Stay abreast of COVID-19 information and developments here
Provided by the South African National Department of Health
MULTICHOICE: IS THE
MOAT DRYING UP?
Since it was unbundled from JSE behemoth Naspers and listed separately in 2019, pay-TV operator MultiChoice Group has remained in the news – the latest development being its rejection of a R30 billion buyout offer by French entertainment giant Canal+. While five years ago we saw potential upside in MultiChoice, the landscape has changed substantially. After the recent price jump following the Canal+ offer, MultiChoice shares are, in our view, now trading at close to fair value and we’ve consequently exited the stock in most of our client portfolios.
On 27 February 2019, the MultiChoice Group was listed as a separate entity on the JSE after being unbundled to shareholders as part of a wider Naspers strategy to unlock the discount in the latter’s share price. At the time, Naspers shareholders each received one MultiChoice share for every one Naspers share owned.
Since then, MultiChoice has faced several challenges impacting the investment case for the group, not least of which were huge fines in some of the African countries in which it operates, regulatory changes, a ratings downgrade, existential competitive threats from global streaming services such as Netflix and Amazon Prime Video, and now a potential buyout. It seems as though investors are constantly having to make sense of a never-ending stream of new information relating to the broadcaster.
Amid these challenges, the MultiChoice share price hasn’t exactly been shooting the lights out since its listing – it has underperformed the All Share Index on a total return basis and even the SA Telecommunications Index.
Five years ago, MultiChoice had sizeable ‘moats’ – or key competitive advantages over potential rivals – the strongest being the quality of its content, including a leading local offering and sports broadcasting rights. However, it is starting to lose these advantages.
DStv, MultiChoice’s direct broadcast satellite television service that operates in 54 countries across sub-Saharan Africa, enjoys a majority market share mainly due to its sports broadcasting rights, which are key for subscriber retention. Over the long run, however, other players are likely to start giving the group a run for its money in this arena.
A case in point is the recent drama around the rights to the Africa Cup of Nations (AFCON) football tournament, which MultiChoice has broadcast since 1992. In January, the group declared its SuperSport pay-TV service had secured the broadcast rights to the event – a week after it had announced it would not be airing it this year after failing to secure a sublicensing agreement.
Other competitive advantages once held by MultiChoice have started to unravel more aggressively. For example, with data costs having substantially declined over the past decade, the cost of switching to competitor products is now far lower. And the rival offerings are alluring – affordable mobile-only plans from Netflix and others have made it much more difficult for MultiChoice to retain subscribers.
Moreover, sole distributor agreements seem to be slowly falling by the wayside. For instance, HBO is no longer granting exclusivity to MultiChoice and is now also using Netflix to distribute its popular shows.
In South Africa, global streaming services Netflix, Disney+ and Amazon Prime Video seem to have been the most aggressive from a price-point perspective, given the wide range of content on their platforms. They have also been catching up in the creation of local content, which has in the past differentiated MultiChoice from these players.
DStv still offers excellent local content, and MultiChoice has its own streaming service in Showmax, which should go a long way in defending market share. However, the price that MultiChoice can charge is limited by the competition. Put differently, if there is a mass migration from DStv to Showmax, this will likely come at lower margins than MultiChoice is used to.
While the migration from linear broadcast pay-TV offerings such as DStv to streaming services is ongoing, and the pay-TV market in South Africa has been in structural decline for some time now, the two mediums could conceivably coexist over the long term. They are not mutually exclusive. Pay TV on the continent still has some runway, which is likely what has attracted the Canal+ offer – and there are definite scale benefits to combining the MultiChoice subscriber base with that of the leading operator of pay TV in French-speaking Africa. In fact, Canal+ has been buying up shares in MultiChoice since 2020.
Whether or not the deal goes ahead in the long run, DStv will likely struggle to defend its profit pool or grow it in real terms. In South Africa, besides the high fixed costs of the business impacting profitability and the migration to streaming services, constant loadshedding has also led to subscriber losses, particularly in the Compact Plus and mid-range customer segments.
Further afield, the tough Africa macro environment in which MultiChoice operates has created a potential share price overhang impacting the long-term investment case for the group. In Nigeria, which accounts for nearly half of MultiChoice’s non-SA revenue, the group has fallen foul of the authorities more than once, racking up huge fines in the process. Just this month MultiChoice announced that it had reached a settlement with the Nigerian federal government and agreed to pay taxes of around US$37.3 million (R700 million) – after in 2022 the group was served with a US$1.27 billion tax claim for its Nigerian operations and a US$342 million claim for value-added taxes.
In general, MultiChoice has seen fairly large losses from its African operations over the years. While management has done a reasonable job in getting these businesses to break-even levels, forex volatility and the cost of expatriating funds are likely to impact profitability over the long run.
The slow evaporation of the MultiChoice moat impacts the price-earnings (P/E) ratio one can justifiably pay for the shares. While its South African operations are cash-generative, this business is now mature and there is not much prospect of earnings growth over the short term. Africa outside South Africa is a very poor-quality earnings stream. Showmax may eventually deliver a fair margin, but it comes with potential execution risks.
On a risk-adjusted basis, with only modest upside left in MultiChoice, we at Sanlam Private Wealth have sold the share from most of our clients’ portfolios. We’ve taken a fresh look at the group’s prospects, and it’s not a business we would like to own over the long term. We decided to wait for the long-expected buyout offer before exiting at a price close to our own fair value. In our view, on a risk-adjusted basis, there are currently more compelling stocks to buy into in our relatively cheap South African market.
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
We can help you maximise your returns through an integrated investment plan tailor-made for you.
Niel Laubscher has spent 10 years in Investment Management.
Have a question for Niel?
South Africa
South Africa Home Sanlam Investments Sanlam Private Wealth Glacier by Sanlam Sanlam BlueStarRest of Africa
Sanlam Namibia Sanlam Mozambique Sanlam Tanzania Sanlam Uganda Sanlam Swaziland Sanlam Kenya Sanlam Zambia Sanlam Private Wealth MauritiusGlobal
Global Investment SolutionsCopyright 2019 | All Rights Reserved by Sanlam Private Wealth | Terms of Use | Privacy Policy | Financial Advisory and Intermediary Services Act (FAIS) | Principles and Practices of Financial Management (PPFM). | Promotion of Access to Information Act (PAIA) | Conflicts of Interest Policy | Privacy Statement
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
MANDATORY DISCLOSURE
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
INVESTMENT PORTFOLIOS
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.