Blue Label hammered following Cell C results

Blue Label Telecoms’ share price declined from R6.14 to around R5.00 following the publication of Cell C’s financial results and post-recapitalisation balance sheet on 29 September.

Cell C CEO Douglas Craigie Stevenson told investors they now enjoyed a reduced debt burden, streamlined company, and new network strategy.

He added that they were transforming into a “techco” with a virtualised network strategy to reduce expenses and put Cell C on a path of sustainability and growth.

Craigie Stevenson highlighted that the recapitalisation was only the beginning and that hard work was needed to save the company.

He may have referred to Cell C’s post-recapitalisation position, which revealed it remains technically insolvent despite a significant debt reduction.

The mobile operator’s liabilities of R12.4 billion dwarf its assets of R6.2 billion, which means Cell C remains in financial distress.

To understand why investors dumped Blue Label’s stock following the Cell C results, Daily Investor spoke to analysts on the condition of anonymity.

What emerged is that they were not convinced Cell C did enough to reduce debt to manageable levels.

They highlighted that while Cell C’s secured lenders took an 80% haircut on their debt, the recapitalisation process was very costly.

Another problem was that investors were told the same story during Cell C’s 2017 recapitalisation process, which did not turn out as expected.

A few points which stood out for the analysts from Cell C’s latest finances were:

• There is no certainty that Cell C reduced its debt to manageable levels.

• The financial results lacked detail and did not provide adequate information for investors to track Cell C’s performance over the last few years.

• Cell C changed its reporting structure and left out core information like service revenue and a breakdown of contract, prepaid, broadband, and MVNO clients.

• There was a decline in subscribers and revenue, which did not bode well for future growth.

• Cell C’s guidance of mid-single-digit revenue and EBITDA growth may not be enough for the company to cover all its expenses and service debt.

• There are many related party transactions, creating a complicated financial structure which is difficult to track.

• It is uncertain how the contract subscriber agreement between Cell C, Vodacom, and Blue Label subsidiary Comm Equipment Company (CEC) will influence Blue Label and Cell C’s revenue and reporting.

One analyst told Daily Investor that Blue Label is highly dependent on Cell C to maintain its revenue and profit levels.

Blue Label impaired its investment in Cell C to nil in May 2019, but it does not mean it can do without the mobile operator.

Blue Label makes a much larger margin on airtime sales from Cell C than from Vodacom and MTN.

It also generates a lot of revenue from Cell C prepaid and postpaid SIM cards, and handset sales and financing to the contract base.

Blue Label co-CEO Brett Levy previously said Cell C makes up around 25% of Blue Label’s total profits as a group.

Considering that Blue Label has set costs to operate, Cell C is a very important partner to the company.

A healthy Cell C is critical for Blue Label’s prospects. It is why Blue Label is willing to invest billions to keep the mobile operator alive.

Without the certainty of a prosperous Cell C, many investors preferred to sell out of Blue Label until they were convinced the mobile operator was on a sustainable path.

Cell C share price following Cell C’s results