Multichoice – Africa’s storyteller rewards shareholders

• South Africa
• Amazon, Amazon Prime, DSTV, Multichoice, Netflix
• June 10, 2020

The front page of Multichoice’s results booklet that was released today describes the group as “Africa’s most loved storyteller” – that’s beautiful, but perhaps not as beautiful as the stunning improvement in their profitability.

StatsSA’s last major survey (done in 2017) estimated that there are 16.2m households in South Africa. Multichoice has 8.4m subscribers in South Africa, which suggests that over half the households in this country have a dish on the roof. Multichoice is big in Africa too, with a further 11m households across the continent watching some type of DSTV bouquet.

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DSTV may well be Africa’s most loved storyteller after all.

They achieved this by curating the bouquet offering to appeal to households at almost every income level, assisting to drive subscriber growth of 5% despite the threat from online streaming competitors.

R42.8bn out of total revenue of R51.4bn is attributable to subscription revenue. Advertising contributes only R3.2bn, perhaps demonstrating why free TV stations (like the SABC) aren’t the best assets around. Perhaps someone should tell our government.

Reacting to a change in subscriber mix

ARPU (Average Revenue Per User) is an important measure because it gives insight into the value of each subscriber. As the mix in subscriber bouquets changes, so will ARPU. Multichoice is becoming a lower LSM business by the day, evidenced by a 10% drop in ARPU overall and a 12% ARPU decrease in South Africa. That means the average customer is watching a cheaper bouquet than before.

The threat of Netflix, Amazon Prime and streaming in general is evident in these ARPU numbers, as houses that can afford broadband have been switching to these services and cancelling DSTV. In an interesting move, Multichoice has done a deal with Netflix and Amazon Prime to include some of their content in their top DSTV bouquet.

Whilst one may initially wonder whether this helps Netflix and Amazon to recoup the cost of content, I question the sense in this. Households that could afford the most expensive DSTV products probably have broadband anyway. Could Netflix and Amazon lose subscribers this way, with a net negative impact? Presumably they’ve done their research, but DSTV understands this continent a lot better than they do.

I continue to beat the drum that Netflix is a media company rather than a tech company. This does nothing to change my mind, although it does make me more bullish about Multichoice’s prospects.

A story of profitability

From a cost perspective, Multichoice managed an impressive reduction of R1.4bn from the cost base. Costs only grew 1% in a year where revenue grew 3%, a wonderful situation where trading margin increases because revenues are growing faster than costs. This is known as “positive JAWS” and investors love it.

Group trading profit grew 14% as a result of this excellent cost containment at a time when revenue growth is under pressure.

The stories Multichoice is telling get even better at headline earnings (up 38%) and free cash flow (up 59%) levels, which are useful ways to assess the true health of the business.

Shareholders can smile broadly as Multichoice announced its first dividend (R2.5bn) since being unbundled from Naspers. The share price is up 18% since the start of June and has almost recovered back to where it was in February 2019 when shareholders could own Multichoice directly for the first time.

The key question, of course, is what will the next chapter in the story be? Positive JAWS, or the type that bites your boat in half?