Hope for South African telco giant after multi-billion rand flop
Blu Label Unlimited provides an attractive investment case despite the disappointing listing of Cell C on the JSE.
Mike Gresty from Anchor Capital stated that the IPO of Cell C overshadowed the narrative surrounding the restructuring of Blu Label.
While the market responded well to the news, pushing the Blu Label share price up to R17, the CEll C IPO proved more challenging than expected, with the group’s share price falling to R10.
Cell C was priced below the initial guidance range, valuing Cell C at R9 billion – half of what bullish ‘ value unlock’ advocates had projected earlier.
Gresty said that the disappointment of the IPO proved the perfect set-up for doom-monqers, with questions over the urgency of the listing and the complexity of the restructuring.
There were also questions over Blu Label’s management team and the future contractual terms on which Cell C depends to secure wholesale capacity from MTN and Vodacom.
Cell C no longer has its own mobile network; instead, it roams off MTN’s, while still holding onto some spectrum.
While Blu Label did not achieve the Cell C IPO valuation price it hoped for, it did deliver the restructuring it promised.
“Understanding what that means suggests that this may be an excellent opportunity to adopt a contrarian position here,” said Gresty.
“Unfortunately, BLU results for the financial year to end May 2026 (FY26) will remain messy due to the scale of the restructuring the Group has undergone this year.”
With investors not a fan of complexity, Gresty said that it may require patience before a clear picture emerges.
Positives
The investor noted that Blu Label’s stake in Cell C now stands at approximately 45%, which means it can be accounted for as an associate rather than being consolidated.
Associates typically have a strong level of influence over the company, but not control. This results in different accounting standards.
Gresty said that this will reveal the BLU ‘rump’ business, which has qualities that were previously underappreciated, as its earnings have been previously impacted by keeping a highly indebted Cell C afloat.
“The BLU rump can be thought of as a low capital intensity “fintech” that essentially acts as a tollgate on a broad range of financial transactions it facilitates.”
“Initially merely a prepaid airtime distributor, it has expanded into many other areas, making use of various forms of prepaid vouchers: prepaid electricity, event tickets, and gaming.”
Anchor Capital believes that this ‘rump’ can generate close to R1/share of earnings with a very high level of cash conversion.
Due to the healthy growth rates in the non-mobile airtime categories, the group expects earnings to grow at a double-digit rate over the next few years.
Cell C itself also has a new life, with the company now having a clean capital structure after losing, due to the conversion of debt to equity before listing.
Gresty said that the company should generate healthy free cash flow (FCF) and will benefit from a sizable, assessed tax loss for years to come.
“On our estimates, we think the initial IPO price equates to a forward P/E multiple of about 4.5x. Assuming Cell C delivers on its promises, there is scope for it to rerate upwards.”
While the proceeds from the Cell C IPO were less than hoped for, Blu Label should emerge unindebted.
It also has a decent cash reserve, which it can use to pay a special dividend or repurchase shares.
“With a market capitalisation at the time of writing of just R8.8 billion, investors appear to be ascribing no value to the BLU rump at all.”
“Even that value implies a very depressed rating for Cell C. We see a tremendous value underpinned here with a multitude of options to drive upside in the year ahead.”
Joint CEOs, Brett and Mark Levy, have also acquired R190 million worth of BLU shares, backing the company’s turnaround.
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