Despite turning in a R16,9m loss in the financial year to 28 February 2011 and facing a R30m lawsuit from MTN, JSE-listed telecommunications specialist Huge Group says it is confident it will survive the next 18 months.

The group published its annual financial results on Tuesday, 28 days after the deadline required in terms of JSE regulations. The results paint a gloomy picture, with revenues down 8,7% to R523,8m and a headline loss per share of 15,3c from earnings of 5,6c a year ago.

Worse, it’s facing potentially damaging legal action. MTN filed papers on 18 January, asking the courts to liquidate Huge Group subsidiary Huge Telecom unless it coughs up R30m plus interest over a long-running dispute following MTN’s acquisition of service provider iTalk Cellular. Huge filed an answering affidavit on 1 March but Huge Group CEO James Herbst says he is hopeful the issue can be settled out of court.

In another dispute, former Huge Telecom director Jonathan Kimber has instituted a claim of R6,8m against the company over an share option agreement signed on 2 September 2008. The parties have agreed to a formal arbitration hearing.

Despite the legal challenges and the poor financial results, Huge Group believes it can ride out the storm.

“The board has not identified any events or conditions that individually or collectively cast significant doubt on the ability of the company and the group to continue as a going concern,” Huge Group says in notes accompanying its financial results. It sets out the reasons why it believes this is the case. They include expected improvements in profitability of subsidiaries Huge Telecom and CentraCell in the 2012 financial year; a reduction in salary expenses; and funding undertakings from key shareholders.

Huge Group and other companies that play in the least-cost routing (LCR) market have been hit hard by recent reductions in wholesale mobile call termination rates, the fees operators charge one another to carry calls between their networks. LCR operators took advantage of arbitrage opportunities while the fees were high, but those opportunities have diminished as the rates have come down.

Cellular operators have also stopped paying connection incentive bonuses — money for connecting Sim cards to their networks — to LCR operators, hitting them hard. But Huge says “strategies identified by Huge Telecom and CentraCell are sufficient to mitigate the full extent of the impact”.

It says also that the company’s credit facilities are sufficient to meet its ongoing needs.

Huge Group has decided not to impair goodwill on its acquisitions of Huge Telecom and CentraCell, despite a decision by rival Vox Telecom earlier this year to write down in the region of R750m, in large part due to its acquisition of LCR player Orion Telecom.

“The board … is of the opinion that the long-term benefits of falling termination rates are positive for Huge Telecom and CentraCell,” the group says. “The directors will continue to assess the industry and the possible changes that could impact the goodwill of the company.”

Huge Group’s share price was trading down 13% at 60c on Tuesday afternoon shortly after publication of the annual results. — Duncan McLeod, TechCentral