom: Eastern Cape - The elimination of all financial bank guarantees issued in favour of third parties - The launch of Huge Charity, a duly registered non-profit Trust and the Corporate Social Investment vehicle for Huge UNAUDITED RESULTS FOR THE 6 MONTH PERIOD ENDED 31 AUGUST 2008 Consolidated Income Unaudited Unaudited Audited Statement 31 August 31 August 29 2008 2007 February
(6 (6 months) 2008 months) (7 months) R R R
Revenue 308 875 29 443 688 243 543 291 948 Gross profit 73 377 5 866 281 58 742 144 068 Other income 2 578 224 94 925 3 078 528 Operating costs (31 968 (3 767 (25 644 678) 440) 271)
Earnings before interest, 43 986 2 193 766 36 176 and taxation 690 325 Depreciation (10 195 (210 100) (4 862 481) 493)
Finance costs - (780 212) (6 266 896) Interest income 1 645 693 1 712 575 10 841 183
Net income before 35 436 2 916 029 35 888 taxation 902 119 Taxation (6 643 (845 649) (9 636 048) 096)
Attributable earnings 28 793 2 070 380 26 252 854 023 Basic earnings per share 26.18 3.50 44.17 (cents) Dividends - - - Total number of shares in 111 760 100 000 106 760 issue (`000) Weighted number of shares 109 979 59 178 59 436 in issue (`000) Consolidated Balance Unaudited Unaudited Audited Sheet 31 August 31 August 29 2008 2007 February 2008 R R R
Assets Property, plant and 58 339 330 23 011 57 286 equipment 823 740 Investments in associate 11 326 381 320 762 1 806 133 Advance payment for - 76 228 - investment 728 Intangible assets 215 691 102 829 222 898 080 838 180
Accounts receivable 126 015 57 682 92 656 017 738 854 Bank and cash 23 664 320 5 954 246 19 878 646
Total assets 435 036 266 028 394 526 128 135 553 Equity and liabilities Issued share capital 236 588 200 562 221 588 412 393 412 Reserves 55 269 923 2 070 381 26 476 066
Non-current liabilities 35 168 814 2 543 403 19 149 545 Account payable 104 461 56 761 121 919 129 075 461
Provision for taxation 3 547 850 4 090 883 5 393 069 Total equity and 435 036 266 028 394 526 liabilities 128 136 553 Number of shares in issue 111 760 10 000 106 760 (`000) Net asset value per share 261.15 266.03 232.36 (cents) Net tangible asset value 68.15 163.20 23.57 per share (cents) Consolidated Statement of Unaudited Unaudited Audited Changes in Equity 31 August 31 August 29 2008 2007 February
2008 R R R Balance at 28 February 100 100 100 2007 Shares issued 200 934 200 934 200 934 833 833 833 Share issue expenses (373 400) (373 400) (373 400) Profit for the 6 month period ended 31 August 2 070 831 2 070 831 2 070 831 2007 Balance at 31 August 2007 200 561 200 561 200 561 533 533 533 Shares issued 21 856 21 856 902 902 Share issue expenses (605 980) (605 980) Profit for the 6 month period ended 29 February 24 181 24 181 2008 192 192 Balance at 29 February 248 064 248 064 2008 478 478 Shares issued 17 500 000 Share issue expenses (2 500 000) Profit for the 6 month period ended 31 August 28 793 2008 854 Balance at 31 August 2008 291 858 335 Consolidated Cash Flow Unaudited Unaudited Audited Statement 31 August 31 August 29 2008 2007 February (6 (6 2008 months) months) (7 months)
R R R Cash flows from operating 19 457 (1 739 27 476 activities 244 231) 452 Cash flows from investing (12 586 (69 242 (134 351 activities 645) 315) 067) Cash flows from financing (3 084 76 935 126 753 activities 925) 692 261 Net cash movement for the 3 785 674 5 954 146 19 878 period 546 Cash at the beginning of 19 878 100 100 the period 646 Total cash at the end of 23 664 5 954 246 19 878 the period 320 646 COMMENTARY The board of directors of Huge is pleased to present the Group`s unaudited results for the six months ended 31 August 2008. These financial statements have been prepared in accordance with accounting policies and methods of computation that are consistent with those of the prior year and with International Financial Reporting Standards ("IFRS"). This announcement is prepared in accordance with IAS 34 - Interim Financial Reporting. COMPANY PROFILE Huge successfully listed on the Alternative Exchange of the JSE Limited on 8 August 2007 and currently operates in the corporate telecommunications sector through its subsidiary company, Huge Telecom (Proprietary) Limited ("Huge Telecom")- which comprises the merged businesses of TelePassport (Proprietary) Limited ("TelePassport")and CentraCell (Proprietary) Limited ("CentraCell"). Huge purchased TelePassport on listing, and completed its acquisition of CentraCell on 15 February 2008 after having received Competition Commission approval. Huge Telecom offers corporate customers in South Africa and Namibia the professional outsourced management of their voice communication services, through the efficient provision and management of the telecommunications companies that provide them. Huge Telecom has offices in Johannesburg, Durban, Cape Town and Port Elizabeth, and an associate company, TelePassport Communications, based in Windhoek. The company services over 11,000 corporate client sites. Huge Telecom is a leading managed telecommunications company, and is the second largest of the four dominant companies in this segment of the telecommunications industry. The segment is currently estimated to be valued at an annual R3.28 billion, of which Huge Telecom has a 20.5% market share. Huge Telecom focuses on the management of corporate voice communication services. This service includes, but is not limited to, the elimination of waste from the misuse of its clients` company resources. This is achieved through the use of proprietary private call prediction technology, the introduction of alternative - and cheaper - forms of communication such as short message services (SMS) and corporate call-back servers, and also through the elimination of cross-network telephone calls. The latter is achieved through the introduction of intelligent, technology-based, cost- savings-orientated, on-net routing of all telecommunications spend (including international, national, mobile and local telephone calls) not addressed by the former steps. Investor and shareholder information is available at www.hugegroup.com. BUSINESS OVERVIEW The financial objectives for the past six months included improving service delivery, increasing operational efficiencies and generating higher operating margins. Huge Telecom has achieved measured success in each of these areas and continues to strive for further improvement. Huge Telecom continues to challenge the current status quo within its business paradigms to ensure that every activity in the business meets the vision of the Group - which is the unlocking of value for all stakeholders. This has required the critical analysis of the way in which the company does its business; and this process is ongoing. Huge Telecom also continues to focus on simplifying its business by removing duplication and complexity: this will drive a focus on activities, functions and processes that deliver high value at low cost. FINANCIAL OVERVIEW The results of Huge for this 6 month interim period ending 31 August 2008 include the full six months trading results for both CentraCell and TelePassport, trading as the merged entity, Huge Telecom. The results of Huge for the 6 month interim period that ended on 31 August 2007 consisted of the trading results of TelePassport for only one month after listing. These results are therefore not directly comparable to those reported for the prior 6 month period. A segmental analysis of the group`s major segments has not been presented as the company only operates in one segment, within South Africa. TRADING ENVIRONMENT The first half of the 2008/2009 trading year was marked by weaker consumer confidence, as the impact of increases in interest rates, increased fuel prices and volatility in global and local financial markets took hold. Despite inflationary pressure, trading performance remained robust during the period. The outlook for remainder of the financial year shows every sign of being a lot tougher for South Africans and is expected to be challenging as the SA consumer continues to come under pressure. Despite the underlying strength of the South African economy, the global macro economic environment will affect South Africa. There are a number of factors that continue to contribute significantly to an increase in local inflation, and this will highlight the need for corporations to tighten their control over telephone and communications usage and effectiveness. Companies delivering managed telecommunications will therefore be naturally well placed to benefit from this cost consciousness. The demand for managed telecommunications by corporate entities also displays a high level of price inelasticity. The main reasons for this are that the person making the corporate telephone call is different from the person paying the bills; communication is also a vital part of any enterprise`s operation, and while per-minute costs are often addressed, the actual volume of communication is one of the last areas to be sacrificed. Huge Telecom normally benefits during tighter economic periods, which traditionally spur adoption of more aggressive cost saving measures by the corporate entity. More specifically, the current fixed line to mobile voice traffic enjoyed by Telkom could face further scrutiny by cost conscious companies and in an effort to reduce the occurrence of such cross-network traffic, a shift to on- network solutions could increase. Huge Telecom would be a major beneficiary of such a shift in the profile of voice traffic. FUTURE PROSPECTS The South African telecommunications market for mobile voice traffic is growing at around 18% per annum. Mobile to mobile telephone calls terminated in SA today using Cellular Least- Cost-Routing ("CLCR") amounts to approximately 2.8 billion minutes per annum. Taking into account that total fixed-line to mobile voice traffic originated by Telkom and terminated on the mobile networks is around 4.2 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 R2500 per corporate subscriber. 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 therefore does not face any competitive infrastructural risks. Huge Telecom`s revenue generated is by nature recurring or annuity-based and the monthly annuity book has a value in excess of R53.5 million per month, representing corporate customers, and this represents the embedded/in- force/book value of the company. This monthly revenue can generate annual turnover of R642 million and at a gross profit margin of 22% can contribute approximately R141 million to the gross margin of an existing competitor with a marginal increase to overhead. The value of Huge Telecom is therefore underpinned by this potential competitive marginal profit contribution and this further underpins the value of Huge. Huge estimates that the market for CLCR services has increased by an annualised rate of 18% in the last 6 months from R3 billion in total revenue at the end of February 2008 to an estimated R3.28 billion in total revenue at the end of August 2008. Huge Telecom has managed to increase its market share by 2.5%, from 18% to 20.5%, by achieving an annualised growth rate in total revenue for the six month period ending 31 August 2008 of 24%. Provided the market and Huge Telecom continue to grow at the same respective rates, Huge Telecom could see its market share expand further. Our objectives for the coming period remain: - Organic growth in Huge Telecom; - Continued focus on operational and customer service excellence in Huge Telecom; - Continued focus on leveraging efficiencies in Huge Telecom; - Continued investment in and support of intellectual capital; - Acquisitive growth into allied industries and markets; and - The introduction of further strategic and BBBEE shareholders. ACQUISITIONS In terms of sale agreements signed on 27 March 2008, Huge acquired 2 500 ordinary shares of R1 each in the share capital of Eyeballs Mobile Advertising (Proprietary) Limited ("Eyeballs Mobile"), representing 25% of the entire issued share capital of Eyeballs Mobile, from The Benson Trust, The 59 Kloofnek Trust and Nathan Lewin ("the sale transactions") for R6 000 000. The effective date is 1 January 2008. Eyeballs Mobile is based in Cape Town, and has developed a unique media platform that delivers rich advertising content to GSM mobile subscriber handsets in an unobtrusive and non-invasive manner, providing an extremely attractive alternative to SMS and MMS advertising which are often seen as spam. The technology developed by Eyeballs Mobile currently has intellectual property protection that provides it with a significant window of opportunity in the mobile advertising and media arenas. The mobile advertising medium has even greater significance in developing markets where Internet access is still limited. In South Africa the mobile medium of cell phones has the ability to reach 80% of the population because of its pervasive presence as a communication medium. The future prospects of Eyeballs Mobile and the synergies that it offers with existing opportunities within Huge are significant. Mobile media is expected to grow exponentially making it an incredibly lucrative market in the very near future. Eyeballs Mobile launched its mobile handset advertising proposition to much media interest in August 2008, and is currently busy building its recipient base. ISSUE OF SHARES FOR CASH On 8 July 2008 Huge issued 5 000 000 ordinary shares for cash at a price of 349.5 cents per share. SUBSEQUENT EVENTS A formal sale of shares agreement between Huge and The Bebinchand Seevnarayan Trust, in relation to the acquisition by Huge of 59% of the ordinary shares held by The Bebinchand Seevnarayan Trust in iTalk as well as the shareholder claims on loan account held by The Bebinchand Seevnarayan Trust against iTalk, was signed on 4 February 2008, and remains subject to the following suspensive conditions, which conditions are required to be fulfilled by no later than 31 December 2008: 1. the granting of all regulatory approvals for the implementation of the Sale Agreement ("first outstanding condition"); 2. written confirmation from MTN Group Limited of the waiver of its pre- emptive rights under the shareholders` agreement with The Bebinchand Seevnarayan Trust in relation to iTalk in respect of the disposal of its shares in iTalk ("second outstanding condition"); 3. written confirmation from Mobile Telephone Networks (Proprietary) Limited of the waiver of its pre-emptive rights under the service provision agreement in respect of the disposal of the shares held by The Bebinchand Seevnarayan Trust in iTalk ("third outstanding condition"); 4. the approval by the board of directors of iTalk for the acquisition of the shares in iTalk by Huge("fourth outstanding condition"); 5. written confirmation from Mobile Telephone Networks (Proprietary) Limited in terms of the service provision agreement with iTalk that it approves the acquisition of the shares in iTalk by Huge ("fifth outstanding condition"); 6. written confirmation from Mobile Telephone Networks (Proprietary) Limited in terms of the service provision agreement with iTalk that it approves the terms and conditions of the sale of the shares in iTalk by The Bebinchand Seevnarayan Trust to Huge("final outstanding condition"); Huge has received Competition Commission approval for the implementation of the transaction in terms of the Sale Agreement. The fulfilment of the first outstanding condition is under the control of Huge. The second outstanding condition and the third outstanding condition are capable of being waived by Huge. The confirmations required in terms of the fourth outstanding condition, the fifth outstanding condition, and the final outstanding condition may not be unreasonably withheld by the entities obliged to provide the confirmations. In terms of the Sale Agreement, Huge shall issue 93 000 000 ordinary shares ("the Vendor Consideration Shares") of one hundredth of 1 cent each to The Bebinchand Seevnarayan Trust at an issue price of 550 cents per share, being a premium of 549.99 cents per share. In terms of an option agreement ("Option Agreement") between Huge and The Bebinchand Seevnarayan Trust, Huge has granted The Bebinchand Seevnarayan Trust an option to require Huge to acquire 74 171 779 Vendor Consideration Shares at a price of 350.54 cents per share, such option to be exercised on or before 31 August 2009 ("the Put Option"). In terms of the Option Agreement, Huge has secured an option which entitles Huge to acquire 74 171 779 Vendor Consideration Shares at a price of 550 cents per share, such option to be exercised on or before 30 June 2010 ("the Call Option"). MTN Group Limited has exercised its rights of pre-emption in terms of the shareholders` agreement with The Bebinchand Seevnarayan Trust in relation to iTalk. The transaction contemplated by MTN Group Limited will require a recommendation to be made by the Competition Commission to the Competition Tribunal for unconditional approval of the transaction contemplated by MTN Group Limited. Huge is currently engaged with the Competition Commission in an effort to oppose the transaction contemplated by MTN Group Limited and to justify to the Competition Commission the reasons why the Competition Commission should recommend the prohibition of the MTN Group Limited transaction to the Competition Tribunal. In the event that the Competition Commission recommends the unconditional approval (as opposed to the prohibition) of the transaction by the Competition Tribunal, Huge has instructed senior counsel to legally object to the merger on the basis that the proposed transaction has the effect of substantially lessening competition in the mobile telecommunications industry in South Africa. CHANGES TO THE BOARD OF DIRECTORS With effect from 1 August 2008, Mr Donovan ("Don") Tredoux was appointed to the board of directors. With effect from 1 September 2008, Mr Kenneth Delroy Jarvis was appointed to the board of directors. DIVIDENDS The board of directors declared a maiden dividend on 29 August 2009 of 12 cents per share to all shareholders registered as shareholders on 19 September 2008. The dividend was paid on 29 September 2008. The board continues to support a dividend policy where the dividend cover is two times earnings and where the dividend cycle is annual. Johannesburg 7 October 2008 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 Investor Services (Proprietary) Limited, Ground Floor, 70 Marshall Street, Johannesburg Directors: EF Lediga*, BA McQueen*, D Tredoux*, KD Jarvis*, AD Potgieter (CEO), JC Herbst (CFO), VM Mokholo, JA Morelis, SP Tredoux, M Pillay *Non-executive Date: 08/10/2008 10:20:22 Supplied by www.sharenet.co.za Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited (`JSE`). The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of the information published on SENS. 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