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Voluntary market guidance and pro forma financial effects of key profitability metric changes
HUGE GROUP LIMITED
(Registration number 2006/023587/06)
Share code: HUG ISIN: ZAE000102042
(Huge or the Group or the Company)
VOLUNTARY MARKET GUIDANCE AND PRO FORMA FINANCIAL EFFECTS OF KEY PROFITABILITY METRIC
CHANGES
INTRODUCTION
The board of directors of Huge (the Board) is pleased to advise shareholders that Huge Telecom
Proprietary Limited and Huge Connect Proprietary Limited (collectively the Huge Telcos) have
successfully negotiated sizeable decreases in certain variable costs, which when combined with
certain price increases and finance cost reductions, are expected to have a favourable impact on
the profitability of the Group going forward.
Accordingly, in order for shareholders to be properly informed as to the financial prospects of the
Group, Huge is issuing this voluntary market guidance, which includes the pro forma financial effects
of the abovementioned factors on the financial results of the Group for the year ended 29 February
2016. The pro forma financial information contained below has been reported on by an independent
reporting accountant.
Shareholders are advised that the pro forma financial information contained in this announcement is
neither a trading update in relation to the financial results of Huge for the year ending 28 February
2017 nor a profit forecast for the year ending on 28 February 2018 and neither does it relate to the
proposed acquisition of Connectnet Broadband Wireless Proprietary Limited and its wholly owned
subsidiary company, Sainet Internet Proprietary Limited (the Connectnet Group).
NATURE OF THE BUSINESS OF HUGE
The Huge Telcos are both wholly owned subsidiary companies of Huge and are the principal revenue
and profit generating companies in the Group.
The Huge Telcos provide fixed location telephony services (the Huge Services) to corporate and
residential customers in South Africa using Global System for Mobile communication (GSM) access
services acquired from various mobile network operators (MNOs) in South Africa.
The Huge Telcos generate their revenue from various charges relating to the Huge Services, which
include, amongst other charges, line rental and usage charges which are charged by minute on a
pure per second basis.
The Huge Telcos acquire access services from the MNOs on a usage basis (paid by minute on a pure
per second calculation methodology).
The charges relating to the access services comprise mobile origination (MO), mobile termination (MT)
and fixed-line termination (FLT). Charges relating to MT and FLT are regulated by the Independent
Communications Authority of South Africa (ICASA) whereas MO is negotiated commercially.
DESCRIPTION OF KEY FACTORS THAT ARE EXPECTED TO HAVE A FAVOURABLE IMPACT ON PROFITABILITY
1. On 1 August 2016, the Huge Telcos increased their usage charges for calls to mobile
telephone number destinations by 2 cents per minute, calls to fixed line telephone number
destinations by 3 cents per minute (the Usage Charges Increases) and increased their line
rentals by 6.5% (the Line Rental Increases).
2. On 1 October 2016, the MT rate relating to telephone calls destined for MTN and Vodacom
decreased by 3 cents per minute from 16 cents per minute to 13 cents per minute and the
rate for MT relating to telephone calls destined for MNOs other than MTN and Vodacom
decreased by 5 cents per minute from 24 cents per minute to 19 cents per minute (the MT
Rate Reductions).
3. On 1 October 2016, the rate for FLT relating to telephone calls destined for telephone
exchanges within a specific geographic area (local calls) decreased by 1 cent per minute
from 11 cents per minute to 10 cents per minute, and the rate for FLT relating to telephone
calls destined for telephone exchanges between specific geographic areas (national calls)
decreased by 2 cents per minute from 12 cents per minute to 10 cents per minute (the FLT
Rate Reductions).
4. On 14 February 2017, the Huge Telcos negotiated a material reduction in MO (the MO
Reductions).
5. On or about 25 October 2016, Huge signed a term sheet with its current bankers, First National
Bank (a division of FirstRand Bank Limited) (FNB) in terms of which FNB will advance R20 million
to the Huge Group at an interest cost of Prime plus 2% on a reducing outstanding balance
basis. The R20 million to be advanced by FNB will be used by Huge to repay a facility of R20
million provided by Stellar Specialised Lending Proprietary Limited (Stellar), which incurred
interest at a cost of circa 20% per annum during FY2016 (the Finance Cost Reductions).
6. During FY2016 and in the 10 months to 31 December 2016, the Huge Telcos have, on a
consistent monthly basis, increased their number of installed telephone lines with the result that
the aggregate monthly book of line rentals has increased steadily. The contribution to
revenue and profit made by the aggregated monthly book of line rentals during FY2016 was
R50.9 million. On 1 March 2015, the aggregated monthly book of line rentals amounted to
R3.8 million and by 29 February 2016, the aggregated monthly book of line rentals amounted
to R4.7 million. The 12 month forward contribution of the 29 February 2016 aggregated
monthly book of line rentals to revenue and profit is expected to be twelve times R4.7 million,
or R56 million – an increase in contribution of R5.1 million on the contribution for FY2016.
The Usage Charges Increases, the Line Rental Increases, the MT Rate Reductions, the FLT Rate
Reductions, MO Reductions and Finance Cost Reductions have a direct bearing on the revenue and
earnings generation capabilities of the Company.
PRO FORMA FINANCIAL EFFECTS OF CHANGES IN KEY FACTORS
The presentation of the pro forma financial information detailed below is voluntary and is presented
for illustrative purposes only in order to provide investment market participants and shareholders of
Huge with some guidance relating to the impact on Huge (before the previously announced
proposed acquisition of the Connectnet Group and the Praesidium Specific Issue) of the Key Variable
Changes on the financial performance of the Group.
The changes in the key factors have been applied to the reviewed summarised consolidated
statement of comprehensive income of the Group for the year ended 29 February 2016 (FY2016) in
Column A, which was published on SENS on 26 May 2016, to produce the results in Column C, which is
presented on the basis that the changes to these key factors took place on 1 March 2015.
The pro forma financial information contained below is the responsibility of the Board and due to the
nature of this information may not fairly represent the financial performance, financial position, cash
flows and changes in equity of the Group post the changes in these key factors.
The pro forma financial information contained below has been reported on by an independent
reporting accountant. A copy of the independent accountant’s report is available for inspection at
the Company’s registered office.
Pro forma
summarised
consolidated
Reviewed statement of
summarised comprehensive
consolidated income for the
statement of year ended 29
comprehensive Pro forma February 2016
income for the adjustments after taking into
year ended 29 reviewed by an account the
February 2016 as independent impact of the
originally reporting Key Variable
presented accountant Changes
Column A Column B Column C
(12 months) (12 months)
R’000 R’000 R’000
Total revenue (1) 216 517 14 875 231 392
Gross profit (2) 88 189 44 200 132 389
Other income 1 296 - 1 296
Operating expenses (66 529) - (66 529)
Operating profit 22 956 44 200 67 156
Investment income 492 - 492
Net change in fair value of financial -
instruments - -
Share of (losses) / earnings from equity -
accounted investments (5) (5)
Finance costs (3) (4 697) 1 499 (3 198)
Profit before taxation 18 746 45 699 64 445
Income tax credit / (expense) 910 (18 955) (18 045)
Net profit for the period 19 656 26 744 46 400
Non-controlling interest 876 - 876
Net profit attributable to owners of the
company 18 780 26 744 45 524
Basic earnings per share (cents) 18.55 26.41 44.96
Adjusted for:
Profit on disposal of property, plant and
equipment (0.04) - (0.04)
Headline earnings per share (cents) 18.51 26.41 44.92
Total number of shares in issue (‘000) 101 255 - 101 255
Weighted number of shares in issue (‘000) 101 255 - 101 255
(1) The factors listed under 1 and 6 have a direct impact on revenue
(2) The factors listed under 1 through to 6 but excluding 5 have a direct impact on revenue, cost of
sales, gross profit and income tax
(3) The factor listed under 5 has a direct impact on finance costs and income tax
ASSUMPTIONS AND BASIS OF PREPARATION OF THE PRO FORMA FINANCIAL INFORMATION
For the purposes of Column B and Column C, it has been assumed that:
- the Usage Charges Increases, the Line Rental Increases, the MT Rate Reductions, the FLT Rate
Reductions and the MO Reductions (collectively referred to as the Margin Metric Changes)
took place on 1 March 2015 and are applied to the profitability metrics (being the number of
installed telephone lines attracting line rental every month during FY2016 and the number of
minutes generated by customers of the Huge Telcos every month during FY2016) of the Huge
Telcos for FY2016.
- for the purposes of determining the impact of the Margin Metric Changes on the Huge Telcos
it was assumed that Vodacom holds 51% of the mobile termination market in South Africa,
MTN 32% and Cell C and Telkom Business Mobile 17%.
- the Finance Cost Reductions took effect on 1 March 2015 and applied to the outstanding
loan balance of the existing funding facility provided by Stellar in the amount of R20 million as
at 1 March 2015 (Finance Metric Changes).
- the Margin Metric Changes have been applied to the actual number of telephone lines
installed and subject to line rental at the end of every month during FY2016 and the actual
number of minutes generated during FY2016.
- Huge would have paid tax at the statutory tax rate of 28%.
- the Margin Metric Changes and the Finance Metric Changes will have a continuing effect.
- in addition to the Margin Metric Changes, the revenue attributed to the line rentals has been
adjusted to reflect the growth in the number of lines installed in the 2016 financial year. The 12
month forward contribution has been determined by annualising the February 2016 book of
line rentals, being R4.7m.
PROSPECTS
On 31 December 2016, the monthly book of line rentals amounted to R6 million and the 12 month
forward contribution of the 31 December 2016 monthly book of line rentals to revenue and pre-tax
profit will be twelve times R6 million, or R72 million – an increase in contribution of R16 million on the
contribution for FY2016, and assuming that the Huge Telcos continue to grow their bases of installed
telephone lines at a constant rate. This equates to an after tax earnings impact of an additional R11.5
million or 11.4 cents per share.
The Huge Telcos have enjoyed customer minute revenue growth of 7.6% or R12.7 million for the 10
months from 1 March 2016 to 31 December 2016, and the after tax earnings impact of this customer
minute revenue growth at the margin generated after the MO Reductions and after deducting
reseller commissions to Business Partners is R5.29 million or 5.2 cents per share.
These prospects and any forward looking information in this announcement have neither been
reviewed nor reported on by the Company’s external auditors or an independent reporting
accountant.
As noted earlier, the information contained in this announcement has been presented for illustrative
purposes only and, accordingly, shareholders of Huge should take care when imputing the impact of
the aforementioned Margin Metric Changes and Finance Metric Changes on earnings for the 12
months ending 28 February 2017 or the 12 months ending 28 February 2018. While the benefits of the
Usage Charges Increases, Line Rental Increases, MT Rate Reductions and FLT Rate Reductions are
immediate, the MO Reductions and the Finance Cost Reductions require the passage of time to
make a full impact. The MO Reductions require MNO rotation relating to 37 000 installed telephone
lines and the Finance Cost Reductions require the conclusion of new agreements with FNB. In
addition to this, the future prospects do not take into account whether or not the Huge Telcos will
continue to enjoy net growth in their number of installed telephone lines or the impact of inflation on
other cost inputs to their businesses.
Johannesburg
15 February 2017
Sponsor
Questco(Pty) Ltd
Ballywoods Office Park, 33 Ballyclare Drive, Bryanston, 2021
Registered office
1st Floor, East Wing, 146a Kelvin Drive,Woodmead,Johannesburg, 2191 (PO Box 16376, Dowerglen,
1610)
Transfer Secretaries
Computershare Investor Services Proprietary Ltd
Ground Floor, 70 Marshall Street, Johannesburg
Independent Reporting Accountants
Moore Stephens Cape Town Inc.
2nd Floor, Block 2, Northgate Park, Corner Section Street and Koeberg Road, Paarden Eiland, Cape
Town, 7405
Directors
Non-Executive: Dr DF Da Silva (Chairman), VM Mokholo, SP Tredoux* (Lead Independent Director), DR
Gammie*, AD Potgieter, Z Bulbulia
Executive: JC Herbst (Chief Executive Officer), D Deetlefs (Group Financial Director)
*Independent
Date: 15/02/2017 08:12:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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