Not a pretty pic­ture, but still worth watch­ing

Financial Mail - Investors Monthly - - Analysis - Marc Hasenfuss

Share trad­ing pat­terns at tele­vi­sion broad­cast­ing con­glom­er­ate eMe­dia Hold­ings do not make for easy view­ing. Over three years, the group’s low-vot­ing N-shares and or­di­nary shares are down more than 65%.

Ad­mit­tedly, a lot has gone wrong. First, de facto eMe­dia boss Mar­cel Gold­ing — the man who built up key sub­sidiary e.tv — sud­denly de­parted. This meant Hosken Con­sol­i­dated In­vest­ments (HCI) CFO Kevin Goven­der had to en­dure pro­longed ten­ure as act­ing CEO of the highly spe­cialised busi­ness.

In­vestor sen­ti­ment has also not been helped by hor­ren­dous illiq­uid­ity in the group’s shares. HCI holds al­most 78% of eMe­dia’s or­di­nary shares and 85% of the N-shares. Trad­ing is con­se­quently scant, and a dis­turb­ing — or “com­pelling”, if you’re a deep value in­vestor — dis­con­nect has been set on the price of these shares.

Ar­guably the big­gest slayer of sen­ti­ment was eMe­dia’s de­ci­sion to es­tab­lish OpenView, a free-to-air satel­lite tele­vi­sion plat­form. The up­front de­vel­op­ment, op­er­at­ing and mar­ket­ing costs have been steep. The strat­egy has also been frus­trated by gov­ern­ment pol­icy on the en­cryp­tion of set-top boxes.

The big­ger pic­ture is that OpenView has to com­pete with well-en­sconced satel­lite broad­cast di­nosaurs like Mul­tiChoice, as well as newer, com­pet­i­tively priced for­mats such as Net­flix.

The group re­cently parachuted in top-rated ex­ec­u­tive An­dré van der Veen as CEO. He pre­vi­ously served as CEO of Niveus, where he was in­stru­men­tal in build­ing up an al­ter­na­tive gam­ing em­pire. He also has ex­pe­ri­ence in deal­ing with dif­fi­cult busi­nesses, hav­ing over­seen the op­er­a­tions of the KWV liquor busi­ness.

There are a few pos­i­tives Van der Veen can take from eMe­dia’s per­for­mance in the year to end-March.

The group man­aged a 5% hike in ad­ver­tis­ing rev­enue to R1.57bn. This helped off­set a new Mul­tiChoice agree­ment with sub­sidiary eMe­dia In­vest­ments — owner of e.tv and 24hour news chan­nel eNCA — that caused a marked cut in li­cence-fee rev­enue.

E.tv’s au­di­ence share came un­der pres­sure due to the SABC’s suc­cess in com­mis­sion­ing pop­u­lar dra­mas. This prompted sev­eral sched­ule changes, in­clud­ing the launch of a new lo­cal drama in April.

But e.tv’s abil­ity to com­mis­sion new dra­mas is lim­ited by its pro­duc­tion bud­get and prof­itabil­ity. Its per­for­mance will also be un­der pres­sure as long as the SABC op­er­ates un­der a sub­sidised regime. In the mean­time, sched­ule changes will hope­fully limit the dam­age.

More en­cour­ag­ing is that eNCA con­tin­ues to be the most-watched 24-hour news chan­nel in SA, with a mar­ket share of close to 50%.

The trick for eMe­dia will be for a less prof­itable e.tv and a vi­brant eNCA to gen­er­ate the cash flows to con­tinue fund­ing the de­vel­op­ment of OpenView.

OpenView’s net op­er­at­ing loss topped R366m in the past fi­nan­cial year. But its set-top box ac­ti­va­tions are grow­ing at about 35,000 a month.

eMe­dia in­tends in­creas­ing its con­tent in­vest­ment in the OpenView plat­form dur­ing fi­nan­cial 2019 — in­clud­ing the launch of a news chan­nel in the last quar­ter of this year, along with an Afrikaans news and cur­rent af­fairs of­fer­ing.

Van der Veen says that while these pro­grammes and chan­nels will be loss mak­ing at first, they form part of the con­tent to pro­mote set-top box up­take and view­er­ship. OpenView at­tracts only about 3.5% of SA’s tele­vi­sion au­di­ence at present. Com­pany es­ti­mates put the break-even point at about 6%.

If set-top box growth con­tin­ues at its cur­rent pace, OpenView will more than dou­bling its sub­scriber base in less than three years. If its of­fer­ings are com­pelling enough, the pace might quicken markedly.

A not-un­re­al­is­tic medi­umterm mar­ket share of about 7.5% would vastly im­prove eMe­dia’s in­come state­ment.

At the rul­ing share price, lit­tle more than the tan­gi­ble NAV of eMe­dia is be­ing re­flected. This as­sumes no good­will can be as­cribed to well-es­tab­lished brands such as e.tv and eNCA.

For in­vestors who can tune out the noise, eMe­dia might be worth pay­ing at­ten­tion to over the next few years.

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