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Independent auditor’s report TO THE SHAREHOLDERS OF BLUE LABEL TELECOMS LIMITED

OPINION

We have audited the Consolidated Financial Statements of Blue Label Telecoms Limited (the Group) set out in Group income statement, which comprise the Consolidated Statement of Financial Position as at 31 May 2024, and the Consolidated Statement of Profit or Loss and Other Comprehensive Income, the Consolidated Statement of Changes in Equity and the Consolidated Statement of Cash Flows for the year then ended, and notes to the Consolidated Financial Statements, including a summary of significant accounting policies.

In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the Consolidated Financial Position of Blue Label Telecoms Limited as at 31 May 2024, and its Consolidated financial performance and Consolidated Cash Flows for the year then ended in accordance with IFRS Accounting Standards as issued by the International Accounting Standards Board and the requirements of the Companies Act of South Africa.

BASIS FOR OPINION

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group and company in accordance with the Independent Regulatory Board for Auditors’ Code of Professional Conduct for Registered Auditors (IRBA Code) and other independence requirements applicable to performing audits of Financial Statements in South Africa. We have fulfilled our other ethical responsibilities in accordance with the IRBA Code and in accordance with other ethical requirements applicable to performing audits in South Africa. The IRBA Code is consistent with the corresponding sections of the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards). We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

KEY AUDIT MATTERS

Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Consolidated Financial Statements of the current year. These matters were addressed in the context of our audit of the Consolidated Financial Statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matters in the current year include:

Key audit matter

How our audit addressed the key audit matter

Sale of Advances to Customers under Post-Paid Contract Device Arrangement

During the current year, CEC entered into three separate arrangements with financial institutions for the sale of debt owing under the Post Paid Contract Device Arrangement (Advances to customers). Due to varying terms for the separate agreements, the accounting implications were complex from a derecognition, recognition and measurement and disclosure perspective in the Group’s Annual Financial Statements.

The accounting treatment of the different agreements resulted in:

  • For book sale one: the transaction resulted in and early settlement of the advances, for which CEC paid a financing fee for the facility provided.
  • For book sale two: the transaction resulted in the derecognition of the book as the transfer qualifies for derecognition, except for a contractually specified portion of the book, referred to as the holdback debtor (or receivable), for which CEC retained the risks and rewards associated of ownership. This transaction also resulted in CEC obtaining a new financial asset, referred to as the Escrow debtor for which a risk margin is held in an Escrow account. CEC has a contractual right to the remaining balance in the Escrow account at the end of a specified period. The Escrow debtor was recognised at fair value and is measured at fair value through profit or loss.
  • For book sale three: advances to customers which had been fully written off prior to the transaction was sold in an unconditional sale. This transaction was accounted for as a recovery of bad debt written off.

The transactions have been presented in note 3.3.3 Advances to customers.

The accounting treatment of the sale of advances to customers was assessed with the assistance of technical reporting specialists and actuarial specialists. The accounting treatment was considered in accordance with the requirements of IFRS 9 and established industry practice. We specifically focused on the transfer of credit risk and control over the related cash flows which are captured by CEC as a collecting agent.

The derecognition requirements of the sale of advances to customers where CEC now acts as a collecting agent has been assessed and is in line with the requirements of IFRS 9. Our assessments focused on whether CEC has transferred the risks and rewards of ownership of the advances by comparing CEC's exposure, before and after the transfer, with the variability in the amounts and timing of the net cash flows of the transferred asset.

Specifically in response to book sale two, we carefully considered the contractual arrangement between CEC and the financial institution. As it relates to the holdback debtor, CEC retains the credit risk for contractually specified non-performing accounts, subject to a maximum of 10% of the total book value. Based on the nature of the contractually specified advances, it is virtually certain at the transaction date that BLT will retain ownership of these advances to customers, and therefore we agreed with management’s assessment that that these specified advances remain on book. Furthermore, as it relates to the recognition of the Escrow debtor, a separate financial asset to CEC, we assessed the requirements of IFRS 9 as it relates to transfers that qualify for derecognition. IFRS 9 states that if, as a result of a transfer, a financial asset is derecognised in its entirety but the transfer results in the entity obtaining a new financial asset, the new financial asset is recognised at fair value. The new asset was identified as the Escrow debtor. The Escrow debtor’s value changes based on the future collections experience over the subscription term of each account, and therefore management’s classification of ‘at fair value through profit or loss’ was considered appropriate.

The derecognition requirements, where applicable, have been evidenced sufficiently by the actuarial assessment of management’s calculations on all three book sales.

The recognition and presentation of the various affected line items and notes as it relates to the various sales of advances to customers has been assessed as appropriate.

Reversal of Impairment Indicator assessment of the Investment in Cell C Limited and its Going Concern

Reversal of Impairment Indicator assessment of the Investment in Cell C Limited as prepared by management

IAS 36 states that if an indication of possible impairment or reversal of impairment is identified or if there has been a change in the estimate used to determine the recoverable amount of the investment, management must estimate the recoverable amount of that asset. Management has not identified any indications of reversals of impairment of the investment in Cell C Limited. Management has performed a sensitivity analysis to further test the robustness and reasonability of the factors relied upon to conclude that no indication of a reversal of impairment has been identified. As part of this testing the sensitivity analysis included the probability of distress and its consequences.

Management considered the changes made to the Cell C business strategy, the successful renegotiation of key service agreements and IT support, the enhanced senior executive management team, the continued focus on operational efficiencies, reduced operational expenditure, the optimisation of traffic and the implementation of a fixed cost infrastructure. This, together with the effects of the capital and debt restructure of the business as a result of the recapitalisation of Cell C, is expected to improve both the liquidity and performance of Cell C. Taking into account the latest available financial information and estimated future cash flows, management has concluded that the going concern basis is appropriate and Cell C Limited will be able to continue as a going concern for the foreseeable future.

We reviewed the assessment of indications of a possible further reversal of previously recognised impairment losses as prepared by management which considered both internal and external sources of information. It should be noted that the indicators of a possible reversal of impairment that are considered in assessing whether impairment testing is required, do not automatically lead to a mandatory calculation of a recoverable amount. Management is required to assess whether the magnitude or effect of any changes from internal or external sources requires the determination of recoverable amounts. In addressing the identification of any indicators of a further reversal of previous impairment losses recognised, we reviewed the assessment performed by management, and supplemented our review through enquiry to both management of BLT and management of Cell C. Our assessment of indicators also considered the audited and unaudited information related to Cell C and management’s forecasts of the financial results for Cell C’s operations as provided by the Cell C management. Our Corporate Finance and Restructuring Specialists reperformed the calculations of management by applying reasonability/reality checks on the sensitivity analysis and verifying through external sources the appropriateness of any inputs used and assumptions applied by management. Our specialists agreed, within a reasonable range, with management’s assessment that there is no evidence of a further reversal of an impairment loss.

 

Going Concern Assessment

For purposes of the Group’s annual financial statements, Cell C has been accounted for using the going concern assumption. Our assessment is an ongoing dynamic assessment of the impact of the stated turn-around strategy, operational efficiencies and financial measurements implemented by management of Cell C.
We continue to monitor the effects of the recapitalisation transactions concluded on in the prior years. Our assessment also included:

  • Commenting on the cash flow projections for Cell C and discussing these with management as appropriate/where possible;
  • Understanding BLT’s response to fund the working capital requirements of Cell C and whether BLT has sufficient resources to provide Cell C with such funding;
  • Consideration of audited and unaudited information relating to Cell C provided by the Cell C management; and
  • Discussions with Cell C management regarding the past, present and future operations of Cell C.

Through assessment of the latest available financial information, cash flow forecasts, and the stress testing performed by our Corporate Finance and Restructuring Specialists of Cell C Limited, we are satisfied that Cell C Limited will be able to continue its operations as a going concern in the foreseeable future.

OTHER INFORMATION

The directors are responsible for the other information. The other information comprises the information included in the document titled “Blue Label Group Annual Financial Statements 2024”, and in the document titled “Blue Label Telecoms Limited Annual Financial Statements 2024”, which includes the Directors’ Report, the Report of the Audit and Risk Committee and the Certificate by the Company Secretary, as required by the Companies Act of South Africa, which we obtained prior to the date of this auditor’s report and the other sections of the document titled “Blue Label Telecoms Integrated Annual Report 2024”, which is expected to be made available to us after that date. The other information further comprises the Shareholder Analysis. The other information does not include the consolidated financial statements and our audit report thereon.

Our opinion on the Consolidated Financial Statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.

In connection with our audit of the Consolidated Financial Statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the Consolidated Financial Statements, or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

RESPONSIBILITIES OF THE DIRECTORS FOR THE CONSOLIDATED FINANCIAL STATEMENTS

The directors are responsible for the preparation and fair presentation of the Consolidated Financial Statements in accordance with IFRS Accounting Standard as issued by the International Accounting Standards Board and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of Consolidated Financial Statements that are free from material misstatement, whether due to fraud or error.

In preparing the Consolidated Financial Statements, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS

Our objectives are to obtain reasonable assurance about whether the Consolidated Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Consolidated Financial Statements.

As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

  • Identify and assess the risks of material misstatement of the Consolidated Financial Statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
  • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
  • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
  • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the Consolidated Financial Statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
  • Evaluate the overall presentation, structure and content of the Consolidated Financial Statements, including the disclosures, and whether the Consolidated Financial Statements represent the underlying transactions and events in a manner that achieves fair presentation.
  • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the Consolidated Financial Statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

We communicate with the directors regarding, amongst other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the Consolidated Financial Statements of the current year and are therefore the Key Audit Matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS

In terms of the IRBA Rule published in Government Gazette Number 39475 dated 4 December 2015, we report that SizweNtsalubaGobodo Grant Thornton Inc. has been the auditor of Blue Label Telecoms Limited for two years.

Alex Philippou

SizweNtsalubaGobodo Grant Thornton Inc.

Engagement Director

Registered Auditor

28 August 2024

221 Garstfontein Road

Newlands

Pretoria

Gauteng