/ 15 February 2019

MultiChoice set for organic growth

Naspers, which also operates Media24 Ltd and is a key investor in China’s Tencent, has decided to unbundle MultiChoice. (Graeme Williams/Bloomberg/Getty Images)

Pay-TV operator MultiChoice will make its debut on the JSE this month, but some believe it is a sunset industry because streaming services threaten its business model. Other analysts, however, say there is a lot of life in the company, which has mastered its own evolution over the past 30 years.

MultiChoice developed from a small pay TV service in the 1980s into a giant operator with 13.9-million subscribers in 50 African states.

Naspers announced to its shareholders in September that it was unbundling MultiChoice.

The company, which has no financial debt, comprises MultiChoice South Africa Holdings, Irdeto, Showmax Africa and MultiChoice Africa Holdings. On paper Multi­Choice makes a strong case for investment with attractive financials, an ungeared balance sheet and strong dividends.

Patrick Mathidi, portfolio manager at Aluwani Capital Partners, warns of headwinds: “The South African market is saturated if you look at its target market,” he said, and cautioned about the threat of streaming services. “But there are growth opportunities in Africa, where there is still a bit of runway in digital to penetrate markets, for example Ghana and Nigeria.”

PSG Wealth portfolio manager Schalk Louw said he was cautiously optimistic about MultiChoice’s outlook as a separate listed entity. “It has really struggled over the past three years, very much in line with other consumer-related companies as well,” but, he said, he was impressed with MultiChoice’s efforts to become a digital broadcaster and compete with video on demand.

Jean Pierre Verster, portfolio manager of the Protea range of hedge funds at Fairtree Capital, said he didn’t believe Naspers was getting rid of MultiChoice because it was declining. He said the company now represents just 5% of the total value of Naspers.

“It is clear that MultiChoice has had pressure [over] the last three years, principally because of its exposure to the rest of Africa,” but, he said, market factors indicated that Africa would swing back.

Mathidi said the fact that MultiChoice was not profitable in the rest of Africa was a worry.

Naspers, a R1.3-trillion global giant and South Africa’s largest company, has wanted to narrow the gap in value between its stake in Chinese internet giant Tencent Holdings and the firm as a whole.

Chief executive Koos Bekker’s gamble to buy 33% of Tencent for $32-million in 2001 is the reason for Naspers’s meteoric rise. At the same time its corporate structure has come under fire for trading at a discount to the sum of its investments because of Tencent’s astronomical value.

Verster said in the past few years there had been an increase in the discount of the Naspers share price relative to thew sum of is parts. “Shareholders have been pressing management to address this widening discount.”

Tencent is the biggest part of Naspers and has been exceedingly successful. “It is a nice problem to have, but has fed into this widening discount,” he said.

Joe Heshu, MultiChoice’s group executive for corporate affairs, said the unbundling would allow the company to unlock shareholder value because, under Naspers, it was not reflected in the share price.

Analysts said MultiChoice would pay more dividends to shareholders than Naspers.

Last month MultiChoice declared its standalone sales, profit and dividend numbers, which showed it generated R47-billion. In 2020 it expects a dividend of R2.5-billion.

Louw said MultiChoice had R4.2-billion in cash and was a cash generative business that should provide shareholders with an attractive dividend yield even if the group experienced a decline in revenue.

Whether MultiChoice would be a good investment would be determined by the price it trades on its first day after the unbundling, Verster said.

“I assess that MultiChoice’s fair value is roughly between R125 and R175 a share, or between a R50-billion and R80-billion market cap.

“If it trades below R125, it could be a good investment to buy at that price, while if it trades above R175, I will be looking to sell my shares that I will receive as a Naspers shareholder. And if it trades between those prices I think that is the range of fair value.”

Several analysts have projected MultiChoice’s market capitalisation above R70-billion, and the JSE has confirmed that MultiChoice would be in the top 40 of its shares from the get go, giving it blue-chip status.

Heshu said the new listing would add another JSE top 40 investment option for investors that is financially attractive.

Louw said the top 40 listing would help to boost MultiChoice in the short term, because index funds such as the Satrix Top 40, with R282-billion invested in it, track the top 40 shares.

“These funds must invest in all of the 40 biggest shares, which will automatically pump a lot of money into MultiChoice’s shares,” he said.

But over the longer term things would start to get more difficult, said Louw. “It will all depend [on] how it utilises its monopoly in local television broadcasting. There have been some clear signs of evolution. The spotlight will certainly shine bright on management from now on.”

Verster said the biggest determiner of fair value and whether it would be a good investment is MultiChoice’s future prospects.

Streaming services, which have taken significant market share from linear services such as those offered by MultiChoice, were an obvious threat. “But launching Showmax was the correct strategic response. ”

MultiChoice’s strategy would be two-pronged with both traditional pay-TV, and its connected video services such as Showmax, according to Heshu. But MultiChoice didn’t see streaming services as a big threat yet. Its research showed that Africa was different to the rest of the world, “even five years out.”

Verster said: “The risk of large-scale cord-cutting to our traditional pay-TV business is therefore relatively low.”

Heshu said: “In Africa fixed broadband connectivity will be constrained — less than 12% in South Africa and less than 6% on the rest of the continent,” and MultiChoice also didn’t expect broadband’s cost to drop soon.

Louw believed the evolving nature of MultiChoice would serve it well: “The company started off with M-Net back in the 1980s. Then came SuperSport. Later DStv became available. It shows us that the company has always had a solid organic growth focus.”

Verster said local content and sport were a critical offering by MultiChoice, which produced 700 live sports events every year, much of it local.

Louw said MultiChoice’s dominance over the larger sports boosts its subscriber base “but one tends to forget that the alternatives are not cheap. I’m not so sure that alternative sports channels will be able to enter the South Africa market for much cheaper, or with the type of sport content that would appeal to the South African market, such as rugby and local soccer.”

The group invested R2.8-billion in local general entertainment content, in addition to R1.3-billion on local sport, and improved the ratio of spend on local content to total general entertainment content from 34% to 38%, according to Heshu.

And MultiChoice planned to increase local content production to cater for viewing preferences. “Local content is a major differentiator for us — every year we invest R2.5-billion in local content.”

It has 10 studios in Africa and, of Showmax’s 17 500 hours of content, half was local.

Verster said local content was critical because viewers would pay a premium to have access to it. “Netflix can’t compete with the local content … yet.”