Alec Hogg
boardroom talk
After years of being shielded by a complicated ownership structure and an M-Cell investment that dwarfed its operational earnings, media and entertainment business Johnnic Communications (Johncom) is about to be exposed to the full glare of shareholder attention. It is not a flattering picture. In virtually every area of its operations, the group is the media industry’s worst performer.
Using the latest 12-month figures as the basis for comparison, Johncom’s print media interests are run at little more than half the profit margins earned on similar operations at Naspers and Kagiso. Of equal concern for shareholders is the inauspicious start of Johncom’s Internet activities, which are losing more money on each rand of revenue generated than the well-chronicled online disasters at Naspers and Primedia.
These shortcomings together with no exposure to the booming radio sector puts Johncom at the bottom of the media industry’s ratings table as it prepares to become a stand-alone operation next month. From mid-July Johncom’s core activities will come under the investment community’s microscope, following the distribution to shareholders of the group’s 34,4% stake in cellular phone network provider M-Cell.
To put this development in perspective, during the 12 months to end September the M-Cell stake accounted for 93% of Johncom’s operating profit. With the cellular phone operator’s business steaming ahead, it’s little wonder investors have been prepared to ignore poor returns generated in the rest of the business. After the unbundling of the M-Cell stake, however, Johncom management is certain to come under pressure to get the company’s returns into line with its peers.
The group’s most obvious laggard is in print media, where the Sunday Times, BDFM (Business Day and Financial Mail) and magazine division produce at an operating profit margin of under 9%. That compares with 15% achieved by Black empowerment operation Kagiso Media and Afrikaans-focused Naspers.
Also, Johncom’s movie operation Nu Metro is underperforming its major rival, the oft-maligned Primedia subsidiary Ster Kinekor. During its most recent 12 months, Nu Metro returned an operating profit of R27,4-million from turnover of R262-million, a profit margin of 10,5%. Ster Kinekor produced a substantially higher profit margin of 15%, with earnings of R81,5-million on turnover of R551-million.
Primedia may have been in the wars with its biggest shareholder lately, but it is not only on the movie front that CEO William Kirsh runs a better operation than his peers. The group’s radio interests generate a stunning 49c profit from every R1 in sales. With Radio 702 and Cape Talk stumbling along at break-even, there’s little question that Kirsh was on the mark when he decided to pay a much-criticised R320-million for what is now the group’s flagship, Highveld Stereo. This station generated the lion’s share of Primedia Broadcasting’s R70-million in operating profit from R142-million in total revenues during the latest 12-month reporting period.
Having lost the M-Cell booster and without the cash cow of a radio station to fall back on, Johncom investors will be keeping a close watch on the haemorrhaging Internet operation Johnnic eVentures. This side of the business turned in a loss of R2,23 for every R1 in revenue generated during the 12 months to end September. By way of comparison, Primedia’s iAfrica.com lost R1,91 for every rand of sales, while the industry’s apparent bottomless pit, Naspers-owned M-Web, was comparatively frugal with a loss of R1,44 for each R1 of revenue.
Group CEO Paul Edwards defends the financial performance thus far of Johnnic eVentures as “typical of a start-up”. It was only launched last April and is projected to reach break-even within the next year.
Colleague Neil Jacobsohn is confident the division will generate “tens of millions of rands in revenues” in the year ahead, driven by the Business-to-Business focus which, in future, will produce 96% of the income.
Edwards says sub-standard profitability in other parts of the group is a direct result of investment in the future: “It costs a lot to take a newspaper like the Sunday Times from circulation of 450 000 to 520 000 as we have done; also, we grew Nu Metro’s market share aggressively last year. Unfortunately the benefits did not work through because of a price war that was started by Ster Kinekor, but the movie side is well positioned for the future.”
Johncom’s overall returns were helped by the music interests, which in the most recent 12 months produced roughly a third of the operating profit at a margin of 10,2%. Even so, the group’s overall profit margin is a slim 7,9% better than the loss of 1,6% recorded by the largest media group Naspers, but well below the returns of 18,7% from Primedia and 24,4% from Kagiso.
Edwards, who will be stepping down as Johncom chairperson in favour of an independent non-executive, is confident the group will post significantly improved returns in future. Shareholders and staff will be looking for signs of this in the group’s next set of financial results, which are due for release in the next two weeks. But there is a long road ahead for the media sector’s wooden spoonists.