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Condensed audited consolidated results for the year ended 28 February 2015 and declaration of dividends
HUGE GROUP LIMITED
(Registration number 2006/023587/06)
Share code: HUG ISIN: ZAE000102042
("Huge Group" or "the Group" or "the Company")
CONDENSED AUDITED CONSOLIDATED RESULTS FOR THE YEAR ENDED 28
FEBRUARY 2015 AND DECLARATION OF DIVIDENDS
HIGHLIGHTS FOR THE PERIOD
- Revenue marginally higher
- Improved profitability
- Resumption of dividend payments
The board of directors ("the Board") of Huge Group is pleased to
present the condensed audited consolidated annual results of the
Company and its subsidiary companies, and joint venture (“the
Group”) for the year ended 28 February 2015.
CONDENSED AUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Audited Unaudited Audited
28 February 31 August 28 February
2015 2014 2014
R’000 (12 months) (6 months) (12 months)
Total revenue 204 589 98 961 203 578
Gross profit 80 939 41 020 94 240
Other income 1 068 890 1 542
Operating expenses (66 074) (33 028) (77 818)
Operating profit 15 933 8 882 17 964
Investment income 621 359 1 021
Net change in fair value of
financial instruments 3 319 1 562 (804)
Share of earnings from joint
venture 12 26 73
Finance costs (2 700) (1 359) (2 293)
Profit before taxation 17 185 9 470 15 961
Income tax expense (5 933) (2 074) (4 628)
Net profit for the period 11 252 7 396 11 333
Attributable to:
Owners of the parent 11 526 7 383 11 853
Non-controlling interest (274) 13 (520)
11 252 7 396 11 333
Basic and diluted earnings
per share (cents) 12.80 9.20 13.54
Adjusted for:
Impairment of non-current
assets - - 0.15
Profit on disposal of
property, plant and equipment (0.02) - (0.03)
Basic and diluted headline
earnings per share (cents) 12.78 9.20 13.66
Total number of shares in
issue (‘000) 101 901 80 255 80 255
Weighted number of shares in
issue (‘000) 90 041 80 255 87 530
CONDENSED AUDITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Audited Unaudited Audited
28 February 31 August 28 February
2015 2014 2014
R’000 (12 months) (6 months) (12 months)
ASSETS
Non-Current Assets
Property, plant and equipment 46 085 42 133 34 451
Goodwill 215 153 215 153 215 153
Intangible assets 2 298 2 130 2 809
Investment in joint venture 714 729 702
Deferred tax 3 333 11 303 11 303
Deferred expenditure 4 444 - 1 779
Total non-current assets 272 027 271 448 266 197
Current Assets
Inventories 1 025 876 -
Trade and other receivables 34 860 76 991 69 220
Current tax receivable - - 164
Deferred expenditure 6 825 7 417 1 988
Other financial assets - 4 874 3 400
Cash and cash equivalents 4 741 4 868 4 173
Total current assets 47 451 95 026 78 945
Total Assets 319 478 366 475 345 142
EQUITY AND LIABILITIES
Equity
Share capital 229 323 208 411 208 410
Reserves - (482) (482)
Retained earnings 23 098 19 270 11 887
Attributable to:
Owners of the parent 252 421 227 199 219 815
Non-controlling interest (4 101) (3 647) (3 659)
Total equity 248 320 223 552 216 156
Liabilities
Non-current liabilities
Finance lease obligations 770 557 459
Deferred tax 499 9 381 7 771
Total non-current liabilities 1 269 9 938 8 230
Current liabilities
Interest bearing liability 20 612 - -
Loans from shareholders 2 757 1 161 1 346
Other financial liabilities 788 1 273 1 168
Finance lease obligations 606 539 360
Trade and other payables 45 126 116 764 107 881
Bank overdraft - 13 247 10 001
Total current liabilities 69 889 132 984 120 756
Total liabilities 71 158 142 922 128 986
Total equity and liabilities 319 478 366 474 345 142
Number of shares in issue
(‘000) 101 901 80 255 80 255
Net asset value per share
(cents) 245.24 278.55 269.34
Net tangible asset value per
share (cents) 30.49 7.81 (2.25)
CONDENSED AUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Audited Unaudited Audited
28 February 31 August 28 February
2015 2014 2014
R’000 (12 months) (6 months) (12 months)
Balance at the beginning of
the period 216 156 216 156 209 774
Total comprehensive income
for the period 11 252 7 396 11 333
Purchase of own shares - - (4 951)
Issue of own shares 20 912 - -
Balance at the end of the
period 248 320 223 552 216 156
CONDENSED AUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
Audited Unaudited Audited
28 February 31 August 28 February
2015 2014 2014
(12 months) (6 months) (12 months)
R’000
Cash flows from operating
activities (12 251) 8 707 11 583
Cash flows from investing
activities (20 294) (11 456) (9 092)
Cash flows from financing
activities 43 113 198 (3 454)
Net cash movement for the
period 10 568 (2 551) (963)
Cash at the beginning of the
period (5 827) (5 828) (4 865)
Total cash at the end of the
period 4 741 (8 379) (5 828)
SEGMENTAL REPORTING
The directors have considered the implications of IFRS 8: Operating
segments and are of the opinion that the current operations of the
Group now constitute one operating segment, and accordingly the
Telecoms and MTS operating segments as well as the Corporate Office
have been combined with effect from the current financial year.
Resource allocation and operational management are performed on an
aggregate basis. Performance is measured based on profit or loss
before tax as shown in internal management reports that are reviewed
regularly by the Chief Operating Decision Maker (CODM), who is the
Group’s Chief Executive Officer. The CODM also regularly reviews
the Group Statement of Financial Position.
COMMENTARY
BASIS OF PREPARATION
The condensed 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 Johannesburg Stock Exchange (“JSE”) Listings Requirements.
In addition, these condensed 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 condensed audited 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 2014.
These condensed audited consolidated annual financial results were
prepared under the supervision of the Group Financial Director,
David Deetlefs CA (SA), and are derived from and are consistent with
the Group’s audited consolidated annual financial statements.
COMPANY PROFILE
Huge Group is an investment holding company listed on the
Alternative Exchange (“AltX”) of the JSE.
Huge Telecom and Huge Mobile are engaged in providing voice,
messaging, data and video connectivity services using wireless,
GSM-based, fixed-cellular, last-mile solutions to residential
consumers and a wide range of corporate clients, ranging from
large corporates to small and medium enterprises.
Huge Software owns the Group’s router equipment and has made this
equipment available to Huge Telecom on a rental basis. Huge Software
also owns the Group’s proprietary billing and rating software and
continues to develop and enhance such software for the benefit of
the companies in the Group and for third parties to which it
provides such services. Ambient Mobile provides the technology
platform used in the provision of messaging services by Huge
Telecom and Huge Mobile to their customers.
Eyeballs is engaged in the development of software for innovative
and affordable real time, permission based, high-impact and targeted
advertising to mobile phones and internet users. During the year
under review, further development of its software has been initiated
in order to align the product with current smart phone technologies
and thereby enhance its revenue generating opportunities.
FINANCIAL OVERVIEW
Investment holding activities
During August and September 2014 the Company undertook a Rights
Offer of 20 000 000 ordinary shares at a price of 100 cents per
share. The Rights Offer, which was oversubscribed, enabled the
Company to raise the necessary cash to facilitate a settlement of
outstanding litigation with MTN Service Provider Proprietary Limited
(MTNSP). It also allowed the Company to strengthen its working
capital position.
Up until November 2014, long-term assets (particularly routing
equipment) were being financed by short-term trade credit. In
November 2014, the Company secured a R20m loan facility from AfrAsia
Special Opportunities Fund Proprietary Limited (ASOF). In terms of
negotiations the Company has had recently with ASOF, it is
anticipated that this facility will be rolled and made more
permanent. The Company also expects to lower the funding costs
attributable to this debt.
Media activities
The Group is committed to finding opportunities in media that will
assist it in creating value from existing investments.
Telecommunications activities
Review of operations
Distribution
Huge Telecom continued to grow its distribution capabilities.
During FY2015, the number of Business Partners increased by 136,
from 289 to 425 Business Partners. This represents a 47% increase
in the total number of Business Partners.
Business Partner activity levels measured by the number of active
Business Partners increased during FY2015 by 76%.
Market positioning
Huge Telecom’s connectivity services are distributed mainly to
SMMEs. Huge Telecom provides connectivity services to over 9 800
customers. It has no more than a 1.3% exposure to its single
largest customer; customer concentration risk is therefore low.
Sales
Increased Business Partner activity continued to have a significant
impact on the sale of Huge Telecom’s products and services.
Average monthly sales of telephone lines increased during the year
under review, from an average of 689 units during FY2014 to an
average of 1 044 units during FY2015 (FY2013: 309 units and FY2012:
203 units).
Sales measured by the number of Telephone Lines sold (excluding
churn) increased by 55% during FY2015.
Churn
During FY2015 Huge Telecom reduced churn from an average of 281
units per month and during FY2014 to an average of 249 units per
month (FY2013: 362 units, FY2012: 397 units).
The average customer life of all of the existing customers of Huge
Telecom is 6.43 years.
Revenue
Revenue for FY2015 increased marginally by 0.5% when compared to
FY2014. There is an approximate twelve month lead time between sales
activity and its effects on revenue. Net growth or net churn in any
period is felt financially, on average, twelve months later. The
revenue generated during FY2015 is a result of the sales and churn
activity in prior periods. The revenue generated during FY2016 will
be a function of the sales and churn activity in FY2015.
Revenue for March and April 2015 is 8.7% higher than revenue for
March and April 2014. Billed minutes for March and April 2015 are
17.9% higher than billed minutes for March and April 2014.
Average Revenue per User (ARPU), where the user is defined as an
installed telephone line, amounted to R694 for FY2015, which is
roughly nine times greater than the average ARPU of MTN across their
two biggest markets, Nigeria and South Africa, and which is roughly
six times greater than the ARPU of Vodacom’s South African
operation.
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 68%:32% when
compared to FY2014, where the mix was 80%:20% (FY2013: 89%:11%).
The average selling price for a mobile minute during FY2015 was 87
cents per minute (FY2014: R0.93; FY2013: R1.15).
The average selling price for a fixed-line minute during FY2015 was
38 cents per minute (FY2014: R0.38; FY2013: R0.44).
Huge Telecom has also been successful in increasing its fixed
annuity income to variable annuity income ratio. The fixed annuity
income consists of channel management fees, on account fees, site
management fees and line rentals, which are all protected from price
compression and in fact escalate annually. The total current
monthly fixed annuity income is in the order of about R3.1m – having
increased from R1.6m at the end of FY2014 as a result of an average
monthly increase of approximately R125 000. Fixed annuity income is
growing presently at about R150 000 per month, which will have the
effect of increasing the total current monthly fixed annuity income
to R4.9m by the end of FY2016. Each month in which the increase is
R150 000, there is a 12x multiplier effect on income for the next
financial year – R1.8m could therefore be added to monthly fixed
annuity income in FY2017. If this is the case, the annual
contribution to revenue and profit for FY2017 from this sales
activity (being sales activity in FY2016) is equal to R1.8m x 12 =
R21.6m. If monthly sales of fixed annuity income continues to grow
at R150 000 per month, the total annual contribution of fixed
annuity income to revenue and profit for FY2017 will be equal to
R4.9m x 12 = R58.8m, of which R21.6m (37%) will be as a result of
sales activity during FY2016. This contribution to revenue and
profit is over and above the contribution the minutes of use on the
telephone lines relating to this fixed annuity income will make.
Supply-side economics
The mobile termination rate decreased from 40 cents per minute to 20
cents per minute (a 50% decrease) on 1 April 2014. Huge Telecom has
benefited from this lower mobile termination rate but for only 11
months of FY2015.
The fixed-line termination rate between geographic area codes (i.e.
national calls) decreased from 19 cents per minute to 18 cents per
minute on 1 October 2014. Huge Telecom has benefited from this lower
fixed-line termination rate between area codes but for only 5 months
of FY2015.
The fixed-line termination rate within geographic area codes (i.e.
local calls) remained at 12 cents per minute for FY2015.
Origination rates at the end of FY2015 were approximately the same
as origination rates at the end of FY2014. Post year end, Huge
Telecom has been able to secure significantly more favourable
origination rates. This will impact gross margins for FY2016.
The factors listed above have all had a positive effect on gross
profit margins for the period under review.
On 1 October 2015 mobile termination rates will decrease by 4 cents
per minute, from 20 cents per minute to 16 cents per minute (a 20%
decrease).
On 1 October 2015 fixed line termination rates between area codes
will decrease by 2 cents per minute, from 18 cents per minute to 16
cents per minute (an 11% decrease).
These decreases will benefit Huge Telecom in the form of reduced
call cost prices during FY2016.
Gross margins
Gross margins before direct expenses (such as consumables and
distribution costs) increased again this year, from 46.3 % to 55.2%,
being an increase of 19.2% year on year. Shareholders are referred
to the SENS announcement published by the Company on 26 November
2013, in which the Company disclosed that it had successfully
negotiated a substantial supplier discount (the Huge Discount). The
Huge Discount was a once-off discount that impacted the gross
margins for FY2014. For this reason the gross margin in FY2015 of
55.2% is not comparable to the gross margin for FY2014 of 46.3%.
Excluding the effect of the Huge Discount, gross margins before
direct expenses have increased by 75% from 31.6% during FY2014 to
55.2% during FY2015. Likewise, the improvement in operating
profitability for FY2015 is greater, given the impact of the Huge
Discount. Gross margins have continued to increase after year end.
Overheads
The two primary overhead costs in Huge Telecom were well controlled
during the year. Employee expenses were contained and reduced by
3.0% year on year. Depreciation increased by 13.0% as a result of
increased capital expenditure on router equipment, a direct result
of increased sales activity.
There were a number of non-recurring expenses in the second six
months of FY2015 and these expenses amounted to R3.9m. Included in
this amount are legal and facility expenses of R1.3m relating to the
debt facility raised from ASOF as well as legal expenses and an
under accrual of settlement expenses of R1.4m relating to the MTNSP
settlement.
Future Prospects
Undoubtedly, a huge portion of Huge Telecom’s intrinsic value can be
found in its distribution capability. Calculating the intrinsic
value of a distribution channel is difficult but as MTN Group
Limited has shown in its acquisition of a 50% plus 1 share in
Afrihost Proprietary Limited for R408m, the value of effective
distribution reach should not be underestimated.
The subscriber value associated with Huge Telecom’s base of 30 000
installed Telephone Lines adds to the investment case. It can be
argued that, with higher minutes of use (ARPU or average revenue per
user) across its installed telephone lines, Huge Telecom’s value per
subscriber telephone line is easily double that which Nashua Mobile
Proprietary Limited achieved on the sale of its subscriber base.
Huge Telecom has built, and more importantly, owns and controls, the
“last mile” network or local loop between each of its customers and
a number of the mobile network operators. As many commentators
suggest, the last mile or local loop is the most valuable part of a
network and the fight over the unbundling of Telkom SOC Limited’s
local loop in respect of the fixed line last mile is testimony to
this. With the total cost of installing a subscriber line at about
R5 000, the value of Huge Telecom’s last mile network is
substantial.
It can also be demonstrated that the Eyeballs Mobile Advertising
technology has an intrinsic or option value and with the recent
increase in the rate of adoption of more affordable smart mobile
devices, the value of the advertising real estate on them is
phenomenal. While Eyeballs Mobile Advertising has been unable as
yet to monetise its technology, the hope in partnering with global
players is that the Eyeballs Mobile Advertising technology will
deliver substantial investment returns.
Huge Group is a different company today when compared to twelve
months ago. It has a stronger balance sheet having raised both
equity and longer-dated debt, and all the material litigation that
was hanging over the Company has been settled. The currency of its
shares has also improved markedly. The performance metrics related
to its principal subsidiary, Huge Telecom, are very positive – sales
activity is expanding rapidly, revenue is increasing, gross margins
are high and there is positive cash flow generation which continues
to improve. Huge Telecom’s cash flows now position Huge Group to pay
dividends and grow, whether organically or by acquisition.
LEGAL AND REGULATORY REQUIREMENTS
Dispute between 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
either 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; 4) further or alternative relief.
On 1 August 2014, the Company announced on SENS that it had reached
a settlement with MTNSP in the amount of R10 million (the Settlement
Figure). A further SENS announcement released on 11 September 2014
confirmed that the Settlement Figure had been paid in full to MTNSP.
The matter between MTNSP and Huge Telecom has therefore been
resolved.
Arbitration
Dispute between Huge Group and Telemasters
During February 2013 Telemasters cancelled an agreement with Huge
Group for the supply of MTN airtime and suspended the SIM cards held
by the Company.
In its Statement of Claim issued on 31 May 2013, Telemasters alleges
that the Company is indebted to it in the amount of R4.176m plus
interest thereon.
In its Plea and Counterclaim issued on 11 June 2014, the Company
claims that Telemasters is indebted to it in the amount of R4.392m
plus interest thereon in respect of amounts overcharged by
Telemasters and made up as follows:
1. R1.215m in respect of “Itemised Billing” for which it was not
entitled to charge;
2. R1.034m in respect of “Administration Fees” for which it was not
entitled to charge;
3. R4.053m in respect of “Gross Out of Bundle Charges” for which it
was not entitled to charge.
In November 2012, TeleMasters admitted that it had overcharged the
Company and credited the Company with an amount of approximately
R1.910m. In the result, Huge alleges that Telemasters is indebted
to the Company in the amount of R4.392m, being the R6.302m less the
credit of R1.910m already passed by TeleMasters, as listed above.
Huge Group is claiming an amount of R2.674m from TeleMasters, being
the R4.932m less an amount of R1.718m (of the R4.176m) that
Telemasters was entitled to raise against Huge Group.
The matter will be subject to arbitration by the Arbitration
Foundation of Southern Africa. The assets and liabilities relating
to this dispute have been recognised at levels appropriate to the
Company’s assessment of the outcome of the arbitration hearing. A
date has not yet been set for the arbitration hearing.
Pro-Active Monitoring of Financial Statements
On 21 February 2013, the Company received a letter from the JSE
Limited, instructing the Company to restate its 2010, 2011 and 2012
Annual Financial Statements (the Relevant Financial Statements) in
so far as this related to the accounting by the Company for the
acquisition of certain single stock futures contracts (SSFs) (the
Restatement Decision).
The Company is in possession of unqualified audit reports relating
to the Relevant Financial Statements on the basis that the
accounting policy in respect of the accounting for the SSFs has
resulted in fair presentation and is in accordance with IFRS.
There has been protracted correspondence between the Company and the
JSE in this regard, culminating in the Company instituting an action
in the Gauteng Local Division of the High Court of South Africa, for
the judicial review of, amongst other things, the JSE’s Restatement
Decision, on the basis that the Restatement Decision constitutes
administrative action that is reviewable in terms of section
6(2)(e)(iii) of the Promotion of Administrative Justice Act, 2 of
2000.
Other litigation
The Company and Group engage in a certain level of litigation in the
ordinary course of business. The directors have considered all
pending and current litigation and are of the opinion that, unless
specifically provided, none of these will result in a loss to the
Group. All significant litigation which the directors believe may
result in a possible loss has been disclosed.
SUBSEQUENT EVENTS
Other than the matter referred to above with regard to the Pro-
Active Monitoring of Financial Statements and the action brought by
the Company in this regard, there are no events subsequent to 28
February 2015 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
There were no changes to the Board of directors during the course of
the year ended 28 February 2015.
DIVIDENDS
Notice is hereby given that the directors have declared a final
gross dividend of 4 cents per ordinary share (2014: 0 cents),
payable out of the income reserves for the year ended 28 February
2015 to the ordinary shareholders in accordance with the timetable
below.
Salient dates relating to the dividend:
Declaration date Thursday, 28 May 2015
Last day to trade to receive dividend Friday, 21 August 2015
Shares commence trading ex-dividend Monday, 24 August 2015
Record date Friday, 28 August 2015
Dividend payment date Monday, 31 August 2015
In terms of South African dividends tax, the following additional
information is disclosed:
Local dividend withholding rate 15%
Net local dividend payable to 3.4 cents per ordinary
shareholders who are not exempt from share
dividends withholding tax
Total number of ordinary shares in 110 901 443
issue
Company income tax reference number 9378909155
Share certificates may not be dematerialised or rematerialised
between Monday, 24 August 2015 and Friday, 28 August 2015, both days
inclusive.
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 unqualified audit report is available for
inspection at the Company’s registered office.
FORECAST STATEMENTS
Shareholders are advised that any forecast financial information
contained in this announcement has not been reviewed by the Group’s
auditors.
By order of the board
Johannesburg
28 May 2015
Further investor and shareholder information is available at
www.hugegroup.com.
Designated Adviser
Afrasia Corporate Finance Proprietary Limited
Level P3, Oxford Corner, c/o Jellicoe and Oxford Roads, Rosebank,
Johannesburg
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)
Company Secretary
Jean Tyndale-Biscoe
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: 28/05/2015 04:00:00 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. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
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