Net1's earnings down by almost half as end to Sassa contract looms

Net1's [JSE: NT1] earnings were down by almost half (48%) for the 2018 fiscal year as its contract to pay social grants was about to end. 

According to the group’s financial report for the 2018 fiscal year ended June 30, and its fourth quarter performance, released on Thursday - earnings were down by 48% from $1.34 (R19.79) per share in 2017 to $0.69 (about R10.19).

According to the report, revenue from the contract between its business unit Cash Paymaster Services (CPS) and the SA Social Security Agency (Sassa) declined 81% year-on-year in the fourth quarter. This is as a result of the declining number of grant recipients, as the contract with Sassa is being phased out.

"It is with great excitement that we are counting down the days to the end of our Sassa contract on September 30, 2018," said CEO Herman Kotzé.

Kotzé said that although many investors raised concerns about how the end of the relationship with Sassa could impact Net1’s other South African businesses, the group had reported "solid" performance for the fourth quarter.

"Furthermore, the elimination of the negative impact that this contract has had on our business, management's time and shareholder value, should provide a meaningful lift to product refinement and R&D (research and development) going forward."

The group’s overall revenue for the year came to $612.9m (about R9.05bn), with no change from the previous year in dollar terms.

Adjusted earnings before interest, taxation, depreciation and amoritsation (ebitda) was down 15% to R127.15m (about R1.89bn).

Although a "turbulent year", the report stated that the company had been positioned for future growth through its strategic investments. During the period the group spent $291.5m (about R4.3bn) on strategic investments and acquisitions, including Cell C, DNI and Bank Frick.

Fourth quarter figures reflect revenue of $149.2m (about R2.2bn). Adjusted ebitda was $24.3m (about R359m).

Segment revenue in South Africa was $64m (about R945m) for the quarter, down 6% in dollar terms. This was driven by the decline in the number of social grants billed at the old contract rate, the report stated. The fees earned were not sufficient to cover CPS’ fixed costs resulting in an operating loss for CPS for the fourth quarter.  

The operating margin for the fourth quarter was 6.7% compared to 21.9% for the same period in 2017.

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