Sanlam Private Wealth ditches MultiChoice

Sanlam Private Wealth has sold MutiChoice’s shares from most of its clients’ portfolios, as the company found it is not a business it would like to own over the long term.

“While five years ago we saw potential upside in MultiChoice, the landscape has changed substantially,” said Sanlam Private Wealth investment analyst Dumisani Chiume. 

“After the recent price jump following the Canal+ offer, MultiChoice shares are, in our view, now trading at close to fair value, and we’ve consequently exited the stock in most of our client portfolios.”

MultiChoice’s share price recently jumped to around R103 – its highest point in months.

This came after the pay-TV operator rejected a buy-out offer from French media giant Canal+, which offered the company R105 per share.

MultiChoice rejected this offer, saying the company is far more valuable than the R105 offer.

While there was no immediate reaction in the share price following the rejection, the company’s share price has been climbing over the past month.

It even exceeded the offer price of R105 before coming down to around R103 again, indicating the market may expect a higher offer from Canal+.

MultiChoice ‘moat’

Since MultiChoice’s listing in 2019, the company has faced several challenges impacting its investment case.

“It seems as though investors are constantly having to make sense of a never-ending stream of new information relating to the broadcaster,” Chiume said.

“Amid these challenges, the MultiChoice share price hasn’t exactly been shooting the lights out since its listing – it has underperformed the All Share Index on a total return basis and even the SA Telecommunications Index.”

Chiume said this is partly because MultiChoice is starting to lose its ‘moat’ – its key competitive advantage over potential rivals. 

For MultiChoice, this was the quality of its content, including a leading local offering and sports broadcasting rights. However, Chiume said the company is starting to lose these advantages.

DStv, MultiChoice’s direct broadcast satellite television service that operates in 54 countries across sub-Saharan Africa, enjoys a majority market share mainly due to its sports broadcasting rights, which are key for subscriber retention. 

“Over the long run, however, other players are likely to start giving the group a run for its money in this arena,” Chiume said.

Other competitive advantages once held by MultiChoice have started to unravel more aggressively, Chiume said. 

For example, with data costs having substantially declined over the past decade, the cost of switching to competitor products is now far lower. 

And the rival offerings are alluring – affordable mobile-only plans from Netflix and others have made it much more difficult for MultiChoice to retain subscribers.

Showmax not a silver bullet

While MultiChoice is present in the streaming industry through its Showmax offering – which was recently revamped – it is competing against international giants like Netflix, Disney+ and Amazon Prime Video.

Chiume explained that while MultiChoice may be able to compete in terms of content, the price it can charge is limited by the competition. 

“Put differently, if there is a mass migration from DStv to Showmax, this will likely come at lower margins than MultiChoice is used to,” he said.

Chiume emphasised that Pay TV and streaming are not mutually exclusive. Pay TV still has some runway in Africa, which is likely what has attracted the Canal+ offer.

In addition, there are definite scale benefits to combining the MultiChoice subscriber base with that of the leading operator of pay TV in French-speaking Africa. 

“Whether or not the deal goes ahead in the long run, DStv will likely struggle to defend its profit pool or grow it in real terms,” Chiume said. 

Additionally, the tough Africa macro environment in which MultiChoice operates has created a potential share price overhang impacting the long-term investment case for the group, he said. 

In Nigeria, which accounts for nearly half of MultiChoice’s non-SA revenue, the group has fallen foul of the authorities more than once, racking up huge fines in the process. 

Just this month, MultiChoice announced that it had reached a settlement with the Nigerian federal government and agreed to pay taxes of around $37.3 million (R700 million).

“In general, MultiChoice has seen fairly large losses from its African operations over the years,” Chiume said. 

“While management has done a reasonable job in getting these businesses to break-even levels, forex volatility and the cost of expatriating funds are likely to impact profitability over the long run.”

Multichoice lost its lustre

Chiume explained that the slow evaporation of MultiChoice’s moat impacts the price-earnings ratio one can justifiably pay for the company’s shares. 

“While its South African operations are cash-generative, this business is now mature, and there is not much prospect of earnings growth over the short term,” he said. 

“Africa outside South Africa is a very poor-quality earnings stream. Showmax may eventually deliver a fair margin, but it comes with potential execution risks.”

On a risk-adjusted basis, with only a modest upside left in MultiChoice, Sanlam Private Wealth has sold the company’s shares from most of its clients’ portfolios. 

“We’ve taken a fresh look at the group’s prospects, and it’s not a business we would like to own over the long term,” he said. 

“We decided to wait for the long-expected buyout offer before exiting at a price close to our own fair value.” 

“In our view, on a risk-adjusted basis, there are currently more compelling stocks to buy into in our relatively cheap South African market.”