MultiChoice now flying solo

Naspers is no longer reliant on its entertainment business cash flow to support new ventures

For the longest time MultiChoice has been the “cash cow” for tech and media giant Naspers. But now Naspers has decided to list its MultiChoice business separately on the JSE, unbundling its full stake in the video entertainment business.

“Naspers will be disinvesting from MultiChoice by unbundling its full stake to its shareholders,” said Sanlam private wealth analyst Renier de Bruyn. “After the unbundling, Naspers will no longer be involved in the management of MultiChoice, which will function completely on its own.”

Naspers shareholders will then get the equivalent of their Naspers shares in the newly formed MultiChoice Group, which will include pay-TV subsidiaries MultiChoice South Africa (in which Naspers had an 80% stake) and MultiChoice Africa; online-streaming site Showmax Africa; and digital security platform Irdeto.

The company’s 2018 financial statement shows that its South African video entertainment business (MultiChoice, M-Net, SuperSport and Showmax, among others) accounted for R522-million, contributing to 27% in free cash flow for Naspers. This figure had fallen from the previous financial year where it accounted for R578-million or 58% of the company’s free cash flow.

De Bruyn said MultiChoice last year accounted for about 5% of Naspers’s total valuation, which was down to 4% this year, adding that while MultiChoice may have been the largest source of Naspers’s cash flow, its stake in China’s Tencent was worth more in terms of the company’s valuation.

So why is Naspers unbundling its 80% stake in MultiChoice and listing the video entertainment business separately on the JSE?

Naspers, which accounts for about 20% of the market capitalisation of the JSE, mainly through its share in Tencent, has been under pressure to unbundle some of its assets.

According to De Bruyn, Naspers is too big for the JSE: “Naspers is trading at a large discount to the fair value of its assets. Unbundling will partially help to unlock this discount.”

With Naspers having outgrown the JSE, it has prevented local asset managers from buying more Naspers shares, given their already high portfolio exposure to the share, he said.

Currently Naspers shares trade at R3195. But De Bruyn said that the fair value of its assets are more than R5 000 a share (with Tencent valued at around R4100, MultiChoice at more than R200 and its other assets and cash worth another R800).

De Bruyn said Naspers would not have been able to unbundle MultiChoice in the past because “it was reliant on its cash flow to support new ventures in its portfolio”.

Following Naspers’s recent sale of part of its stakes in Tencent and electronics retail company Flipkart, which saw it realise a total of about $12-billion, Avior equity analyst Charl Wolmarans said this amount will cover the short-term trajectory after Naspers completes the listing of its video entertainment business separately in early 2019.

Unbundling MultiChoice indicates that Naspers’s other business interests “are becoming more self-sustaining”, said Wolmarans.

Naspers’s classifieds business, known as OLX, has also turned profitable, said De Bruyn.

MultiChoice’s value has been unappreciated in the full value of Naspers, group chief executive Bob van Dijk told the media during a conference call on Monday. Naspers closed 0.83% down on Tuesday following the announcement.

The company’s video entertainment business grew by 13% to 13.5-million households, with revenue and trading profit increasing by 8% and 29% respectively.

In its 2018 financial report, Naspers said the focus of its video entertainment business would remain on driving subscriber growth. Although it will be listing this business separately, it is expected that this focus will remain for the new MultiChoice Group.

Currently, 60% of the video entertainment’s total subscribers “remains at lower-end”. The cheapest DStv package a consumer can buy is the DStv Access, priced at R99 a month, while the more expensive DStv Explora goes for R949 a month.

The group’s big earner is live sport, and it is one of the factors that gives it an edge over other online streaming platforms such as Netflix and Hulu, Google Play Movies & TV, Amazon Prime and Apple TV, to name a few.

Repo rate on hold

The South African Reserve Bank kept the repo rate unchanged on Thursday at 6.5% in what was deemed a close call. After heightened volatility the central banks of emerging market peers Russia and Turkey recently raised their rates. The monetary policy committee (MPC) said it was still concerned about risks to the inflation outlook “due to exchange rate risks related to both domestic and external factors, elevated international oil prices and the possibility of higher electricity tariffs”.

FNB chief economist Mamello Matikinca said the Reserve Bank, while seeking price stability, “kept rates unchanged in the hope that doing so can assist a very modest growth recovery in the second half of 2018”. The MPC said the problems in the economy are structural and “cannot be solved by monetary policy alone”.

Toking up Coke

In the week that the Constitutional Court decided it was fine for South Africans to toke up, as long as it is in private, news emerged that Coca-Cola is exploring the idea of drinks infused with marijuana components. In a statement responding to speculation, the drinks manufacturer said it was “closely watching” the development of cannabidiol (CBD) as an ingredient in “wellness beverages”. CBD is a non-psychoactive compound found in cannabis. “The space is evolving quickly,” it said. “No decisions have been made at this time.” The company had “no interest in marijuana or cannabis”, it added.

Comair keeps soaring

In what it believes is a record in the aviation industry, Comair, which operates low-budget airline Kulula, completed its 72nd year of unbroken profitable operations. The company, which also has a travel service and catering business among others, increased its aftertax profits by R29-million to R326million, it said in its latest results announcement.

This was despite a period of faltering economic growth, exchange rate volatility, rising fuel prices and “a domestic airline market that continues to be characterised by overcapacity”. Instead of taking lessons in how to run a tighter ship, state-owned SAA remains locked in a legal battle with Comair over a more than R1-billion fine for anti-competitive behaviour. SAA has appealed the case and Comair has, in turn, cross-appealed. Should Comair be successful, this could take the fine closer to R2-billion. The supreme court of appeal is set to hear the matter early next year.

Trump trades shots with China

United States President Donald Trump escalated the country’s trade war with China this week. On Monday, he slapped a further 10% tariff on $200-billion worth of goods, with the intent of raising this to 25% by the start of next year. China retaliated by raising tariffs on $60-billion of US goods, exacerbating concerns about declines in global trade.

This round of the tariff war is on top of the 25% levies on $50-billion of imports both ways that have been in place since July, according to Oxford Economics. It said in a research brief that even with China offsetting some of the effects of the tariffs by easing macro policy, it forecasts that China’s gross domestic product growth rate could fall well below 6% in 2019.