Not a pretty picture, but still worth watching

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.