Wrap Text
Audited Condensed Consolidated Results for the Year Ended 28 February 2013
HUGE GROUP LIMITED
(Registration number 2006/023587/06)
Share code: HUG ISIN: ZAE000102042
("Huge" or "the Group" or "the Company")
AUDITED CONDENSED CONSOLIDATED RESULTS FOR THE YEAR ENDED 28
FEBRUARY 2013
HIGHLIGHTS FOR THE PERIOD
- 53% increase in gross profit margins from 19.4% to 29.7%
- Telecom Operating Segment increases operating profit before tax
160% from R5.8 million to R15.1 million
- Telecom Operating Segment generates operating profit margins of
5.7%
- Cash generated from operations increased 138% from R7.9 million
to R18.8 million
- Impact of amortisation and impairment of intangible assets
(including the impairment of the Eyeballs Technology to zero)
on earnings amounted to R13.8 million
- Impact of reduction in deferred tax assets on earnings amounted
to R3.8 million
- Impact of derivative instruments on earnings amounted to R6.1
million
The board of directors ("the Board") of Huge is pleased to present
the consolidated audited annual results of the Company and its
subsidiary companies, associate companies, and joint venture (“the
Group”) for the year ended 28 February 2013.
AUDITED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Audited Unaudited Audited
28 February 31 August 29 February
2013 2012 2012
(12 months) (6 months) (12 months)
R R R
Total revenue 266 321 277 155 924 806 384 030 023
Gross profit 79 049 591 37 935 877 74 671 335
Other income 1 181 983 740 084 4 253 833
Operating
expenses (81 453 815) (34 595 357) (81 898 821)
Operating
profit (loss) (1 222 241) 4 080 604 (2 973 653)
Investment
income 1 311 007 433 098 1 452 827
Net change in
fair value of
financial
instruments (6 076 548) 3 770 875 (2 662 602)
Share of
earnings from 67 063 93 269 61 733
equity
accounted
investments
Finance costs (3 705 033) (2 212 505) (2 501 843)
Profit (loss)
before taxation (9 625 752) 6 165 341 (6 623 538)
Income tax
credit
(expense) (2 263 838) 2 359 146 2 213 040
Net profit
(loss) for the
period (11 889 590) 8 524 487 (4 410 498)
Non-controlling
interest (2 018 426) (446 699) 151 309
Net profit
(loss)
attributable to
owners of the
company (9 871 164) 8 971 186 (4 561 807)
Earnings (loss)
per share
(cents) (11.0) 9.9 (4.8)
Adjusted for:
(Profit)/loss
on disposal of
property, plant
and equipment - - 1.4
Profit on
disposal of
associate
company - - (2.4)
Impairments of
intangible
assets and
associate
company 6.9 0.1 -
Headline
earnings (loss)
per share
(cents) (4.1) 10.0 (5.9)
Total number of
shares in issue
(„000) 89 255 89 255 90 242
Weighted number
of shares in
issue („000) 89 672 90 160 94 586
AUDITED CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Audited Unaudited Audited
28 February 31 August 29 February
2013 2012 2012
(12 months) (6 months) (12 months)
R R R
ASSETS
Non-Current Assets
Property, plant and
equipment 32 489 579 33 116 994 33 025 064
Goodwill 215 153 482 215 153 482 215 153 482
Intangible assets 3 243 525 12 866 618 15 392 170
Investment in joint
venture 629 293 655 499 562 230
Other financial
assets 298 630 387 986 263 159
Deferred tax 15 755 915 16 865 096 12 258 656
267 570 424 279 045 675 276 654 761
Current Assets
Inventories 5 742 244 3 894 490 9 151 439
Trade and other
receivables 70 823 341 56 647 369 81 335 887
Loans to associate
companies - - 199 959
Current tax
receivable 164 404 - 164 404
Other financial
assets 8 120 747 18 091 467 14 157 102
Cash and cash
equivalents 9 963 189 6 351 119 10 492 136
94 813 925 85 386 660 115 500 926
Total assets 362 384 349 364 432 335 392 155 688
EQUITY AND
LIABILITIES
Equity
Share capital 213 361 060 213 352 130 214 404 582
Reserves (1 074 561) (1 074 561) (1 074 561)
Retained earnings 627 759 19 470 108 10 498 923
Attributable to
equity holders of
parent 212 914 258 231 756 701 223 828 944
Non-controlling
interest (3 139 922) (1 568 194) (1 121 496)
209 774 336 230 188 507 222 707 448
Liabilities
Non-current
liabilities
Finance lease
obligations 308 582 577 584 445 550
Deferred tax 7 595 942 4 045 685 1 798 081
Provision for losses
in associate - - 736 461
7 904 524 4 623 267 2 980 092
Current liabilities
Loans from
shareholders 410 664 1 189 031 2 851 384
Other financial
liabilities 903 725 537 651 2 698 984
Finance lease
obligations 213 163 37 687 294 020
Trade and other
payables 128 350 547 115 404 027 143 225 968
Bank overdraft 14 827 390 12 452 165 17 361 308
Current tax payable - - 36 484
144 705 489 129 620 561 166 468 148
Total liabilities 152 610 013 134 243 828 169 448 240
Total equity and
liabilities 362 384 349 364 432 335 392 155 688
Number of shares in
issue („000) 89 255 89 255 90 242
Net asset value per
share (cents) 235.0 257.9 246.8
Net tangible asset
value per share
(cents) (9.7) 5.3 (8.7)
AUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Audited Unaudited Audited
28 February 31 August 29 February
2013 2012 2012
(12 months) (6 months) (12 months)
R R R
Balance at the
beginning of the
period 222 707 448 222 707 449 234 204 128
Total comprehensive
income / (loss) for
the period (11 889 590) 8 971 186 (4 410 498)
Purchase of own
shares (1 043 522) (1 043 429) (6 713 374)
Directors? Call
Options - - (372 808)
Balance at the end of
the period 209 774 336 230 188 507 222 707 448
AUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Audited Unaudited Audited
28 February 31 August 29 February
2013 2012 2012
(12 months) (6 months) (12 months)
R R R
Cash flows from
operating activities 10 368 769 (2 508 695) 5 034 699
Cash flows from
investing activities (2 812 683) (1 789 272) 5 313 373
Cash flows from
financing activities (5 551 115) (5 393 626) (7 195 260)
Net cash movement for
the period 2 004 971 (6 113 049) 3 152 812
Cash at the beginning
of the period (6 869 172) 12 003 (10 021 984)
Total cash at the end
of the period (4 864 201) (6 101 046) (6 869 172)
SEGMENTAL REPORTING
The directors have considered the implications of IFRS 8: Operating
segments and are of the opinion, based on the information provided
to the chief operating decision maker, that the current operations
of the Group can be split into two main operating segments, namely a
Telecom Grouping and a Media, Technology and Software (“MTS”)
Grouping. The operations within each of these main segments or
groupings, are substantially similar to one another, and the risk
and returns of the operations of these groupings are likewise
similar. Resource allocation and management of the current
operations are performed on an aggregate basis within each of the
two main groupings. The summarised information is included below in
line with the requirements of IAS 34. The revenue generated from the
products and services supplied by the Group is distributed
countrywide to all clients with no geographical differentiation.
The Telecom Grouping comprises:
- Huge Telecom (Pty) Limited (“Huge Telecom”);
- Huge Mobile (Pty) Limited (“Huge Mobile”) – formerly CentraCell
(Pty) Limited;
- Huge Cellular (Pty) Limited;
- Le Gacy Telecom (Pty) Limited; and
- Gonondo Telecom (Pty) Limited;
The MTS Grouping comprises:
- Eyeballs Mobile Advertising (Pty) Limited (“Eyeballs”); and
- Huge Software (Pty) Limited – formerly Huge Media (Pty) Limited
The Company provides the services of a Corporate Office.
Telecom Corporate
Grouping MTS Grouping Office Total
R R R R
Total revenue 266 146 277 175 000 - 266 321 277
Gross profit 78 879 092 170 500 - 79 049 592
Other income 1 181 982 - - 1 181 982
Operating
expenses (64 945 837) (5 617 138) (2 468 711) (73 031 686)
Impairment of
Eyeballs
intangible –
at company
level - (5 211 270) - (5 211 270)
Impairment of
Eyeballs
intangible –
at
consolidation
level - (3 210 859) - (3 210 859)
Operating
profit (loss) 15 115 237 (13 868 767) (2 468 711) (1 222 241)
Investment
income 832 416 - 478 591 1 311 007
Net change in
fair value of
financial
instruments (2 053 798) - (4 022 750) (6 076 548)
Income from
equity
accounted
investments 67 063 - - 67 063
Finance costs (2 675 456) (28 603) (1 000 974) (3 705 033)
Profit (loss)
before income
tax 11 285 462 (13 897 370) (7 013 844) (9 625 752)
Income tax
credit
(expense) (4 062 994) 2 243 080 (443 924) (2 263 838)
Profit after
income tax 7 222 468 (11 654 290) (7 457 768) (11 889 590)
COMMENTARY
BASIS OF PREPARATION
The audited consolidated annual financial results have been prepared
in accordance the recognition and measurement principles of
International Financial Reporting Standards and presented in
accordance with the minimum content, including disclosures,
prescribed by IAS 34: Interim Financial Reporting applied to year
end reporting, the Companies Act of South Africa, and the JSE
Limited?s Listings Requirements. In addition, these audited
consolidated annual financial results have been prepared in
accordance with SAICA Financial Reporting Guides as issued by the
Accounting Practices Committee and Financial Reporting
Pronouncements as issued by the Financial Reporting Standards
Council. The accounting policies used in preparation of these
audited consolidated annual financial results are consistent with
those applied in the last comparable six month period, as well as
those applied in the preparation of the annual financial results of
the Company for the year ended 29 February 2012.
COMPANY PROFILE
Huge is an investment holding company listed on the Alternative
Exchange (“AltX”) of the JSE Limited?s Stock Exchange (“JSE”) and
comprises a Telecoms Grouping and an MTS Grouping. The Group is
focused on building shareholder value. Its treasury operations are
mandated to maximise the financial position of the Company in the
debt and equity markets using cash and derivative-based instruments.
Huge Telecom and Huge Mobile, wholly-owned subsidiary companies of
Huge and the principal trading operations of the Group and which
comprise its Telecoms Grouping, are two of South Africa?s leading
providers of voice, messaging, data and video connectivity services
utilising a wireless, GSM-based, fixed-cellular, last-mile solution.
Eyeballs (77% owned by Huge) is a technology provider whose
technology consists of a software application that recipient users
download and install, at no cost to themselves, on their mobile
phones. It displays advertising and content images on the phone
screen when calls are made or messages received. Eyeballs intends
generating revenue from the successful deployment of the server-end
of its technology on the servers of various customers, particularly
mobile network operators operating throughout the world.
FINANCIAL OVERVIEW
The year ended 28 February 2013 (FY13) can be characterized as a
tale of substantially two parts:
- During the first five months of FY13 Huge Telecom enjoyed the
fruits of a lower cost environment, both in terms of lower cost
of sales and overheads.
- On 1 March 2012, MTR fell from 73 cents per minute to 56 cents
per minute for mobile destined calls, equating to a reduction of
17 cents per minute on wholesale originated calls.
- During this period, approximately 25% of the Telecom Grouping?s
minute traffic was originated on a wholesale, cost-plus supply
basis and this resulted in a monthly cost reduction of about R1
million with an immediate positive impact on both profitability
and cash flow generation in this amount.
- The Telecom Grouping also benefited from the full impact of a
lower overhead cost structure implemented during the latter half
of the previous financial year, which resulted in a cost saving
of approximately R500 000 per month.
- These factors translated into a monthly benefit in terms of lower
costs of roughly R1.5 million per month.
The last seven months of FY13 were negatively impacted by churn (the
termination of existing connections) exceeding the sale of a new
connections (the activation of new connections). The resultant
lower levels of revenue during this period were however partially
offset by the benefits of the lower cost structures carried forward
from the prior five month period.
During the year under review, management adopted a strategy of not
combating churn through lower pricing. The predominant retail less
discount business model meant that proactive price protection
initiatives would result in margin erosion. In contrast, the
benefit of the recently concluded wholesale, cost-plus agreement is
the ability to offer more attractive pricing in the market.
The Telecom Grouping?s key performance measure – ARTWD (average
revenue per trade weighted day) – was lower during most of the
second period. There has however been an encouraging improvement in
this metric since December 2012 with month on month growth which
indicates that the declining revenue trend has been arrested. This
is partly attributable to the Group?s sales strategy and sales
efforts now being predominantly focused on selling through its
Business Partner channel.
Competitive threats in the market for the provision of last-mile
connectivity services remain but Huge Telecom?s competitive position
is significantly stronger than what it has been in the last two
financial years. A significant number of VoIP over Telkom?s legacy,
fixed-line, copper last-mile (Legacy VoIP) participants are starting
to experience substantial pressure and are unable to demonstrate the
advantages of this last-mile connectivity service. The advantages
enjoyed by the Legacy VoIP operators are fast disappearing, with
many clients choosing wireless, GSM-based, Fixed-cellular, last-mile
connectivity services in place of Legacy VoIP. Telkom remains Huge
Telecom?s most significant competitor.
Eliminating the inherent conflict of interest created by competing
with one?s channel was very important and will be remembered in
making future decisions of this nature. Huge is not a supplier of
PABX equipment and therefore does not compete with its Business
Partners, many of whom are PABX vendors.
The trust and relationship that Huge Telecom has built with its
distribution channel as a result of this strategy is substantial;
many vendors of PABX equipment, who have sold the services of other
last-mile connectivity service providers in the past, have switched
to selling the wireless, GSM-based, Fixed-cellular, last-mile
connectivity services supplied by Huge Telecom.
The decision by Huge Telecom not to compete with its Business
Partners applied the same logic as Huge Telecom?s decision not to
compete with its suppliers (by becoming a network infrastructure
player in the SA telecoms market).
INVESTMENT HOLDING ACTIVITIES
Huge Group?s investment holding activities, including treasury
management, are mandated to maximize the financial position of the
Group in the debt and equity markets using cash and derivative-based
instruments.
TELECOMMUNICATIONS ACTIVITIES
The Telecom Grouping is the Group?s principal revenue generator.
Total revenue generated in the twelve months ended 28 February 2013
decreased to R266 million from R384 million in the previous year, a
decrease of 30%.
MEDIA ACTIVITIES
The Group has decided to impair the remaining carrying values of its
investments in media, being its Eyeballs Technology.
GROUP NET CHANGE IN THE FAIR-VALUE OF FINANCIAL INSTRUMENTS
The charges on single stock futures contracts (“SSFs”) and contracts
for difference (“CFDs”) decreased the operating profitability of the
Group by R6.1 million in the twelve month period ended 28 February
2013.
FUTURE PROSPECTS
Huge Telecom is a supplier of a wireless, GSM-based, last-mile
connectivity service using fixed cellular routing (FCR) technology.
It procures these last-mile connectivity services on a wholesale
cost-plus basis from the MNOs. As such, Huge Telecom is also able
to offer better coverage than any single MNO as it is able to supply
substantially all mobile networks. In other words, its Cell C-MTN-
Vodacom coverage is better than a Cell C, MTN or Vodacom coverage
simpliciter. The power of this aggregated service is not
questionable.
Huge Telecom is also now faced with lower operational risk than in
the past. It?s operational and sales structures have been
simplified, and its credit control and client services processes
remain strong points.
The risks the Group faces are far lower than at any time in its 20
year history. In particular, the following key risks have been
reduced and/or largely eliminated:
- Complicated retail-minus discount pricing structures;
- Subscription-based breakage;
- Asset-liability matching of the terms of inbound subscriptions
(duration and pricing) with outbound services.
The strategies which the Group has adopted in the last four years
are starting to bear fruit – in particular its sales strategy and
its drive to recruit new Business Partners are proving to be
extremely successful.
A key to revenue growth in the future is the number of active
selling Business Partners. Huge Telecom sees the appointment of an
increasing number of Business Partners as an effective recipe to
combat current and future churn. Business Partner activity will
have a material impact on the sale of new connections and on revenue
in the future. This is the focus for FY14 – to increase the number
of actively selling Business Partners.
The declines in revenue in FY13 are therefore definitely
attributable to churn and not from a lack of sales effort or an
inability to activate new connections.
The current trend for churn appears to suggest a reversal - when
comparing FY13 to FY12. However, high volume customers (measured by
minutes per connection) have been lost and low volume customers
(measured by minutes per connection) acquired, which explains the
continued declines in revenue. Having said that, the prospects look
good - churn continues to decline and sales of new connections
through the channel continue to improve.
Huge Telecom has also been successful in increasing its fixed
annuity income stream which consists of channel and site management
fees as well as line rentals, all of which are protected from price
compression.
GENERAL REPURCHASE OF SHARES FOR CASH
The Company has been acquiring its own shares under the general
authority granted to the directors at the last six annual general
meetings (“AGMs”). During the year under review, the Group
repurchased 987 100 shares at a cost of R1 043 429, an average cost
of R1.06 per share.
The number of ordinary shares in issue at year-end amounted to
100 512 495 with 11 257 978 treasury shares being held. This affords
the Group the opportunity of reducing the number of shares in issue
to 89 254 517.
LEGAL AND REGULATORY REQUIREMENTS
Huge Telecom is currently party to the following litigation:
Dispute between MTN Service Provider Proprietary Limited (“MTNSP”)
and Huge Telecom
MTNSP instituted a notice of motion in the South Gauteng High Court,
Johannesburg, on 18 January 2011 whereby it made application for an
order 1) liquidating Huge Telecom; 2) that the costs of the
application be costs in the liquidation; 3) further and/or
alternative relief, or alternatively a judgment against Huge Telecom
for 1) payment of the amount of R30 million; 2) interest; 3) costs
of the suit, and 4) further or alternative relief.
In terms of a Court Order of the South Gauteng High Court handed
down by Mokgoatlheng J on 20 August 2012, the matter was 1) referred
to trial; 2) the notice of motion and founding affidavit were
ordered to stand as a simple summons; 3) MTNSP was required to
deliver a declaration, and 4) the costs of the application are to
be the costs in the cause of a trial action.
MTNSP delivered its declaration on 1 October 2012, which was amended
and lodged on 7 December 2012.
On 20 February 2013 Huge Telecom filed its Plea to MTNSP?s amended
declaration. The amended declaration no longer includes a prayer for
the winding up of Huge Telecom. Huge Telecom filed its Special Plea
and Plea defending the action, and on 18 April 2013 MTNSP filed a
replication.
The matter has as yet not been set down for hearing.
On 15 February 2012 the Sheriff of the South Gauteng High Court
served a combined summons against Huge Telecom in terms of which
MTNSP prayed for judgment against Huge Telecom for payment of the
sum of R 56 020 357 plus interest and costs on the basis of a tacit
agreement being concluded between Huge Telecom and MTNSP during
September 2009, alternatively on the basis of unjustifiable
enrichment at the expense of MTNSP. Such action will only proceed in
the event that MTNSP is unsuccessful in the first action.
The matter has not yet been set down for hearing.
The Group has recognised the assets and the liabilities relating to
the MTNSP dispute in accordance with the settlement agreement which
MTNSP claims was reached between the parties. As such the carrying
amounts of these assets and liabilities may be materially adjusted
within the next financial year, depending on the outcome of the
legal dispute.
Mr JP Kimber
On 22 November 2010, Kimber instituted a claim against Huge Telecom
for payment of R6.8 million in terms of an option agreement signed
by Huge Telecom and Kimber on 2 September 2008, as varied by the
option agreement amendment agreement signed by Huge Telecom and
Kimber on 27 February 2009 (“the option agreements”).
On 12 October 2011 Kimber launched an application in the South
Gauteng High Court for rectification of the option agreements and
for payment of the sum of R6.8 million plus interest thereon (“the
main application”).
Huge Telecom opposed the notice of motion in terms of the main
application and filed its answering affidavit on 19 October 2011.
On 14 November 2011 Huge Telecom launched its own notice of motion
in terms of a separate Section 6(1) application in the South Gauteng
High Court seeking an order compelling Kimber to comply with the
arbitration undertakings in the option agreements, which prevent
Kimber from litigating in court.
The matter was heard on 28 March 2012. On 31 August 2012, Vermeulen
AJ passed judgment a) staying the application by Kimber until the
finalization of the arbitration proceedings in relation to the
dispute relating to the option agreements, and b) ordering Kimber to
pay Huge Telecom?s costs of this application.
Kimber has as yet not launched arbitration proceedings against Huge
Telecom.
No amounts have been recognized in the financial results given that
the Board is of the view that there is no basis to the cause of the
action and such action therefore has little chance of success.
Potential litigation:
Dispute between Huge and Telemasters Holdings Limited (Telemasters)
During February 2013 Telemasters cancelled an agreement with Huge
for the supply of MTN airtime and suspended the SIM cards held by
Huge. Telemasters alleges that Huge is indebted to it in the amount
of R 4.4 million. Huge has claims against Telemasters in the amount
of R 5.3 million in respect of amounts overcharged by Telemasters,
and inclusive of an interest claim of R 1.2 million. Formal legal
proceedings have not been instituted by either party against the
other.
SUBSEQUENT EVENTS
There are no events subsequent to 28 February 2013 and prior to the
date of this announcement which have had or may have a material
impact on the Company.
GOING CONCERN
The Board has made a detailed assessment of the going concern
capability of the Group with reference to certain assumptions and
plans underlying various cash flow forecasts.
The Board has not identified any events or conditions that
individually or collectively cast significant doubt on the ability
of the Company and the Group to continue as a going concern.
CHANGES TO THE BOARD OF DIRECTORS AND COMPANY SECRETARY
Mr Ken Jarvis resigned as a non-executive director of the Company
with effect from 8 June 2012.
Mr Brian McQueen resigned as a non-executive director of the Company
with effect from 28 June 2012.
Mr Dennis Robert Gammie was appointed as a non-executive director of
the Company and the Chairman of the Combined Audit and Risk
Committee with effect from 29 June 2012.
Mr David Deetlefs was appointed as Group Financial Director with
effect from 1 October 2012.
Mrs Jean Tyndale-Biscoe was appointed as the Company Secretary of
the Group with effect from 1 August 2012.
Subsequent to the year-end, Mr Michael Ronald Beamish resigned from
the Board with effect from 20 May 2013.
DIVIDENDS
No dividends were paid or declared during the twelve months ended 28
February 2013.
GOVERNANCE
The Group recognises the need to conduct its business with
integrity, transparency and equal opportunity, and subscribes to the
spirit of good corporate governance as set out in the King III
Report on Corporate Governance.
AUDIT OPINION
These results have been audited by the Group auditors, BDO South
Africa Inc, and their unmodified audit report is available for
inspection at the Company?s registered office.
Johannesburg
31 May 2013
Further investor and shareholder information is available at
www.hugegroup.com.
Designated Advisor
Arcay Moela Sponsors Proprietary Limited
Number 3, Anerley Road, Parktown, 2193
Auditor
BDO South Africa Incorporated.
22 Wellington Road, Parktown, 2193
Registered office:
1st Floor, East Wing, 146a Kelvin Drive, Woodmead, Johannesburg, 2191
(PO Box 16376, Dowerglen, 1610)
Transfer Secretaries
Computershare Investor Services Proprietary Limited
Ground Floor, 70 Marshall Street, Johannesburg
Directors:
VM Mokholo (Executive Chairman), SP Tredoux* (Lead Independent
Director), DR Gammie*, AD Potgieter*, JC Herbst (CEO), D Deetlefs
(Group Financial Director)
*Non-executive
Date: 31/05/2013 04:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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