Wrap Text
Provisional condensed reviewed consolidated results for the year ended 28 February 2014
HUGE GROUP LIMITED
(Registration number 2006/023587/06)
Share code: HUG ISIN: ZAE000102042
("Huge" or "the Group" or "the Company")
PROVISIONAL CONDENSED REVIEWED CONSOLIDATED RESULTS FOR THE YEAR
ENDED 28 FEBRUARY 2014
HIGHLIGHTS FOR THE PERIOD
- 56% increase in gross profit margins from 29.7% to 46.3%
- Telecom Operating Segment increases operating profit before tax
by 53% from R15.1 million to R23.1 million
- Telecom Operating Segment generates operating profit margins of
11.4% (up 98% year-on-year)
The board of directors ("the Board") of Huge is pleased to present
the condensed reviewed consolidated annual results of the Company,
its subsidiary companies and joint venture (“the Group”) for the
year ended 28 February 2014.
CONDENSED REVIEWED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Reviewed Unaudited Audited
28 February 31 August 28 February
2014 2013 2013
(12 months) (6 months) (12 months)
R R R
Total revenue 203 577 908 106 698 288 266 321 277
Gross profit 94 239 784 46 234 498 79 049 591
Other income 1 541 967 1 420 948 1 181 983
Operating
expenses (77 817 551) (39 367 791) (81 453 815)
Operating
profit (loss) 17 964 200 8 287 655 (1 222 241)
Investment
income 1 021 159 327 800 1 311 007
Net change in
fair value of
financial
instruments (804 304) (1 341 444) (6 076 548)
Share of
earnings (loss)
from equity
accounted
investments 73 170 (10 251) 67 063
Finance costs (2 293 002) (1 209 546) (3 705 033)
Profit (loss)
before taxation 15 961 223 6 054 214 (9 625 754)
Income tax
expense (4 628 565) (2 843 006) (2 263 838)
Net profit
(loss) for the
period 11 332 658 3 211 208 (11 889 590)
Owners of the
parent 12 081 447 3 664 838 (9 871 164)
Non-controlling
interest (748 789) (453 630) (2 018 426)
11 332 658 3 221 208 (11 889 592)
Basic and
diluted
earnings (loss)
per share
(cents) 13.80 4.11 (11.01)
Adjusted for:
Impairment of
non-current
assets 0.15 - -
Impairment of
fixed assets - 0.01 -
Profit on
disposal of
property, plant
and equipment (0.03) - -
Impairments of
intangible
assets and
associate
company 6.9
Legal
settlement - 1.95
Basic and
diluted
headline
earnings (loss)
per share
(cents) 13.92 6.07 (4.07)
Total number of
shares in issue
('000) 80 255 89 255 89 255
Weighted number
of shares in
issue ('000) 87 530 89 255 89 672
CONDENSED REVIEWED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Reviewed Unaudited Audited
28 February 31 August 28 February
2014 2013 2013
(12 months) (6 months) (12 months)
R R R
ASSETS
Non-Current Assets
Property, plant and
equipment 34 450 565 33 604 828 32 489 579
Goodwill 215 153 482 215 153 482 215 153 482
Intangible assets 2 808 534 5 693 057 3 243 525
Investment in joint
venture 702 463 674 467 629 293
Other financial
assets - - 298 630
Deferred tax 11 302 734 12 287 244 15 755 915
264 417 778 267 413 078 267 570 424
Current Assets
Inventories - 4 747 177 5 742 244
Trade and other
receivables 69 220 149 67 935 275 70 823 341
Loans to associate
companies - 366 830 -
Current tax
receivable 164 404 - 164 404
Deferred
Discretionary
Incentive Bonuses 3 766 635 - -
Other financial
assets 3 400 079 7 147 375 8 120 747
Cash and cash
equivalents 4 173 099 4 638 173 9 963 189
80 724 366 85 641 093 94 813 925
Total assets 345 142 144 353 242 285 362 384 349
EQUITY AND
LIABILITIES
Equity
Share capital 208 410 530 213 361 060 213 361 060
Reserves (482 456) (1 074 561) (1 074 561)
Retained earnings 12 117 099 4 292 597 627 759
Attributable to
equity holders of
parent 220 045 173 216 579 095 212 914 258
Non-controlling
interest (3 888 711) (3 593 552) (3 139 922)
216 156 462 212 985 543 209 774 336
Liabilities
Non-current
liabilities
Finance lease
obligations 458 920 182 038 308 582
Deferred tax 7 771 325 - 7 595 942
Provision for losses
in associate - 55 274 -
8 230 245 237 312 7 904 524
Current liabilities
Loans from
shareholders 1 345 961 - 410 664
Other financial
liabilities 1 167 946 - 903 725
Finance lease
obligations 359 732 219 393 213 163
Trade and other
payables 107 881 153 127 128 086 128 350 547
Bank overdraft 10 000 645 12 671 951 14 827 390
120 755 437 140 019 430 144 705 489
Total liabilities 128 985 682 140 256 742 152 610 013
Total equity and
liabilities 345 142 144 353 242 285 362 384 349
Number of shares in
issue ('000) 80 255 89 255 89 255
Net asset value per
share (cents) 269.34 238.63 235.03
Net tangible asset
value per share
(cents) (2.25) (8.81) (9.66)
CONDENSED REVIEWED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Reviewed Unaudited Audited
28 February 31 August 28 February
2014 2013 2013
(12 months) (6 months) (12 months)
R R R
Balance at the
beginning of the
period 209 774 334 209 774 334 222 707 448
Total comprehensive
income / (loss) for
the period 11 332 658 3 211 208 (11 889 592)
Purchase of own
shares (4 950 530) - (1 043 522)
Balance at the end of
the period 216 156 462 212 985 542 209 774 334
CONDENSED REVIEWED CONSOLIDATED STATEMENT OF CASH FLOWS
Reviewed Unaudited Audited
28 February 31 August 28 February
2014 2013 2013
(12 months) (6 months) (12 months)
R R R
Cash flows from
operating activities 11 583 219 1 561 436 10 368 769
Cash flows from
investing activities (9 092 459) (2 900 710) (2 812 683)
Cash flows from
financing activities (3 454 105) (1 830 303) (5 551 115)
Net cash movement for
the period (963 345) (3 169 577) 2 004 971
Cash at the beginning
of the period (4 864 201) (4 864 201) (6 869 172)
Total cash at the end
of the period (5 827 546) (8 033 778) (4 864 201)
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”);
- Huge Cellular (Pty) Limited;
- Le Gacy Telecom (Pty) Limited; and
- Ambient Mobile (Pty) Limited
The MTS Grouping comprises:
- Eyeballs Mobile Advertising (Pty) Limited (“Eyeballs”); and
- Huge Software (Pty) Limited
The Company provides the services of a Corporate Office.
Telecom MTS Grouping Corporate Inter- Total
Grouping Office segment
transactions
R R R R R
Total revenue 288 329 922 6 426 319 - (91 178 333) 203 577 908
Cost of sales (194 492 453) - - 85 154 329 (109 338 124)
Gross profit 93 837 469 6 426 319 - (6 024 004) 94 239 784
Other income 5 976 939 - 563 346 (4 997 409) 1 541 967
Operating
expenses (82 774 080) (3 309 854) (2 755 030) 11 021 413 (77 817 551)
Impairment of
Eyeballs
intangible –
at company
level - (239 747) - - (239 747)
Operating
profit (loss) 23 063 423 (2 907 539) (2 191 684) - 17 964 200
Investment
income 718 845 - 378 364 (76 050) 1 021 159
Net change in
fair value of
financial
instruments 531 447 - (1 335 751) - (804 304)
Income from
equity
accounted
investments 73 170 - - - 73 170
Finance costs (2 036 593) (30 960) (301 499) 76 050 (2 293 002)
Profit (loss)
before income
tax 22 350 292 (2 938 499) (3 450 570) - 15 961 223
Income tax
(expense) (4 202 241) (1 358 637) 932 313 - (4 628 565)
Profit (loss)
after income
tax 12 124 047 1 726 868 (2 518 257) 11 332 658
COMMENTARY
BASIS OF PREPARATION
The condensed reviewed 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 Johannesburg Stock Exchange Listings Requirements. In addition, these condensed reviewed 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 condensed reviewed consolidated annual financial results are consistent with those applied in the most
recent six month period, as well as those applied in the preparation of the annual financial results of the Company for the year ended 28
February 2013.
These condensed reviewed consolidated annual financial results were prepared by the Group Financial Director, David Deetlefs CA (SA).
COMPANY PROFILE
Huge is an investment holding company listed on the Alternative Exchange (“AltX”) of the Johannesburg 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, are the principal trading entities of the Group comprising the
greater portion of its Telecoms Grouping, and 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
Investment holding activities
Huge'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.
We believe that a number of merger and acquisition opportunities are starting to emerge that will allow Huge to progress its vision of
building a Group that excels in the creation of client, employee and stakeholder value, led by a “Huge” brand and service ethic. Huge is
also keen to diversify its investment portfolio into other allied industries.
Media activities
The Group is committed to finding opportunities in media that will assist it in creating value from existing investments.
Telecommunications activities
Huge Telecom and Huge Mobile are the Group's principal trading entities.
Introduction
FY2014 was another important building block in establishing Huge Telecom as the pre-eminent provider of full suite telephony services
to corporate enterprises in South Africa, and in particular to SMMEs.
Every aspect of the operation is important if Huge Telecom is to remain relevant in the telecommunications market and so a review of
the different parts of the operation is important.
Huge Telecom has made improvements in every area of the business this year.
Review of operations
Market positioning
With all of the attention of the South African telecommunications market on SMMEs, it is fortuitous that Huge Telecom's dominance lies
in this segment of the market. Everyone is targeting the SMME market, from the mobile network operators (Cell C, MTN, Telkom
Business Mobile, Virgin Mobile and Vodacom) to the major VoIP operators (Altech Technology Concepts, Internet Solutions, Nashua
Communications, Saicom, TeleMasters and Vox Telecom) to the fixed-line operators (Neotel and Telkom). It really is the last frontier,
and it is where the last gold rush is taking place. The enterprise customers are all taken, the margins generated from enterprise
business are very low and the market for enterprise customers grows at a slower rate. Similarly, the consumer market is saturated and
over-competed. This makes the hitherto overlooked market for SMMEs a "holy grail" of customers and Huge Telecom's focus on and success
in the SMME segment increases its value in the market.
Huge Telecom provides full suite telephony services to over 7 100SMMEs. It has no more than a 2.5% exposure to its single largest
SMME customer; customer concentration risk is therefore low.
Service offering
Huge Telecom provides a full suite telephony service that can also integrate comprehensively with a private automated branch exchange
(PABX) including line hunting (distributing phone calls from a single telephone number to a group of several phone lines), direct-
inward-dial or DID (which is dialling direct to the extension), direct-outward-dial or DOD (which is dialling direct from the
extension), Mobex (mobile extensions that are integrated with the PABX) and caller line identity or CLI.
The beauty of Huge Telecom's service offering lies in its simplicity and ease of installation. These qualities help to fortify the only
value proposition available in a commoditised market – service.
Unique value propositions (UVPs)
The full suite telephony service provided by Huge Telecom is founded on extremely fast levels of service. The entire sales cycle, from
sales initiation to contract processing, from technology implementation to after sales service and billing, takes only a few days
and continuous improvements are being made.
Huge Telecom recently undertook an overhaul of its internal process that will have the effect of reducing our current sales initiation
lead times and contract processing lead times (including credit vetting) from 3 to 5 days to no more than a couple of hours. This
will also reinforce the link between Huge Telecom and our distribution partners, thereby ensuring that the sales process is
seamless and uniform across organisational boundaries.
We are introducing a sales ticketing system in FY2015 in an effort to further reduce the lead times from customer introduction to
signature of the eBSA (electronic Business Services Agreement) and from contract acceptance to technology implementation.
Huge Telecom also prides itself on having the lowest mean times in the market in terms of executing service calls.
It is moreover Huge Telecom?s vision and strategy that within the next three years lead times will have improved to such an extent
that a customer who signs up in the morning will be able to make a telephone call that same afternoon.
Huge Telecom is focussed on providing superior customer service to the SMME segment of the South African Telecommunications market –
this is a segment that the fixed-line operators, MNOs and VOIP providers have long aimed to penetrate – without success.
Distribution
Without HUGE distribution capacity (i.e. the number of people or organisations promoting or selling one's service), the benefits of
great market positioning, great service offerings and unique value propositions would in all likelihood still yield very poor results.
It is this aspect of the business of Huge Telecom that separates it from the rest of the competitors in the market who are vying for the
attention of the SMME. In the last three years, Huge Telecom has established significant capabilities resulting in over 320 Business
Partners currently selling the company's product offering on a national basis.
Huge Telecom does not compete with its Business Partners in the supply of PABX or Office Automation (OA) equipment. This is very
important and means that the trust and reputation that Huge Telecom has built in the last 30 months is high. All the other providers of
telephony in South Africa have not been able to restrain themselves and have entered the PABX and OA markets. Competing with one's own
distribution cannot be prudent.
During FY2014, we increased the number of Business Partners by 115,from 174 to 289.
We also focused on increasing the activity levels of our Business Partners. Business Partner activity levels measured by the number
of active Business Partners and the average units sold per Business Partner both increased during FY2014 by 150% and 11% respectively.
A key feature of 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 churn. Increased Business Partner activity will have a
material impact on the sale of new connections and on revenue in the future. This will continue to be a focus point for FY2015 much as
it was in FY2014.
There is a lag between the time from which Business Partners are appointed and the time sales of new connections accrue from these
Business Partners. Sales of new connections are a function of the number of active Business Partners. Greater numbers of active
Business Partners will therefore result in greater sales of new connections, lower churn and higher net growth and revenue.
The acquisition of new Business Partners is thus a lead indicator of increased monthly sales of new connections, which in turn is a lead
indicator of Huge Telecom's primary revenue metric – average revenue per trade weighted day (ARTWD). Huge Telecom is upbeat about its
future prospects for revenue growth.
In order to be successful in increasing Business Partner activity levels,the tracking and rewarding of our Business Partners'
activity has been and will remain a critical component of our sales success. This is another one of our focus points.
Sales
Sales measured by the number of telephone lines sold (excluding churn) increased substantially during the year, to 8 262 units –
representing a 226% increase over FY2013 (in FY2013 there was an 88% increase over FY2012).
In the result, average monthly sales of telephone lines also increased during the year under review, from an average of 309 units
during FY2013 to an average of 689 units during FY2014 (FY2012: 203 units).
In March 2014, sales of new telephone lines exceeded 1 000 lines for the first time in the company's history. It is therefore clear that
the strategy of selling through Business Partners (which was put into operation some 30 months ago) is gaining momentum. Future
prospects look very good and further records are bound to be broken. The activation of new telephone lines (i.e. our sales performance)
should also be considered against the backdrop of the arithmetic average of Huge Telecom's selling rates – where selling rates have
in most instances been higher than those of its competitors. This further underpins the real performance achieved. Fruits of this
sales performance will evidence itself in the years ahead.
Churn
Churn is the termination of existing telephone lines and it has an impact on net growth of telephone lines, which is a success
indicator for Huge Telecom because it has an impact on revenue.
Huge Telecom operates in an environment in which a certain level of churn is to be expected. What is important is for the sale of new
telephone lines to exceed an acceptable level of churn (based on a percentage of the base of customer telephone lines in force). This
is a function of our distribution (the number of active Business Partners selling for Huge Telecom). If one looks at other markets,
like the market for prepaid mobile subscriptions in India, 100% of the market churns in a single year. Therefore, churn represents a
normal challenge to operating a telecommunications business.
We have been able to arrest the levels of churn in the business during the period under review. During FY2014 Huge Telecom reduced
churn from an average of 362 units per month during FY2013 to an average of 281 units per month (FY2012: 397 units).
While it is impossible to avoid churn, efforts are being made continuously in order to ensure that the services provided by Huge
Telecom are competitive, both from a price and a quality of service perspective.
We are of the opinion that we must use service as opposed to price to combat churn.
Revenue
While revenue for FY2014 decreased by 23% when compared to FY2013, this is not an accurate measure of the sales success of the business
during the period under consideration – given the compounding effects of historical sales against historical churn as well as the
impact of revenue mix. There is about a twelve month lead time between sales activity and its effects on revenue. Net growth or
net churn in any period is felt twelve months later. The revenue for FY2014 is a result of the sales and churn activity in prior
periods.
The telephone calls per trade weighted day and the minutes generated per trade weighted day are much better measures of sales performance
and in this year they have been increasing. Telephone calls per trade weighted day were 20% higher in February 2014 when compared to
March 2013. Minutes generated per trade weighted day were 8% higher in February 2014 when compared to March 2013. The trend lines
continue to move upwards.
The mix between calls to mobile and fixed-line numbers (where prices to the former are higher than to the latter) also changed during the
year. This year the mobile to fixed-line mix was 80%:20% when compared to FY2013 where the mix was 89%:11%.
The average selling price for a mobile minute during FY2014 was 93 cents per minute (FY2013: R1.15) while the average selling price for
a fixed-line minute over the same period was 38 cents per minute (FY2013: 44 cents).
ARTWD trended higher during FY2014. Huge Telecom pays close attention to ARTWD. This metric is calculated by dividing the
revenue for the month by the trade weighted days in each calendar month. The number of trade weighted days is calculated with
reference to working days, Saturdays, Sundays and public holidays.
Huge Telecom has also been successful in increasing its fixed annuity to variable annuity ratio. The fixed annuity consists of
channel management fees, on account fees, site management fees and line rentals, which are protected from price compression. Current
monthly fixed annuity charges are in the order of about R1.554 million (FY2013: 1.455 million, providing a rolling profit
contribution of R18.656 million (FY2013: R17.457 million) per annum. This fixed annuity is presently growing at about R35 000 per
month.
Supply side economics
The mobile termination rate dropped from 56 cents per minute to 40 cents per minute (a 34% decrease) on 1 March 2013 and this had the
effect of substantially reducing the cost of a minute to a mobile destination for FY2014. This had a marked effect on gross profit
margins for the period under review.
At 28 February 2014, 80% of Huge Telecom?s minutes are procured on a wholesale format (based on originating and terminating costs), while
20% is procured on a retail-minus discount format (FY2013: 75% and FY2012: 25%).
On 1 April 2014, the Independent Communications Authority of South Africa (ICASA) reduced the mobile termination rate from 40 cents per
minute to 20 cents per minute – a 50% reduction. With terminating costs exceeding originating costs, the impact of this decrease on
FY2015 will be significant.
The costs related to router equipment, which are accounted in the statement of financial performance by way of a depreciation charge,
continue to rise and are a concern. Investigations are under way to either source routers at a lower cost or to manufacture routers
ourselves. The current cost of router equipment per channel exceeds R1 300.
Gross margins
Gross margins before direct expenses (such as consumables and distribution costs) increased again this year, by 14% from 41% to
55%.
Overheads
The two primary overhead costs in Huge Telecom, being staff costs and depreciation and amortisation were kept well controlled during
the year. Staff costs increased by 7.4% in line with inflation. Depreciation and amortisation increased by 4% as a result of
increased capital expenditure on router equipment and software.
Future Prospects
Huge Telecom has found a niche in the SMME segment of the market – but with the margins currently being enjoyed by it, and with every
other telecommunications operator in South Africa wanting to make inroads into this segment of the market, Huge Telecom will have to
ensure that it continues to be ahead of the game. While Huge Telecom's business model and approach to the market is unique
currently, it may not take long before other competitors attempt to replicate Huge Telecom's model and success.
Huge Telecom is currently the only provider of full suite telephony to corporate South Africa using GSM technology over fixed-cellular
customer premises equipment (CPE). It therefore has a de facto leading position in this segment.
The VoIP operators use Telkom's legacy fixed-line, copper-based, last-mile to provide telephony over a data protocol. They use
expensive and complicated CPE to convert voice to data for transmission and they use their very competitors to carry this
transmission. Most VoIP participants are experiencing substantial pressure from service degradation such as that caused by the last-
mile provider throttling its services (which Telkom denies) and are unable to demonstrate the advantages of this last-mile connectivity
service, which is far more complex than the plug and play simplicity of a fixed-cellular solution that leverages GSM. Few commentators
understand that VoIP is simply digitized talking over fixed-line, last-mile connectivity using Telkom. To Huge Telecom, VoIP is not
sustainable as a business model because it is crystal clear that the money in South Africa is in mobile and not fixed-line. The cash
that MTN and Vodacom hold on their balance sheets exceeds the total market capitalisation of Telkom (let alone Neotel). In addition,
the lowest cost producers of minutes and megabytes in the industry are the MNOs, due to the fact that the cost per unit of voice (in
minutes) and the cost per unit of data (in megabytes) is a function of the total cost of ownership of a network divided by the total
units manufactured. It is abundantly clear that because Vodacom and MTN's subscriber bases are the largest, they control more of the
termination market for voice and data, and as such they are the lowest cost producers in the country. Cell C is clearly third and
Telkom a distant fourth. It therefore makes no sense for Huge Telecom to build its own network (like ECN, Saicom and Internet
Solutions) as it would never be able to drive down its costs of manufacture to the levels of Vodacom, MTN and Cell C. It is cheaper
to buy wholesale access from the lowest cost producers – the MNOs – and concentrate on what really counts – distribution and service.
The MNOs also have a desire to provide telephony solutions to corporate enterprises and particularly, SMMEs. However, this is
easier said than done. Vodacom launched OneNet Express last year to much fanfare but since then nothing much has been said or heard
about this offering – and Huge Telecom has encountered little competitive activity in the market from it.
We used to see a lot of competition from Neotel three to four years ago but this was limited to high-end enterprise customers where
volumes are large and margins are thin. With Vodacom's recent interest in Neotel things have become even quieter from Neotel, and
if Vodacom is successful in acquiring Neotel, it will eliminate another competitor from the market. At the SMME end of the market,
Huge Telecom seldom encounters Neotel.
Nashua Mobile and Altech Autopage – though not using the same business model – are the only remaining competitors to Huge Telecom
who use GSM and fixed-cellular CPE. However, holding on to least cost routing (LCR) is probably futile. In any event, Nashua Mobile
has just sold its mobile subscriber base back to MTN and Vodacom. Once again, competition is evaporating.
That leaves Telkom, and Telkom has traditionally been and remains Huge Telecom's most material competitor. However, Telkom provides
fixed-line telephony and fixed-line telephony is declining with many residential customers choosing fixed-mobile. It seems that the same
fate is destined for Telkom at the SMME end of the corporate market with Huge Telecom finding that many customers are more than willing
to make the migration to GSM solutions.
As regards new entrants to our market – there are certainly a number of barriers to entry. Scale is important and so too is
distribution. Supply side arrangements are important. Other aspects of the business, like the need for a reliable rating and billing
engine, are also critical.
In closing
Huge Telecom has built a strong investment case in the last three years.
It has created a niche in the telecommunications market focusing on the SMME end of the corporate telephony market.
It is the only provider of full suite, PABX integrated telephony using GSM and fixed-cellular CPE. In many ways, it has a dominant
position in its chosen market.
There are barriers to entry for new entrants, like scale and rating and billing capability.
Sales growth rates are high and so too are gross margins. The business is 100% annuity based and monthly sales growth has a
compounding effect.
Huge Telecom only has a few direct competitors.
Huge Telecom has an extensive distribution network of over 320 Business Partners.
Its unique value propositions include a passionate focus on customer service, short customer initiation timeframes, short contract
processing times as well as short implementation times. Mean times to complete service calls are the shortest in the industry. At Huge
Telecom, we have an honest and delivery focussed attitude. We keep our customers because it is all about service and the Company has
earned a reputation for great customer service.
Huge Telecom also has a sustainable supply of wholesale-based, last-mile access services at competitive costs and it faces a declining
wholesale cost market for origination and termination. By using all the MNOs it has the most pervasive network in South Africa. Huge
Telecom's coverage is better than the coverage of Cell C, MTN, Telkom Business Mobile or Vodacom – simpliciter.
It has proven and reliable technology that is simple and easy to install.
Working capital requirements are low, there is no requirement to carry stock, services are acquired in real time, and there is
extremely low client concentration risk with no client accounting for more than 2.5% of the business.
It has a low operational risk environment where its credit control and debtors' collection processes remain strong points.
Huge Telecom focuses on the things that count – like happy customers and a happy workforce.
For FY2015 Huge Telecom will be focusing on scale and reducing the cost of CPE. The value of scale is huge given the operational
leverage that exists. Reducing the cost of CPE will allow Huge Telecom to grow at a significantly faster pace.
Huge Telecom intends expanding its offerings to include mobile broadband.
GENERAL REPURCHASE OF SHARES FOR CASH
In terms of a special resolution passed by the shareholders of the Company at the Annual General Meeting (“AGM”) held on 12 July 2013,
the Company and its subsidiaries are granted (until the date of the next AGM) a general approval to acquire Huge shares. During the
year under review, Huge Telecom purchased 9 000 000 shares at a cost of R4 950 000 in the open market.
As at the year end, Huge Telecom held 18 706 926 Huge shares, which equates to 18.6% of the Company's issued share capital. This is in
excess of the 10% which a subsidiary company may hold in its holding company. The Group's auditors reported this matter to the
Independent Regulatory Board of Auditors (“IRBA”) on the basis that they had reason to believe that a reportable irregularity may have
taken place in terms of section 45 of the Accounting Profession Act (the APA). The matter has been remedied since year end by Huge
Telecom declaring a dividend “in specie” of 9 060 000 shares. Accordingly, the Group's auditors are satisfied that there is no
longer a possible reportable irregularity (to the extent that a reportable irregularity as defined by the APA had in fact taken
place).
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 been set down for hearing on 25 August 2014.
On 15 February 2013 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 R56 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.
On 4 March 2013, Huge Telecom filed a notice of intention to defend this action, and on 18 April 2013, filed its Special Plea and Plea
defending this action.
On 23 July 2013, MTNSP delivered a replication in response to the Special Plea and Plea filed by Huge Telecom.
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”).
This claim was settled through an out of court settlement reached during August 2013, and all claims by Mr JP Kimber have been waived
in full and final settlement of the matter.
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.
As at 28 February 2013 Telemasters alleges that Huge is indebted to it in the amount of R4.167 million. Huge has claims against
Telemasters in the amount of R6.025 million plus interest, in respect of amounts overcharged by Telemasters. The matter will be
subject to arbitration by the Arbitration Foundation of Southern Africa. A date has not yet been set for the arbitration hearing.
SUBSEQUENT EVENTS
There are no events subsequent to 28 February 2014 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
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 2014.
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.
REVIEW OPINION
These results have been reviewed by the Group auditors, BDO South Africa Inc, and their unqualified and unmodified review report is
available for inspection at the Company's registered office.
In accordance with our responsibilities in terms of sections 44(2) and 44(3) of the APA, we report that we have reason to believe
that there has been a material breach of fiduciary duty by one or more persons responsible for the management of Huge Telecom
Proprietary Limited and Huge Group Limited which constitutes a reportable irregularity in terms of the APA, and have reported
this matter to IRBA.
Particulars of the reportable irregularity are that Huge Telecom Proprietary Limited acquired shares in Huge Group Limited which,
together with shares already held by it, resulted in Huge Telecom Proprietary Limited holding 18.6% of the issued shares in Huge
Group Limited. We believe this to be a contravention of Section 48 of the Companies Act of South Africa. As at the date of this
report, we are satisfied that the contravention of Section 48 has been remedied.
Johannesburg
30 May 2014
Further investor and shareholder information is available at www.hugegroup.com.
Designated Advisor
Arcay Moela Sponsors Proprietary Limited
One Health Building, 54 Maxwell Drive, Woodmead, 2191
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* (Chairman), SP Tredoux* (Lead Independent Director), DR
Gammie*, AD Potgieter*, JC Herbst (CEO), D Deetlefs (Group Financial
Director)
*Non-executive
Date: 30/05/2014 03:45:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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