Blue Label (BLU) stock valuation on 25 August 2017

Category: Financial markets and stock valuations
Date: 25 August 2017
Price at time of writing: R17.20 

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Blue Label Telecoms Share price graph
chart created with amCharts | amCharts
Background and overview of Blue Label Telecoms (BLU)
Blue label offers a variety of services, most largely based on electronic tokens. Think "pay as you go" airtime and data for cellphones, buying pre-paid electricity, ticketing solutions (via ticket pro). Blue label recently announced it possibly taking up a subscription to recapitalize Cell C. Which if succesfully concluded would see BLU own roughly 35% of Cell C.  BLU recently announced additional details regarding the proposed deal with Cell C in which they stated the following: (note the deal has been concluded)
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"Blue Label shareholders (“Shareholders”) are referred to the announcement released on the Stock Exchange News Service of the JSE Limited on 14 November 2016 (“Update Announcement”). Defined terms in this announcement shall bear the same meanings ascribed to them in the Update Announcement. Blue Label ispleased to advise Shareholders that a binding umbrella restructure agreement has been entered into by Blue Label, Cell C, debt providers of Cell C, a third party investor and other relevant parties in terms of which, inter- alia: - the maximum Net Borrowings of Cell C will be reduced to approximately R6.0 billion; - the third party investor is to subscribe for 15% of the share capital of Cell C for R2.0 billion; and - Blue Label’s subscription for 45% of the share capital of Cell C remains unchanged. The binding restructure agreement is subject to the conclusion of the relevant transaction agreements, which agreements are expected to be unconditional by no later than 30 June 2017. The conclusion of the transaction 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."

Blu also ha exposure in India via Oxigen Services India, offering E-wallet services in the second most populist country in the world. This if managed successfully can be a very big money spinner for BLU in future, based solely on the large number of people in the country.

The drag on BLU has been their operations in Mexico. With it continuing to incur losses. Although losses has reduced from R63million to R37million.

For more on Blue Label see http://www.bluelabeltelecoms.co.za/ 

The graphic below shows Blue Label Telecoms share price history over the last number of years on an interactive candlestick chart.

Percent change:

​Scroll over or click on the funnel chart to get more details of BLU's latest financial results
funnel | amCharts
Financial review: 
The net profit margin achieved by Blue Label Telecoms amounted to 3.11%, this is very similar margins to the South African retailers, where they have massive turnover and low net profit margins (see Shoprite, Pick 'n Pay, Massmart). Margins are exceptionally thin, but thanks to the massive turnover amounts they do make a hefty sum of profits. Interesting to see both their revenue and the "cost of sales" or as they call it "change in inventories of finished products" have remained almost unchanged over the last 12months​.
The pie chart below shows the contribution of Blue Label's operations to their revenue and pre-tax profit earnings.
3D donut | amCharts
It is clear from the pie charts above that the bulk of BLU's revenue and profit before taxes comes from their South African distribution division (this includes ticketpro, pre-paid airtime and data, pre-paid electricity etc). Margins in the mobile component seems very strong though, as it only contributes 1.3% of revenues but around 5.6% of net profits. This was a very similar case 12months ago for BLU. Perhaps its time BLU focuses more on the higher margin products.

Core headline earnings per share came in at R1.20 per share for the year, placing BLU on a PE ratio of around 14.3, which given their improving margins and the JSE market average their PE does look relatively low. Looking at BLU's cash generated by their operations, they generated R2.02 a share (or just over R1.36billion,  up from the R432million the year before). BLU is clearly very cash generative and there is strong demand for their services (and with more and more houses using pre-paid electricity for example, demand for their services is set to continue to increase).

With regards to BLue Label Mexico, we wrote the following in March 2017 :

"Blue Label Mexico is still loss making, but on a positive note, the size of the losses are reducing and management stated that they managed to cut expenditure by 5%. (This seems to be an ongoing story as the losses at Mexico continues as it did the year before). So it seems like their turnaround strategy is taking longer than planned to gain the necessary traction required to pull them out of the red. . The losses in Mexico impacted BLU's overall performance." 

It seems like nothing has really changed since March 2017, with their Mexico operations still making a loss and being a drag on BLU's results.

With regards to Cell C we wrote this in March 2017: "There is still a bit of uncertainty around BLU's price, largely due to the Cell C deal that has not been concluded and bedded down yet and it will be interesting to see how BLU intends on offsetting their services using Cell C's reach and infrastructure. And in addition to this the questions are floating around as to whom the third party shareholder in Cell C that was mentioned in the updated SENS announcement we quoted earlier in this article."

The uncertainty regarding the Cell C deal is gone since the deal has been finalised. However we suspect the mention of BLU director Mr Mark Pamensky in the #Guptaleaks or #guptaemails are not helping their cause at this point in time.
A few financial ratios to mull over for Blue Label Telecoms (calculated using our Financial Ratios Calculator):
  • Debt to Equity Ratio: 0.74 (more than 2 shows high levels of financial leverage). 
  • Current Ratio: 1.79 (a measure of liquidity. Less than one signals possible trouble in paying off current liabilities)
  • Quick Ratio: 1.19 (Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt).  
  • Return on Assets (ROA): 9.45%
  • Return on Equity (ROE): 16.40%
  • Net Profit Margin: 3.12%
  • Dividend Yield: 2.33%
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Valuation: 
Based on its current financial statements and services provided by BLU we value them at between R26.40  and R26.60 We therefore feel that at it's current price BLU offers good value. With a now significant stake in Cell C, a slow but continued turnaround in Mexico, greater demand for services such as pre-paid electricity and a expanding business in India, we feel BLU is well placed for future growth. They should however focus on bolstering their margins, and hopefully the large stake in Cell C leads to greater synergies and additional cost savings with little fatter profit margins.

We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.

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