MultiChoice has been a mainstay in South African living rooms since the 90s and its recent unbundling from Naspers presents an opportunity for investors to benefit from its dominant market position. Northstar holds a position in MultiChoice due to its inherent scale, solid balance sheet and distinct avenues for growth.
Scale operator with strong balance sheet
Pay-TV is a scale business with a virtuous cycle. MultiChoice’s impressive SA subscriber base of 7 million paying subscribers and the company’s largely fixed cost base leads to robust cash returns that it uses to buy additional premium content, attracting even more subscribers and further cementing its leadership position.
MultiChoice is a capital-light business and, as such, generates returns of close to 30% on an asset base that requires little to no upkeep. This has allowed MultiChoice to maintain a solid balance sheet with no debt while accruing free cash flow of around R5 billion per annum.
In spite of the above, MultiChoice has traded as cheaply as a 15% yield on 2020 free cash flow, or 10 times 2020 earnings, a material discount to the JSE’s 13 times multiple.
Rest of Africa losses and turnaround strategy
MultiChoice has operations in 49 other countries, including large nations such as Nigeria, Zambia, Kenya and Angola. This segment of the business has been loss-making since 2015 due to a currency mismatch on revenue against costs. MultiChoice Africa purchases its content in US dollars and prices its service in local currency. Currency blowouts in several African nations, coupled with its shift in strategy from a premium-led to a mass-market product, led to a precipitous drop in earnings.
Chart 11: Sub-Saharan Africa Pay-TV households Chart: 12 Sub-Saharan Africa TV and Pay-TV penetration
Source: PWC, Northstar (September 2019)
Chart 11 illustrates that significant opportunity exists as Pay-TV households in Sub-Saharan Africa are expected to grow at around 10% a year for the next five years and, apart from South Africa and to a lesser extent Kenya, Pay-TV penetration remains low. Nigeria presents a significant opportunity in the form of a relatively underpenetrated Pay-TV household base, as shown in Chart 12.
We see potential for a doubling in the total addressable market for African PayTV between 2018 and 2023 driven by a rollout of Digital Terrestrial Television (DTT). MultiChoice is well positioned to take advantage of this with a broad selection of content and a DTT product with mass-market pricing. MultiChoice is also currently on track to complete a turnaround driven by subscriber gains and cost rationalisation.
Streaming services not a near-term threat
Streaming competitors such as Netflix and Amazon are a threat in the premium end of the market but are only such where access to broadband internet exists. Charts 13 and 14 demonstrate that Africa is still early in the shift to widely available broadband and the cost of mobile data presents a hurdle for potential customers.
Chart 13: Broadband penetration Chart: 14 2016 data price (USD)
Source: MultiChoice Group (September 2019)
Other advantages that MultiChoice has over the streamers include its sports content and around 30 000 hours of local content. South Africans are a sports-mad bunch, but even in the event that a premium subscriber doesn’t much care for sports there are hours of offshore and locally produced content that can only be accessed via DSTV or Showmax.
The top five most watched shows on DSTV in February of 2020 were all local TV shows including, as examples, The Queen and Isibaya. The most viewed sports match was the Soweto Derby, further demonstrating the compelling nature of locally produced content. Another example, Absa Pirates vs Chiefs garnered over 700,000 viewers.
MultiChoice remains well-positioned over the medium term
While television is rapidly changing and streaming services such as Netflix might be a threat in South Africa and Kenya, the rest of Africa still represents an opportunity for the current players in the market and linear television has significant potential for growth.
MultiChoice is the dominant player in this area and over the medium term, we hold a company that is well positioned, with a large middle-class subscriber base and a history of delivering high quality local and sporting content into Africa.