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Ballooning social grant numbers cost Net1

Ballooning social grant numbers cost Net1

CAPE TOWN – The implementation of the R10bn social grant tender is proving more complex and costly than originally expected, putting a severe dampener on Net1 UEPS Technologies half year results.

The electronic payments company, which is listed on the Nasdaq and Johannesburg stock exchanges, reported revenue of $223m, (R1.9bn) for the six months to December 2012. This is up 16% in dollar terms and 26% in rand terms from the previous year. However net income has fallen to $9.3m (R83.4m) from $44.8m (R399m). Diluted earnings per share fell from $1 (R8.90) to 21c (186.9c).

The company’s results were adversely affected by the strengthening of the dollar, however it is the rapidly expanding number of social grant beneficiaries who need to be registered on the Net1 system that is pushing costs upwards. In January 2012, Net1 was awarded the tender by the South African Social Security Agency to pay out all social grants – child support, disability grants and old age pensions – nationally.

In terms of the agreement, Net1 began enrolling both the grant recipients (those individuals who receive the actual payment) and the grant beneficiaries (those individuals who have qualified for the social grant, but are not necessarily the recipient of the grant) in July last year. While the number of recipients has remained stable at 9.4m people, the number of beneficiaries is continually being revised by SASSA, from an initial estimate of approximately 15.5m, to the current estimate of about 21.6m.

The company has registered 12m beneficiaries so far, and is pulling out all the stops to complete the process by March this year.

Initially, when the company signed its service level agreement with SASSA , it expected to spend $68m to $95m between February 2012 and March 2013. This would be spent on building the infrastructure; registering and re-registering 15.6m beneficiaries and rolling out the biometric technology nationally. However the cost of registering an additional 6 million people and employing more temporary staff for longer, will push Net1’s expected cash outlay to between $100m and $105m by March 2013, says Herman Kotzé, Net1 CFO.

The implementation costs are a one-off event, adds Serge Belamant, chairman and CEO of Net1 (pictured), and are essential to the future smooth running of this contract. Once the implementation is complete, the company expects earnings to increase. Revenue from transaction-based activities in South Africa rose 31% to $60.8m in the three months to December. “The increases in segment revenue were primarily due to higher revenues earned under our new SASSA contract.”

Internationally, transaction revenue from its operations in Korea, Iraq and Botswana rose 15% to $33m in the last three months.

Legal woes

Net1’s legal woes also remain a thorn in its side. Last year Absa-owned AllPay, which lost out to Net1 on the SASSA contract, challenged the veracity of the tender award in court. The North Gauteng High Court ruled that the state social grant tender awarded by SASSA in January was illegal and invalid. In fact the judge went so far as to say the process followed by SASSA was “procedurally unfair,” constitutionally “inconsistent” and “invalid.”

The judge did not set aside the contract, arguing that to do that would put the payments of millions of social security payments at risk.

Net1 and SASSA, as well as AllPay have appealed this decision. Net1 and SASSA are contesting the finding that the procedure followed was flawed and AllPay is contesting the judge’s decision not to overturn the tender itself.

The case will be heard next week.

As an indirect result of this finding, the US Department of Justice (DOJ) and the Securities Exchange Commission is investigating the company on charges of bribery and corruption. “We continue to cooperate with the DOJ and SEC on their investigations, but as a result of these investigations, we are experiencing some adverse impact from the damage caused to our reputation, including our ability to execute certain aspects of our strategic plan,” said Belamant.

The share price fell precipitously in December when news broke of the investigation. It fell from R74.79 to R35.00, but has recovered to R52.31.


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