Blu Label: Financial Simplification Sets Stage for Formal Dividend Policy

• Blu Label Unlimited reported a R4.9 billion loss for the year to May, primarily due to accounting write-downs for Cell C.
• The company's underlying core business showed strength, with R923 million EBITDA and R680 million net profit after tax on a normalized basis.
• BLU adopted a formal dividend policy on August 25, targeting 30%-50% of core headline earnings (excluding Cell C) for shareholder distribution via dividends or share repurchases.
• BLU declared a total dividend of 53.56 cents per share for the year, including an interim dividend that was its first in eight years.
• The company plans to continue share buybacks, believing its shares are undervalued on the JSE, and will distribute 50%-70% of any dividends from its remaining Cell C stake.

This new policy targets an annual payout to shareholders ranging between 30% and 50% of its core headline earnings, specifically excluding any earnings derived from its remaining 49.53% stake in Cell C.

Blu Label Unlimited (BLU) is poised for a significant structural and financial simplification, expected to be fully realized by the 2027 fiscal year. The company recently reported a R4.9 billion loss for the year ending in May, a figure largely attributed to accounting changes that necessitated complete write-downs for its investment in Cell C. This financial recalibration, however, sets the stage for BLU to commence the new financial year with a streamlined operational structure and a clean balance sheet, free from the complexities previously associated with its Cell C stake.

The strategic disentanglement from Cell C began with its separate listing in November, which altered BLU's accounting treatment of its interest from an associate to an equity-accounted investment. This change highlighted a disparity between the investment's book value and its market valuation. Brett Levy, co-founder and joint CEO of BLU, emphasized in a recent interview that despite the reported loss, the underlying core business remains robust, signaling a clear path forward for the company.

Despite the headline loss, BLU's core operations demonstrated considerable strength. On a normalized basis, the company generated R923 million in earnings before interest, tax, depreciation, and amortisation (EBITDA), alongside a net profit after tax nearing R680 million. Core headline earnings per share stood at 75 cents, reflecting healthy operational performance. Furthermore, normalized revenue from the distribution of various vouchers, a key segment of BLU's business, saw a 7% increase, providing insight into the organic growth trajectory of the company's primary activities.

The financial restructuring related to Cell C, which BLU first invested in during 2017 with a R5.5 billion acquisition of a 45% stake, had previously complicated BLU's financial reporting. Cell C's deteriorating financial health led to its losses, impairments, and subsequent recapitalization flowing through BLU's group accounts in various ways. However, BLU has confirmed that it will not incur any Cell C-related costs in the upcoming year, marking the conclusion of what Levy described as a 'seven long years' of challenges associated with the mobile operator.

In a move underscoring its commitment to shareholder returns and robust South Africa corporate governance, Blu Label Unlimited announced the adoption of a formal dividend policy on August 25. This new policy targets an annual payout to shareholders ranging between 30% and 50% of its core headline earnings, specifically excluding any earnings derived from its remaining 49.53% stake in Cell C. The distribution mechanism offers flexibility, allowing for payouts through dividends, share repurchases, or a combination of both, providing a clear Blu Label formal dividend policy for investors.

Demonstrating this commitment, BLU declared a final dividend of 10 cents per share, bringing the total shareholder distribution for the year to 53.56 cents per share. This follows an interim dividend of 43.56 cents per share for the period ending November, which was notably the company's first dividend in eight years and coincided with Cell C's separate listing. Furthermore, BLU is targeting a distribution of 50% to 70% of any dividends it receives from its residual Cell C stake, which can be paid out either as cash dividends or by distributing Cell C shares of equivalent value. The company also indicated its intention to continue with a Blu Label Unlimited share buyback program, believing its shares are undervalued on the JSE and that such repurchases are accretive to shareholder value.

The market's immediate reaction saw BLU's shares close at R8 on the bourse, a 3.85% decline on the day, contrasting with the JSE All Share index's marginal 0.01% loss. Despite this, BLU's leadership remains focused on its long-term strategy. Brett Levy highlighted the significance of the company's ability to pay out 72% of its profits in dividends, stating it demonstrates a strong financial position and fulfills a commitment made in February to re-establish BLU as a dividend-yielding company.

Mike Gresty, a fund manager at Anchor, acknowledged the positive aspect of the share buyback but expressed some disappointment regarding the absence of Cell C share dividends, which he had anticipated. Gresty also noted that much of BLU's recent financials appeared 'a complete mess' due to the extensive Cell C-related restructuring. Levy, however, conceded that the financial statements might be perceived as 'unreadable' or 'messy' for a short period, viewing it as a temporary inconvenience necessary for the company's long-term clarity and simplified structure.

Lawyers advising JSE-listed companies or investors should analyze Blu Label's newly adopted formal dividend policy and share buyback strategy as a benchmark for corporate governance and shareholder value management post-significant divestment. This case illustrates the practical implications of financial restructuring on listed entities' shareholder commitments.

Source: Reporting based on recent financial disclosures.