Huge Group’s big change – and what it means for investors

Huge Group changed from a consolidated group to an investment entity and, armed with refinancing and acquisition facilities of R240 million, has embarked on an acquisition trail.

To fully understand the impact of Huge Group’s significant change over the last year, you have to turn back the clock to 1993, when Anton Potgieter founded TelePassport South Africa.

TelePassport showed strong growth and was acquired by Vanquish Fund Managers, which would become Huge Group. In July 2007, Huge Group was listed on the JSE’s AltX exchange.

Potgieter, which served as Huge Group and TelePassport CEO at the time of listing, stepped down in November 2008. James Herbst took the reigns and has been Huge Group CEO ever since.

Since listing, Huge Group has operated as a consolidated group with numerous subsidiaries, including Huge Telecom, Huge Networks, Huge Software, Huge Connect, and Huge Distribution.

In March 2021, Huge Group changed from a consolidated group to an investment entity.

Since then, there have been many developments at Huge Group, including a new facilities agreement, a few acquisitions, and a new corporate identity.

On 26 May 2022, Huge concluded a new facilities agreement with Rand Merchant Bank (RMB).

The facility included refinance and acquisition facilities of R240 million, general banking facilities of R15 million, and asset-based financing facilities of R12 million.

Huge Group has already started using this money with a few significant acquisitions.

Huge Telecom, a wholly-owned subsidiary of Huge Group, acquired Otel Communications’ 49.98% share in Huge Networks for R15 million. It makes Huge Networks a wholly-owned subsidiary of Huge Telecom.

It also agreed to acquire Glovent Solutions through a subscription for new ordinary shares of Glovent, giving it a global growth opportunity operating in fintech, software, and xTech.

In July, Huge Group reached an agreement to buy Tethys Mobile, previously known as Virgin Mobile South Africa.

Should the deal go through, Tethys Mobile will become a wholly-owned subsidiary of a foreign company controlled by Huge Group and change its name to Huge Digital Enablement.

As part of the change from a group of operating companies to an investment company, Huge Group launched a new corporate identity.

It is the brand’s first refresh since its launch in 2007. “Since then, Huge Group has evolved into a company with a diversified investment portfolio exceeding R1 billion,” Herbst said.

Herbst said the brand refresh signals their intention to be a very active investor in the connectivity, cloud, software, and xTech sectors.

Impact of Huge Group’s change

Huge Group’s change from a consolidated group to an investment entity significantly impacts the company’s reporting and tracking of its performance.

Their core business now revolves around the generation of returns from receipts of interest and dividends and capital gains from their portfolio of investments.

The change in status to an investment entity means Huge Group qualifies to report according to IFRS 10.

It is no longer required to consolidate its subsidiaries to a group statement unless the subsidiary provides services directly related to the parent firm’s investment activities.

The 2021/2022 statement is the first financial period Huge Group reported under these standards.

The new reporting standard will be implemented prospectively, resulting in comparative information (prior period financials) remaining unchanged.

When reporting under IFRS 10, investment companies – aka subsidiaries – are no longer consolidated into a single group statement. Instead, they are recorded at Fair Value Through Profit or Loss (FVTPL).

It means that the investment companies of Huge Group would periodically be measured at their fair value, which can generate fair value gains or losses.

In simple terms, all profits will come from interest, dividend receipts, and fair value gains or losses.

The impact of these reporting changes on Huge Group’s financial statements is significant.

Revenue fell from R469.86 million in 2021 to R7.1 million in 2022. It is due to the subsidiaries’ revenue not being consolidated to the group.

Net income jumped from R64.3 million in 2021 to R517.6 million in 2022. The main cause for this large distortion is how the subsidiaries were removed and re-added to the financial statements.

Huge Group’s subsidiaries that qualified as investment assets were deemed disposed of and re-acquired as investment assets.

After they were acquired as investment assets, the subsidiaries were adjusted from their original cost to their fair values, which resulted in a fair value gain of R416 million.

The abnormally high net income is mostly due to a shift from cost- to fair value reporting.

Numerous expense line items show vastly different figures from prior periods. These result from subsidiary expenses no longer being consolidated into the group statement.

One significant effect of this change is that comparing financials from previous periods is basically meaningless.

It makes it very difficult, if not impossible, to accurately measure the performance of Huge Group for the 2021/2022 financial period.

Valuation of Huge Group also becomes hard to determine as certain trends no longer can be followed. It distorts forecasting.

Also noteworthy is that the fair value adjustments for all of Huge Group’s investment assets had a level 3 priority ranking on the fair value hierarchy, with level 1 highest priority and level 3 lowest priority.

What it means is that the fair value adjustments were based on unobservable inputs – non-public information – of the investment assets.

These fair values, therefore, have to be accepted at face value, as the financial data used in the valuations are not available to the investor.

The statements’ independent auditors report, conducted by Moore Global, did specify that the statements are presented fairly in all material respects.

Under the IFRS 10 reporting, Huge Group has a 2022 Net Asset Value Per Share (NAVPS) of R8.97 – up from R5.95 in 2021 – and an enterprise value per share of R4.17.