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General update and withdrawal of cautionary
HUGE GROUP LIMITED
(Registration number 2006/023587/06)
Share code: HUG ISIN: ZAE000102042
(“Huge” or “the Group” or “the Company”)
GENERAL UPDATE (INCLUDING AN UPDATE ON LITIGATION, A TRADING
UPDATE AND AN UPDATE ON FUNDING) AND WITHDRAWAL OF CAUTIONARY
ANNOUNCEMENT
UPDATE ON LITIGATION INVOLVING MTN SERVICE PROVIDER (PTY) LTD
Shareholders are referred to the Integrated Report of the
Company for the year ended 28 February 2014, wherein
disclosure is made, inter alia, regarding certain litigation
involving MTN Service Provider (Pty) Ltd (MTN SP).
MTN SP instituted action (the Actions) against Huge Telecom
for payment of R30 million, alternatively R56 020 357.49,
together with interest thereon under case numbers 2011/00962
and 2013/05977 before the High Court of South Africa Gauteng
Local Division, Johannesburg.
The Board of Directors is pleased to announce that a
settlement agreement (the Settlement Agreement) has been
signed between Huge Telecom (Pty) Ltd (Huge Telecom) and Huge
Mobile (Pty) Ltd (formerly CentraCell (Pty) Ltd) (the Huge
Parties)and Mobile Telephone Networks (Pty) Ltd (MTN) in terms
of which the Huge Parties have undertaken to pay MTN the sum
of R10 million (the Settlement Amount) in full and final
settlement of all claims of any nature that MTN and MTN SP may
have against the Huge Parties. The Settlement Amount must be
paid by Huge Telecom by no later than 15 September 2014.
MTN has undertaken to file a notice removing the Actions from
the trial roll by no later than 7 days after the date of the
last signature to the Settlement Agreement.
MTN has also undertaken to file a notice of withdrawal of the
Actions by no later than 7 days after receipt of the
Settlement Amount.
TRADING UPDATE
Five years ago, Huge Telecom (the principal operating
subsidiary company of Huge) was defined as a least cost
routing (LCR) service provider offering a limited (outbound
mobile to mobile) service in an overcrowded market. This
limited service had as its foundation the saving that could be
provided to customers because of the retail price arbitrage
between the cost of a Telkom to mobile telephone call and a
mobile to mobile, on the network, telephone call.
LCR was built on inbound supplier agreements which were of a
retail reseller nature involving discounts and commissions.
In July 2010, the major mobile network operators (MNOs)
terminated paying connection incentive bonuses (CIBs) – the
commission paid to LCR service providers to activate new
subscribers on the networks of the MNOs. In Huge Telecom’s
case this accounted for a material part of its gross profit
generation.
The removal of CIBs (which resulted in a significant
margin/discount squeeze) and other regulatory changes in the
SA telecommunications market resulted in a mass exodus from
the market by companies providing LCR services. Most LCR
service providers converted their business models to business
models which involve providing voice services over fixed-line
data services (or what has become known as Voice Over internet
Protocol (VoIP) services in SA).
This left the GSM last mile to the remaining LCR service
providers, like Huge Telecom.
In the last three years Huge Telecom has successfully
redefined itself. It has changed its business model and
pioneered a special niche in the South African
telecommunications market. It has transformed itself into a
high growth, high margin business. Huge (through various
subsidiary companies) has secured new supplier arrangements
which eliminate the possibility of margin squeeze that had
previously taken place.
Today, Huge Telecom provides a full outbound and inbound
telephony service using a GSM last-mile solution in
conjunction with fixed-cellular (or fixed wireless) customer
premises equipment. In simple terms, Huge Telecom installs
telephone lines where the connection is wireless and based on
the GSM standard. The advantage of this type of service is
that it is simple, easy to install and allows for high levels
of service. Huge Telecom makes use of the networks of all the
MNOs and therefore has the most extensive cellular network
coverage in South Africa, whilst making use of devices that
are fixed cellular in nature and is therefore able to offer an
unrivalled reliable quality of service.
Huge Telecom operates in partnership with over 350 resellers
(or Business Partners). This distribution channel is being
expanded each month and the channel has proved that it has the
ability to generate consistent organic growth.
Huge Telecom measures its sales activity by the number of
telephone lines (often referred to as connections) that it
sells (and then installs) on a monthly basis. At the end of
its last financial year (28 February 2014) Huge Telecom had a
base of 20 000 installed telephone lines (or connections).
During the first five months of his financial year (up to 31
July 2014) Huge Telecom, through with its Business Partners,
sold in excess of 5 400 telephone lines, representing an
annualized growth rate over this period of around 65%. The
rate of sale over this period has shown a steady increase
month on month. The average contract duration for new business
is now 29 months as compared to 24 months during the previous
financial year.
Gross margins have increased significantly in the last three
years from 19.2% in the year to the end of February 2012 to
54.6% in the year to the end of February 2014. Huge Telecom
currently enjoys margins of approximately 55%.
Huge Telecom has significant operating leverage - management
believes that for each additional rand of revenue generated,
the business has the ability to deliver four times the
operating profit generated by the additional rand of revenue.
The business of Huge Telecom is 100% annuity based and each
month’s sales (of telephone lines) and revenue is compounding
in nature.
With Huge Telecom’s focus on SMMEs and the dominant use of its
chosen technology it has found a special niche in the market
where client concentration risk is very low. No single client
accounts for more than 1.7% of its revenue.
The investment case for, and value of, Huge and Huge Telecom
comprises the value of its subscriber base (measured by the
number of installed telephone lines), its network (measured by
the installed value of its customer premises equipment (CPE))
and the value of its distribution channels(measured by the
number of Business Partners and the number of active Business
Partners).
The aforementioned values support Huge and Huge Telecom’s
discounted cash flow values.
The introduction of further products and services (like mobile
data) to feed a product and service hungry distribution
channel will serve to enhance profitability.
FUNDING MATTERS
Huge has recently seen significant interest from providers of
debt finance to provide debt funding to Huge and as such Huge
expects to shortly announce a debt funding transaction. This
funding will be applied to fund the significant growth that
Huge is experiencing.
The rights offer of 20 million ordinary shares at 100 cents
per share, announced earlier today, lends further support to
Huge’s efforts to raise expansion capital.
WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
Shareholders are referred to the cautionary announcement dated
30 June 2014, and are advised that the cautionary is hereby
withdrawn.
Johannesburg
1 August 2014
Designated advisor
Arcay Moela Sponsors Proprietary Limited
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