13 Aug Blue Label market value could double after Cell C spinoff
Portfolio manager believes restructuring could lift valuation to as much as R27bn
Blue Label Telecoms, whose shares have nearly quadrupled in the past year, is drawing renewed investor interest amid signs that a long-awaited restructuring of its troubled Cell C subsidiary is taking shape.
According to Cape Town based Flagship Asset Management, the restructuring which includes a debt for equity swap and a potential initial public offering IPO could lift the company’s valuation to as much as R27bn from its current market capitalisation of R14.9bn.
The company, which distributes digital tokens such as prepaid airtime and electricity, has seen its share price surge from R4.25 on August 8 last year to R16 on Tuesday, a gain of 275%, according to Iress data. That performance makes it the JSE’s best performing stock since September last year a dramatic turnaround for a business long weighed down by its 2017 acquisition of Cell C.
Blue Label’s investment in Cell C, once viewed as a strategic entry into telecom, proved costly in the years that followed.
Contrarian
Cell C’s troubles, coupled with questions about Blue Label’s capital allocation and complex financial reporting, led to a steep decline in its share price, which bottomed out at R2.60 in September 2023.
“By late last year, sentiment was deeply negative, and most institutional investors had exited,” said Flagship portfolio manager Philip Short. “But for contrarian investors, it became a case of looking through the noise and asking whether there was value to be realised, especially if Cell C could be turned about.”
Contrarian investors buy low and sell high by going against prevailing markets trends.
Regenesys Investment Fund trader Neelan Gungudoo said: “Any restructuring, especially a separate business listing, is always a huge value unlock for shareholders.”
Gungudoo’s comment follows Blue Label Telecoms’ announcement that it plans to change its name to Blu Label Unlimited Group, part of a Mark Levy, the joint CEO and cofounder of Blue Label Telecoms. File restructuring aimed at separating its telecom and non-telecom businesses.
The announcement of the name change reflecting the group’s expanding business interests was well received by the market.
According to Flagship’s analysis, the next phase of Blue Label’s recovery is expected to be driven by a corporate restructuring of Cell C, expected within the next six months.
“The planned restructuring would simplify Cell C’s balance sheet and prepare it for a potential listing, which would give the market a clearer view of its standalone value,” Short said.
Flagship estimates Cell C could generate annual earnings before interest, tax, depreciation and amortisation of R2.5bn and net profit of R2bn.
The restructuring comes as telecom and financial institutions increasingly compete in the digital services space. Blue Label sits at the centre of this shift, processing about 30% of SA’s prepaid airtime sales through its platform.
One of its key partners, Capitec Bank, has used this infrastructure to launch Capitec Connect, a mobile virtual network operator MVNO that rides on Cell C’s network. Since launching, it has gained 1.5million subscribers. Analysts see this as a strategic asset for Cell C, generating high margin wholesale revenue without customer acquisition costs.
“MVNOs like Capitec and FNB are revitalising Cell C’s model,” said Short. “They manage their own customers, while Cell C earns from network access. That’s a cleaner and more scalable setup.”
Competitive service
According to Flagship, operational improvements via Cell C are central to Blue Label’s positive outlook. Cell C’s asset light model, where it retains spectrum but roams on Vodacom and MTN infrastructure, enables competitive service without major capital outlay.
Cell C also supports growing MVNOs like Shoprite and Standard Bank, earning wholesale revenue without retail management costs.
Leadership changes have also played a role in shifting the company’s direction. Since early 2023, more than half of Cell C’s executive team has been replaced, including several hires from Vodacom.
Despite the market’s renewed optimism, analysts caution that Blue Label’s recovery is not guaranteed.
“The restructuring is complex and subject to regulatory, financial and execution risks. Execution is key here,” said Short.
“The market has started to respond to the restructuring narrative, but delivering on that promise especially through a successful Cell C listing will be critical.”
By LINDIWE TSOBO Financial Reporter: Business Day
