Share to Watch: Fear of competition fades away for Multichoice after robust growth
JOHANNESBURG – For more than a decade now, Multichoice has experienced robust subscriber growth in both South Africa and the rest of Africa. Their interim results showed an increase in the subscriber base of 7 percent to nearly 19 million.
There does not appear to be evidence that Multichoice is losing subscribers to other services such as Netflix. A good reason is probably that Netflix lacks relevant local content, does not (and will not) be streaming sports, and requires access to fast download speeds at prices that are currently not affordable in Africa.
Although Multichoice showed a year-on-year decline in premium 90-day active subscribers, it was probably driven more by affordability than due to competitors.
Standalone subscriptions in Showmax have grown significantly during 2019, and uptake amongst the premium subscribers (who have free access to Showmax) has been strong.
Multichoice is now Africa’s leading video entertainment operator, with most of the growth coming from the mass-market segment. All-in-all 18.9 million subscribers – only 8.2 million South African – are spread across 50 African countries where access to the capabilities required to stream content from services such as Netflix is limited as a result of high data costs and poor connectivity.
The low adoption of fixed broadband as a consequence of a relatively dispersed population in Southern Africa further limits the widespread implementation of services. Multichoice has a significant scale with its direct-to-home TV and digital terrestrial television capabilities, which acts as a substantial barrier to entry to the Southern African market.
Content is a crucial strength for MultiChoice and differentiates them from the competition. They have a prominent portfolio of sports, local and international content. For sport, they own the rights to major sports events, both locally and internationally. They have a leading local content offering, which resonates well with the market. Additionally, MultiChoice has access to international content from 10 of the top 13 US studios.
It operates in a unique space, having no proper competition. Names like Netflix, Disney, YouTube (Alphabet) come up; however, they are not comparable peers for various reasons.
These services operate primarily in developed markets, Disney won’t be available in SA for at least two more years and Netflix has explicitly said that they will not get involved in streaming sports. Currently, these groups are not major competitors to MultiChoice.
MultiChoice shareholders do face certain risks. A significant portion of the group’s operations is exposed to foreign exchange risk. With large expenses in US dollars (content and satellite leases) and euro (transmission costs), a depreciation of local revenue currencies (Nigerian naira, the Angolan kwanza, Kenyan shilling and Zambian kwacha) against the rand and dollar could affect the group’s revenue, operating costs, and general business and financial condition.
Multichoice also faces potential regulation risks that could disrupt its leading market position by making it easier for new entrants to compete.
These are only long-term risks, as competitors will face substantial costs and will require a considerable amount of time to build up the scale, brand awareness, relationships with content providers and the expertise to compete with MultiChoice.
Technological changes could disrupt the industry. Consumer viewing behaviour is similarly changing as more content is available on multiple devices, across numerous platforms and from several producers.
Competition for attention is becoming increasingly intense, which could erode their subscriber base.
Although we feel it is unlikely, if the availability of internet access were to increase throughout sub-Saharan Africa rapidly, Multichoice is well positioned with a compelling offering.
Multichoice operates in valuable markets where the populations are both growing and spending more hours watching TV each day than the world average of 2 hours 56 minutes per day.
The standard for Kenya is 5 hours 13 minutes, SA is 4 hours 37 minutes, and Nigeria 4 hours 36 minutes.
Operating margins are healthy at more than 10 percent every year and growing consistently to just below 20 percent now.
Net profit margins are also increasing steadily; net profits attributable to ordinary shareholders are 5.8 percent of revenue.
Multichoice has a strong balance sheet with just under R10 billion in net assets, and a cash war-chest of R6.9bn. It has a history of strong cash generation, and philosophy of returning excess cash to shareholders, starting with a dividend of R2.5bn at the end of the 2020 financial year, which is expected to grow substantially over the next three years.
In February 2019, MultiChoice was unbundled from Naspers and listed on the JSE. Just after listing the share price quickly passed the R20 mark, went as high as R140, and the last month moved back to the R20 level. The current price of R118 per share seems to be reasonable.
Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. Multichoice shares are currently held on behalf of clients.