EUR 1739.58 For Business Accounts Only

Blue Label Telecoms (BLU) – Building an ecosystem

Summary

We initiate coverage on Blue Label Telecoms with a BUY recommendation

The SA Distribution segment remains the core of the business. We believe that regulatory developments in India and a resurgence in cash usage have negatively impacted on the growth potential of the Oxigen business. Despite the significant potential of Mexico’s airtime market, stubbornly high market concentration threatens to persist and smother growth. The Mexican business is subscale, in our view.

On its own, the growth prospects for Cell C seem weak. However together with 3G Mobile, Reware, BLU’s existing ecosystem and management IP related to distribution, we believe that Cell C could become sustainably profitable. More importantly, Cell C provides BLU with another channel to market. BLU’s handset ecosystem also provides it with the potential for revenue diversification and growth opportunities outside of SA.

Investment Impact

Over the last few months, concerns around a global correction have significantly impacted SA telecoms stocks. BLU in particular has been under significant pressure with its 12-m forward P/E multiple declining from a long-term average of 11.4x to 5.1x.

The fundamentals of the core SA Distribution business remain unchanged and disintermediation risk is low, in our view. Recent acquisitions complement the existing ecosystem, and there is adequate capacity to fund these acquisitions.

 Management have demonstrated prudence in matching funding to opportunity in underperforming international operations – so we do not expect this to be a drain on the business. The current market movement creates an entry point.