Huge Group improves profitability and gears for growth

1 June 2010 - Huge Group

A marked turnaround at Huge Group in the second half of the year turned an interim loss into a year-end net profit of R8 million, with improved profitability reflected in year-on-year increases in gross and net profit, headline earnings and gross profit margin.

Huge Group, an AltX-listed investment holding company specialising in telecommunications and media, today reported results for the year to end-February 2010.

The turnaround is mainly due to a successful restructuring, which merged the group’s two telecommunications businesses, TelePassport and CentraCell into Huge Telecom. The result was that Huge Telecom, the group’s principal operating division and revenue generator, produced a 35% increase in gross profit in the traditionally slower second half of the year after a first-half net loss.

Huge also reported continuing diversification of its operations with a new subsidiary, Huge Media, launched in January 2010.

Huge now has a majority holding in the promising Eyeballs Mobile Advertising operation, which sells advertising applications for mobile phones. After a successful launch of this technology in South Africa, Huge now intends to market the technology abroad. It has increased its stake in Eyeballs from 25% to 77%, and it said that growing investor interest in Eyeballs demonstrated the underlying value of this investment.

Huge Telecom helps corporate clients, ranging from small businesses to major multi-national corporations, to realise substantial telecommunication cost reductions by providing them with a broad spectrum of managed telecommunications products and services.

The group produced net profit before tax for the second half of the year of R19,2 million, and a net profit after tax of R13,8 million. The reversal of the first-half loss of R5,8 million resulted in net profit after tax for the year of R8,1 million.

The group’s improved profitability was achieved despite a slight reduction in group revenue, down to R573,5 million from R608,5 million in 2009.

Basic earnings per share were up 25,8% to 8,58c (2009: 6,82c), and headline earnings per share were up 28,3% to 8,79c (2009: 6,85c).

The group said it had created further value for shareholders through an active share repurchase programme. It stated that the repurchases would continue up to the fair valuation range set in an independent valuation in May 2010 of 182 cents to 236 cents per share. Net asset value per share increased by 7,4% to 252,35 cents per share.

The group reported that Huge Telecom has been strategically positioned to take advantage of the changing regulatory environment, and in particular to benefit from the pressure that the industry regulator, ICASA, is putting on mobile operators to lower retail tariffs charged to consumers by reducing interconnect rates – the rate they charge each other for terminating calls on their networks.

“Huge Telecom stands to benefit from the regulatory reduction in termination rates” (interconnect tariffs), the group said. It welcomed lower termination rates on the basis that lower communication costs will drive down input costs, increase demand and deliver growth in the voice traffic generated by Huge Telecom clients.

Huge has strategically not focused its business model or its infrastructure investments on voice over internet protocol (VoIP) services, but noted that proposed regulatory changes posed significant threats to companies that had done so.

ICASA’s proposed new categorisation rules for network operators would put VoIP service providers in the same category as fixed line network operators. VoIP service providers’ revenues will thus be negatively affected by the proposed further reduction in fixed line termination rates to 15c per minute, while the mobile termination rates were only expected to reduce to 65c per minute.

Huge said that companies in Huge Telecom’s peer group that had invested heavily in VoIP infrastructure may have briefly enjoyed additional revenue streams on incoming voice traffic on the basis of bilateral interconnection agreements, which will in all probability become asymmetric. However, if the new termination rates came into effect in July 2010 as proposed, “their investments are at risk of being rendered unprofitable long before their expected break-even points are reached.”

The group reported in detail on the fact that its auditors had indentified what they believed was a reportable irregularity. The auditors had apparently based this on decisions by the JSE regarding trading in single stock futures in 2008. The group said that, as these decisions were currently under dispute by the directors named by the JSE, and those directors had lodged an appeal with the Financial Services Board, no final decision had yet been taken by the JSE.

As a result, the company’s directors, “confirm that, having regard to the information currently available to the directors, no reportable irregularity has, or is, taking place.”

Huge Group said that, in the year ahead, Huge Telecom will focus on introducing alternative revenue streams that complement its business. It will also pursue opportunities to increase its client base to enhance capacity utilisation and further improve profit margins.

“Huge Telecom is well positioned to benefit directly from increased managed services sales once the South African economic recovery gains momentum,” it said.

 “In the next period, the group anticipates increasing returns from its investment in Huge Telecom. In addition, the group expects the growth of Huge Media and Eyeballs to contribute to group returns,” Huge said.

For further information, please contact:
Patricia Naicker, Communications Manager, Huge Telecom, on 011 603 6000