From ImaraSPReid:- The management of Blue label has forecast that revenue and earnings will grow by 21.2% and 70% respectively for FY08. The 2008 forward PE range is therefore 21.9 - 25.67. Strong growth Potential from India Blue owns 35% of Oxygen in India which has established a rolled out 40,000 points of sale as at May 2007. Blue has stated that it is expected that the mobile service user base in India will rise to 484 million by 2011 from 149.5 million as at FY06 year end.. Placees must have a high level confidence in the growth potential froom this quarter to warrant the FPE range above. Key Risks 1. Non-exclusivity of various supply, distribution and WASP agreements. Some of Blue Label's agreements are non - exclusive and can be terminated at short notice. 2. Blue Label Telecoms is a high volume business with profitability that is very sensitive to variation in margins. Network operators determine margin available to the prepaid airtime distribution channel. Thus, Blue is exposed to possible margin squeeze by network operators. 3. Blue's business is dependent upon general economic conditions in the retail sector. Downturn in retail sector as a result of lower consumer spending could reduce demand for Blue's product and negatively affect profitability. The recent interest rate hike by the reserve bank of SA may reduce discretionary spending by retail consumers. Recommendation Blue Label Telecoms is an interesting counter as it has a highly successful entrepreneurial group backing it. The management has successfully established the Blue label as one of the leading distributors of prepaid airtime in South Africa. There is potential for growth of the business as it expands into other developing economies where electronic tokens of value and transactional services markets are still in infant stage. However, growth will be limited in South Africa as the mobile penetration rate is above 70%. At the offer price of R5.75 - 6.75, and pending greater clarity regards contribution from outside SA, the counter is FULLY VALUED. IMO - allegedly biggest IPO post-Telkom. Has some very savy shareholders and will easily reach R8 by Jan '08 (i sound like Blank Frack don't I?)
Think about this one in three areas - Volume growth; pricing power; and then cost control.
Do your own thinking, then decide if you should be in or not.
My thought starters:- Volume growth Large in the sense that cell/airtime is rolling out across the planet, but undefinable in that the tech evolution of how people talk and pay is not likely to permit the same market lock up as say flogging petrol to the auto fraternity. ALso much growth will likely be in external markets where the rules have yet to be drawn. Hence this is one for the brave.
Pricing power Low. The cell operators (Vodacom, mtn etc) will encourage these guys to drive volume, then squeeze once the volume is established. I see no brand, and no proprietary technology - really just some reward from their early mover advantage. This party may end.
Cost control Not known. Some scalability from volume, but that would only really work in a single market.
At this stage I'll watch from the open side grandstand.
Microsoft had earlier indicated that it wanted to introduce "Pay as you Go" strategy for the use of its products. Purchasing 12% of Blue Label then makes sense since prepaid is Blue Label's core competency, and Blue Label would be the vehicle for this strategy, which will be value enhancing for Blue Label.
It was not based on any science at all, merely my (Windhoek draught enlarged) gut and there it's gone on day 1 to around the 880 level. Where it closes may prove to be more accurate of where it will be by Jan 2008