Blue Label Telecoms, the JSE-listed company that now owns 45% of Cell C, said on Thursday that it expects core headline earnings per share for the six months ended 30 November 2017 to double compared to the same period in 2016. The share surged more than 10% but pared its gains to 3% at the close of trading in Johannesburg.
Core Heps is likely to be between 93% and 113% higher, it said in a trading update to shareholders. Heps and basic earnings per share are expected to climb by similar amounts.
“The increase … is inclusive of the group’s share of an increase in a deferred tax asset recognised by Cell C and the consequent positive impact on group earnings,” it said. “The quantum of the increase in this asset amounts to R1.92bn, of which the group’s 45% share is R865m.”
Equities analyst Keith McLachlan said in an article on his website smallcaps.co.za after the trading update was published that Blue Label’s performance in the six months was robust and that the share price “could quite easily double” from current levels.
The acquisition of a 45% stake in Cell C for R5.5bn and the agreement to buy telecommunications specialist 3G Mobile make the latest numbers difficult to analyse, however.
Given that Cell C has incurred large historical losses, it has a big assessed loss for tax purposes, McLachlan said. “Now, given that there are likely future profits against which to set this assessed loss, the telco (Cell C) can now raise these assessed losses as a tax asset on its balance sheet. In short, Cell C is unlikely to pay tax for quite a long time to come, and this does in fact have value for shareholders.”
He said if one reverses the estimated 99c/share worth of deferred tax in the trading update, it suggests that Blue Label’s core Heps not did double but in fact dropped about 26%.
“This is bad, isn’t it?” McLachlan said. “Well, no, because we have only reversed the deferred tax asset and not controlled for Cell C’s equity accounted loss and the dilution from its investment. We need to do both to compare like with like.”
“In the acquisition of Cell C, Blue Label Telecoms issued shares to the effect of diluting shareholders by about 26.5%. Hence, if we then control for dilution, Blue Label Telecoms’ core Heps was flat year on year. But if you add back Cell C’s loss, you probably arrive at core profit growing by 15% to 25% year on year.”
McLachlan said such growth is “fantastic” for a stock trading on a “rather ridiculous” price-to-earnings multiple of an estimated 10 times (calculated using an annualised core Heps of 61c/share with Cell C’s tax asset stripped out and with no other adjustments).
“Blue Label Telecoms is a stock that is on a low multiple with a great growth rate and a game-changing stake in a telco. Quite simply, this is a stock that could easily double.”
Blue Label will publish its 2018 interim results on 22 February. — © 2018 NewsCentral Media