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Operational update, trading update and cautionary announcement
BLUE FINANCIAL SERVICES LIMITED
Incorporated in the Republic of South Africa
Registration Number: 1996/006595/06
JSE Code: BFS
ISIN: ZAE000083655
(“Blue” or “the Company” or “the Group”)
OPERATIONAL UPDATE, TRADING UPDATE AND CAUTIONARY
ANNOUNCEMENT
Shareholders are referred to the announcements published on the Stock
Exchange News Service (“SENS”) of the JSE Limited (“JSE”) on 26 June
2013 (“June 2013 SENS”), whereby shareholders were advised of the
Company’s voluntary suspension of trading in Blue securities, 26 August 2013
(“August 2013 SENS”), 31 October 2013 (“October 2013 SENS”), 6
December 2013 (“December 2013 SENS”), 1 April 2014 and 30 April 2014
(“April 2014 SENS”), 30 September 2014 (“September 2014 SENS”), 30
December 2014 (“December 2014 SENS”) and 31 March 2015 (“March 2015
SENS”) whereby shareholders were updated on the developments at Blue.
This includes the conversion of debt in terms of the debt rescheduling
agreement (“DRA”), the restructuring of Blue Financial Services South Africa
Proprietary Limited (“Blue SA”), the forensic investigations launched in 2010
and 2013 respectively and the status of the financial results pertaining to the
full year ended February 2013, six months ended 31 August 2013, the full
year ended February 2014, the six months ended 31 August 2014 and the ten
months ended 31 December 2014.
In terms of paragraph 3.4(b) of the JSE Limited Listings Requirements,
companies are required to publish a trading update as soon as they are
satisfied that a reasonable degree of certainty exists that the financial results
for the period to be reported on next will differ by 20% or more from the
financial results for the previous corresponding period.
The company is in the process of finalising all its outstanding financial results
indicated above and more specifically in terms of the March 2015 SENS, and
anticipates that it will report the following:
Financial year end trading updates:
28 February 2013
- For the 12 months ended 28 February 2013, a basic loss per share
(“EPS”) of 10.32 cents, being a decrease (deterioration) of 1300%,
compared to the 12 months ended 29 February 2012 basic earnings per
share of 0.86 cents.
- For the 12 months ended 28 February 2013, a headline loss per share
(“HEPS”) of 4.63 cents, being a decrease (deterioration) of 626%,
compared to the 12 months ended 29 February 2012 headline earnings
per share 0.88 cents per share.
Most notable contributors to the deteriorated position can be summarised as
follows:
- An increase in impairments of R308 million on the advances book
mostly as a result of impairments in South Africa, Lesotho and Zambia.
Impairments in South Africa, which constituted the majority of the
impairments raised, were caused by economic conditions in South
Africa of which the impact can be seen with all financial institutions. In
Lesotho the impairments was as a result of the Lesotho Government
not honouring the salary deduction code. Due to the interest rate in
Zambia being capped, which caused the Company to combine the two
trading operations, an impairment was effected.
- A goodwill impairment of R396 million in line with IAS 36. This is mostly
attributable to the impairment of goodwill previously carried in South
Africa, Tanzania, Kenya, Botswana, Zambia, Namibia and Uganda.
Shareholders are reminded that in 2010 the goodwill was written down
to R427 million which the Company has now written down in this
financial year, to R47 million, after taking into account foreign currency
translation.
28 February 2014
- For the 12 months ended 28 February 2014, a basic loss per share
(“EPS”) of 1.01 cents, being a decreased loss (improvement) of 90%,
compared to the 12 months ended 28 February 2013 basic loss per share
of 10.32 cents.
- For the 12 months ended 28 February 2014, a headline loss per share
(“HEPS”) of 0.98 cents, being a decreased loss (improvement) of 79%,
compared to the 12 months ended 28 February 2013 headline loss per
share of 4.63 cents.
Most notable contributors to the improved position can be summarised as
follows:
- Although a 54% reduction in operating income was experienced due to
a declining advances book, this was countered by a 26% decrease in
operating expenses.
- A 90% decrease in impairments on the advances book due to an
increased focus on collections. In addition, most advances in the South
African trading operations were provided for during the 28 February
2013 period.
- A significant decrease in interest expense and foreign exchange losses
as a result of the acceleration notice issued by the DRA funders. This
resulted in interest on such liabilities being terminated and the liabilities
being converted to ZAR in anticipation of the full debt to equity
conversion, therefore eliminating the foreign exchange risk.
- The non-reoccurrence of the goodwill impairment during the 28
February 2013 period, which also explains the differential between
EPS and HEPS.
31 December 2014
- For the 10 months ended 31 December 2014, a basic loss per share
(“EPS”) of 0.44 cents, being a decreased loss (improvement) of 56%,
compared to the 12 months ended 28 February 2014 basic loss per share
of 1.01 cents.
- For the 10 months ended 31 December 2014, a headline loss per share
(“HEPS”) of 0.80 cents, being a decreased loss (improvement) of 18%,
compared to the 12 months ended 28 February 2014 headline loss per
share of 0.98 cents.
Most notable contributors to the improved position can be summarised as
follows:
- Although a 44 % reduction in operating income was experienced due to
a declining advances book, this was countered by a 31% decrease in
operating expenses.
- A 74% decrease in impairments on the advances book due to an
increased focus on collections.
- A profit with the derecognition of certain operating entities of R47
million which is not included in HEPS, explaining the differential
between EPS and HEPS.
- It should further be noted that the Company changed its financial year
end from 28 February to 31 December, explaining the 10 month period
for the year ended 31 December 2014.
Interim periods trading updates:
31 August 2013
- For the 6 months ended 31 August 2013, a basic loss per share (“EPS”)
of 0.77 cents, being a decrease of 267%, compared to the 6 months
ended 31 August 2012 basic earnings per share of 0.46 cents.
- For the 6 months ended 31 August 2013, a headline loss per share
(“HEPS”) of 0.74 cents, being a decrease of 261%, compared to the 6
months ended 31 August 2012 headline earnings per share of 0.46 cents.
Most notable contributors to the deteriorated position can be summarised as
follows:
- A 59% reduction in operating income was experienced due to a
declining advances book. This is mostly due to the derecognition of
advances in previous periods to enable Blue Botswana to settle a
funding programme during December 2012. This was somewhat
countered by an 18% decrease in operating expenses.
- Increased impairment of the advances book mostly as a result of
impairments in Zambia and Tanzania. The Zambia impairment was due
to the statutory capping of interest rates and as such certain product
offerings had to be terminated resulting in higher default by customers.
31 August 2014
- For the 6 months ended 31 August 2014, a basic loss per share (“EPS”)
of 0.54 cents, being a decreased loss (improvement) of 30%, compared to
the 6 months ended 31 August 2013 basic loss per share of 0.77cents.
- For the 6 months ended 31 August 2014, a headline loss per share
(“HEPS”) of 0.53 cents, being a decreased loss (improvement) of 28%,
compared to the 6 months ended 31 August 2013 headline loss per share
of 0.74 cents.
Most notable contributors to the improved position can be summarised as
follows:
- Although a 29% reduction in operating income was experienced due to
the declining advances book, this was countered by a 19% decrease in
operating expenses.
- A reversal of impairments on the advances book for this period due to
an enhanced focus on collections.
The financial information on which this trading statement is based has not
been reviewed or reported on by Blue’s auditors.
Summarised financial results and turn-around journey
Taking all of the above financial information and explanations into account,
the developments since the Mayibuye take-over in 2011 can be summarized
as follows:
In April 2013, two years into the turnaround, and after much was done to
reduce the cost base and to introduce processes and controls, the Group was
well positioned for growth.
At that time the Group was in the final stages of concluding a partial credit
guarantee for R500 million for a capital raising program of R2 billion. This
would have allowed the Group to fully utilise its infrastructure and leverage its
extensive African footprint, resulting in profitable trading and the creation of
value for all stakeholders.
The forensic event that came to light in April 2013, introduced significant
doubt and uncertainty, and as such the Company requested the JSE to
voluntarily suspend trading in its shares and consequently the partial credit
guarantee could not be pursued further.
In addition, the unsecured lending industry in South Africa started to
experience the effects of an over traded environment, and the Company was
impacted in the sense that it had to raise significant impairments on its South
African advances.
The key factors contributing to the losses made in 28 February 2013 are
therefore the impairments on the South African, Lesotho and Zambian
advances. The goodwill impairment is informed by a deteriorating free cash
flow in such operating entities which can be directly coupled with the R500
million funding facility not being concluded.
Given the above context, and the low probability of attracting new funding at
that time, the Company was necessitated to focus its resources on the
forensic investigation and further cost reductions.
The benefit of this strategy is evidenced in the much improved results of the
Company for the years ended 28 February 2014 and 31 December 2014.
Nevertheless, during this time the Company had and still has no alternative
other than to use proceeds of its advances book to fund its operational activity
and to manage any cash flow mismatches accordingly. This process
negatively impacts the advances book and will continue until such time as
new funding can be injected as explained in more detail in the paragraph
below dealing with the Recapitalisation.
Delay in the issuing of audited results
The delay in the finalization of audited results of the Company is mostly
relating to the uncertainty that the April 2013 forensic event brought about.
The Company had and still has a responsibility to ensure diligent investigation
of the matter to ensure results that are a fair reflection of the Group’s
financial affairs.
This forensic report took approximately 15 months to conclude and was
issued in August 2014. This report allowed the Company further insight into
the matters with sufficient grounds to believe that some further work was
required to fully understand the relationship not just between the Company
and Leonox Investments (Pty) Ltd (“Leonox”), but also between Leonox and
the Housing Impact Fund of South Africa (“HIFSA”).
A contributing factor in the delay is that Deloitte indicated to the Company that
it will not be in a position to complete the audit for the full year ended
February 2013 and subsequent years. Consequently Deloitte is currently in
the process of completing their audit work and opinions on all subsidiary
Annual Financial Statements for financial years 29 February 2012. The 2012
Group Consolidated Annual Financial Statements were signed off by Deloitte
previously, although they have not issued their audit opinions on some of the
subsidiary Annual Financial Statements at that time. At the date of this SENS
we do not have a firm commitment from Deloitte on when this process will be
completed.
The Company has previously approached and will now formally appoint
SizweNtsalubaGobodo (“SNG”) to assume the audit for the full year ended
February 2013 and subsequent audits. The audit for the full year ended
February 2014 has already commenced and it is expected that these results
will be finalized in a relative short space of time once the 28 February 2013
numbers have been concluded.
Deloitte will remain appointed as the auditors for the full year ended 29
February 2012 until the audits of certain subsidiary company annual financial
statements have been completed.
Litigation and related rights and obligations
With reference to the March 2015 SENS, where more details were disclosed
in terms of progress made with regards to the forensic investigations of 2010
and 2013, it should be noted that the Company is of the opinion that it has
certain legal rights, damages claims, as well as a claim for the recovery of
certain assets.
After a review of all the forensic information, the board is of the view that Blue
was not involved in any fraudulent activities.
The Group has already started and will now further vigorously pursue legal
action for the benefit of its shareholders as it is the Group’s view that actions
of certain parties have caused significant damages which must be remedied.
In this regard the Group has now issued a summons for R209 million against
HIFSA for damages suffered arising out of the Leonox special purpose
vehicle.
It should however be noted that no such economic implications have been
included in the above trading updates. The implications of such legal process
can only be accounted for once realized.
Debt Rescheduling Agreement (”DRA”)
The DRA is a recapitalisation agreement with certain terms and conditions. At
the end date, the surfeit of assets versus liabilities is converted into equity at
the Company level. The funders and signatories to this agreement have under
certain conditions the right to accelerate the end date. The effect of the
acceleration of the end date is that the conversion of the surfeit of assets
versus liabilities is accelerated.
In August 2013, the Company received notice from the lenders under the
DRA of their intention to accelerate the end date of the agreement. In terms of
this notice, the end date of was designated to be 6 September 2013.
Based on the financial results, a full conversion to equity of all remaining DRA
liabilities is required.
At a Group level this will result in a debt to equity conversion of R468 million.
It should be recorded that the DRA funders have filed a dispute on how the
conversion calculations have been done. Going forward the Company intends
to drive this process to completion.
Shareholders are reminded that the conversion of the debt to equity will be in
the amount of R468 million but due to the Mayibuye anti-dilution rights the
shares that will be issued will be double that. This will imply that existing
shareholders will effectively, from 6 September 2013, have been diluted as
such even though the shares have not yet been issued due to the dispute.
Recapitalisation
In the March 2015 SENS shareholders were advised that initiatives were
underway to initiate a recapitalisation of the Group through a rights issue of
R200 million.
The rights issue is essential to ensure the sustainability of the Company.
Although discussions in respect of the rights issue is ongoing, should the
Company not be able to secure support for at least 76% of the eligible voting
rights by 30th April 2015, the rights issue will not proceed.
Although the rights issue is the preferred route, the Group, in parallel to the
abovementioned rights issue is engaging in discussions with a consortium
(which may include related parties) that has expressed an interest in acquiring
the following entities from the Group at their fair market values.
The entities comprise:
Botswana, Ghana, Malawi, Namibia, Uganda and Zambia.
The remaining investments being Lesotho, Swaziland and Mauritius will be
wound down or disposed of.
The Company has been given support to continue the process in Blue South
Africa to ensure the recovery of its assets.
It is anticipated that the minority holdings in Nigeria and Zimbabwe will be
disposed of to the majority shareholders in those businesses.
After the 30th April 2015 the Company will be in a better position to issue a
further update and inform shareholders accordingly.
Cautionary Announcement
Shareholders are hereby advised that the Recapitalisation and the
discussions engaged in, if successfully concluded may have a material effect
on the price of the Company`s securities.
Accordingly, shareholders are advised to exercise caution when dealing in the
Company`s securities until a further announcement is made.
Johannesburg
20 April 2015
Designated Adviser
Grindrod Bank Limited
Date: 20/04/2015 02:19:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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