MultiChoice Group Ltd (code: MCG) - Pre-unbundling Investment Note - AAM
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MultiChoice Group Ltd (code: MCG) – Pre-unbundling Investment Note Keith McLachlan 7 February 2019
What is MultiChoice Group Ltd?
Group structure & businesses
Source: MultiChoice Group Ltd
Business Model:
MultiChoice Group Ltd is the leading video entertainment operation on the African continent with
c.13.5m subscribers across 50 countries on multiple platforms.
Off this subscription base and utilizing a sunk-cost architecture, the Group buys in global content and
produces its own local content to generate viewership across its network.
Predominantly subscription-based revenue generated from DTT (DStv), DTH (GOtv) and OTT (Showmax)
entertainment offering (c.80% revenue).
Supplemented by advertising revenues (c.6~10% revenue) and technology (c.10% revenue from ir.deto).
2
What is MultiChoice Group Ltd?
Brief financial history & forecasts
Summarized Financials FY 18A FY 19E FY 20E FY 21E FY 22E FY 23E
Revenue (Rm) R47 452m R49 603m R50 450m R50 377m R49 372m R46 365m
Growth (%) -0.5% 4.5% 1.7% -0.1% -2.0% -6.1%
Subscribers (m) 13.5m 15.0m 16.3m 17.5m 18.5m 18.9m
Growth (%) 12.8% 11.0% 9.2% 7.3% 5.5% 2.2%
ARPU (pa)* R3,521 R3,316 R3,090 R2,875 R2,671 R2,455
Growth (%) -11.9% -5.8% -6.8% -7.0% -7.1% -8.1%
Trading Profit (Rm) R6 321m R8 472m R9 319m R9 246m R8 241m R5 234m
Adjusted HEPS (cps)** 352cps 1390cps 1529cps 1517cps 1352cps 859cps
DPS (cps) - - 570cps*** 565cps 504cps 320cps
Sources: MultiChoice Group Ltd’s PLS & roadshow, Iress & Bloomberg, & Alpha Asset Management workings & assumptions – Note: High forecast risk in model.
* Alpha Asset Management ARPU calculated on an annual basis (revenue / number of subscribers) which differs from the Group’s PLS methodology.
** Adjusted HEPS: Retrospective adjusted to remove finance charges as the Group will be listing debt-free. Also assumed forward finance charges net to zero (unrealistic) & flat currencies (unrealistic) with a flat 28% corporate tax
rate modelled on South Africa’s corporate tax rates (the Rest of African operations have assessed losses of c.R10bn that offset any foreseeable future’s tax payable). Also excludes BEE deal costs, BEE MSCA dilution & listings costs.
*** Modelled on management’s guidance of a R2.5bn dividend in FY 20E. Forward dividends modelled on FY 20E’s implied dividend cover. Given risks and forex exposures of the Group, actual results could differ.
Note that we have adjusted forward and historical HEPS to reflect the ungeared balance sheet the Group is to be
unbundled with.
Likewise, we have assume flat currencies going forward, while adjusting for some of the Rest of Africa’s
deflationary ARPU’s for some pan-African currency weakness.
Assuming our valuation of c.R37bn or c.8500cps is correct & our forecasts are correct, the stock will trade at:
FY 19E Price Earnings of 6.1x, &
FY 20E Dividend Yield of c.6.7%.
3
What is MultiChoice Group Ltd?
Main risks facing the Group
Disintermediation & Over-the-Top (OTT) competition:
OTT players like Netflix and Amazon (Disney is expected to launch an OTT play this year) are globally
competitive in both price and content, and the Network Effect with growing scale should only add to this.
Google (i.e. YouTube) has a very real potential to pivot into this space with scale overnight.
Both OTT and any future developments may disintermediate or create redundancy in MultiChoice’s legacy
products (DTT & DTH), irrespective of local content advantages.
Note: MultiChoice has Showmax as their own OTT play. While Showmax content may (currently) be
competitive, their technology platform & compression does not appear to as good as the OTT majors.
Deflation and falling ARPU:
The risk of disintermediation and OTT competition is driving / will likely drive deflationary pressure in the
broadcast environment (see MultiChoice’s dropping ARPU year-on-year on the next three slides).
The Group’s “value strategy” is essentially to lower prices & drive up volumes, which is deflationary and
consumer elasticity may be misjudged (i.e. any gain in volume may be more than offset by a drop in price).
Currency exposure:
Pan-African operations earn in volatile, illiquid local currencies (African operations remain loss-making).
Material portion of content & satellite costs are in hard currency (c.35% of cost-base in mostly USD).
MultiChoice Group reports in Rands, thus forex interactions noted above may create volatility in their
results and/or negatively impact their margins (e.g. a quickly depreciation Rand and limited ability to pass
this cost onto the consumer due to the above-noted deflationary pressures could collapse margins).
4
What is MultiChoice Group Ltd?
South Africa: Subscribers & ARPU
South African Segment
Falling
blended
ARPU
Source: MultiChoice Group Ltd
5What is MultiChoice Group Ltd?
Rest of Africa: Subscribers & ARPU
Rest of African Segment
Source: MultiChoice Group Ltd
6What is MultiChoice Group Ltd?
Group: Subscribers & ARPU Consolidated Subscribers & ARPU
While the Group has added net subscribers,
these have been in the mass-market / value
offerings.
Thus, revenue per subscriber has been
falling.
I.e.: ARPU has been contracting.
This ARPU contraction is aggravated by the
African currency depreciation negatively
impacting the ‘Rest of Africa’ segment.
Rand weakness’s inflationary boost to USD-
denominated content and satellite costs could
materially constrain margins against such a
deflationary subscriber base.
Besides the Group’s sports offering, we see
limited pricing power from the Group’s
subscriber base and product offering:
We have modeled in a -3.5% y/y South
African ARPU contraction. Falling
Source: MultiChoice Group Ltd blended ARPU
Likewise, we have modelled a -8.8% y/y
ARPU contraction (including forex
deprecation) in the Rest of Africa.
7MCG Unbundling from Naspers Ltd
Details & timeline
26 February 2019:
Last date to trade in Naspers (code: NPN) in order to participate in MultiChoice Group Ltd (code: MCG)
27 February 2019:
MCG admitted to JSE for listing
NPN trades ex-entitlement to MCG unbundling
1 March 2019:
Unbundling record date and time (@ 17:00 South African time)
4 March 2019:
Unbundling operative date (@ 09:00 South African time)
MCG begins trading on the JSE
MCG will list into the Top 40 Index due to a technicality but its market cap will thereafter determine which
size-based index it moves into.
8Valuation of MCG Shares
(1) Discounted Free Cash Flow (DCF) Model
DCF Model: FY 18 FY 19E FY 20E FY 21E FY 22E FY 23E FY 24E Terminal Year Key Assumptions:
Revenue (R'm) 47 452 49 603 50 450 50 377 49 372 46 365 41 883 41 883 ZAR Annual Depreciation (% y/y) 0% y/y
Total Subscribers (m) 13.5m 15.0m 16.3m 17.5m 18.5m 18.9m 18.8m 18.8m Opex Inflation (%) 0% y/y
Growth in Subscribers (%) 12.8% 11.0% 9.2% 7.3% 5.5% 2.2% -0.6% 0.0% Capex % Revenue -1.9% pa
SA Subscribers (m) 6.9m 7.4m 7.7m 7.9m 8.0m 7.6m 6.8m 6.83m SA ARPU Growth (%) -3.5% pa
SA ARPU (pa) R4,725 R4,558 R4,397 R4,242 R4,093 R3,948 R3,809 R3,809 African ARPU Growth (%) -8.8% pa
African Subscribers (m) 6.6m 7.6m 8.6m 9.6m 10.5m 11.3m 11.9m 11.9m Effective Tax Rate (%) -28% pa
African ARPU (pa) R1,999 R1,886 R1,720 R1,569 R1,431 R1,305 R1,191 R1,191 Change in NWC as % Revenue -3.0% pa
Trading Profit (R'm) 6 321 8 472 9 319 9 246 8 241 5 234 752 752
Dep. & Amrt. (R'm) 2 675 2 827 3 012 3 200 3 387 3 571 3 744 3 744 Sensitivity
CoE -2% - CoE +2%
Tax (R'm) -1 770 -2 372 -2 609 -2 589 -2 308 -1 466 -211 -211 Table:
Working Capital (R'm) -2 496 -1 510 -1 536 -1 534 -1 503 -1 412 -1 275 -1 275 ARPU +2% y/y 11,718cps 10,695cps 9,877cps
Capex (R'm) -759 -924 -940 -939 -920 -864 -780 -780
Free Cash Flow (FCF) 3 971 6 492 7 246 7 385 6 898 5 065 2 230 2 230 - 7,973cps 7,478cps 7,068cps
Discount Factor - 0.92 0.79 0.67 0.57 0.49 0.42 0.36
Discounted FCF - 5 996 5 707 4 961 3 952 2 475 929 4 595 ARPU -2% y/y 4,513cps 4,499cps 4,463cps
Enterprise Value (EV) R28,615M
Net cash (R'm) R4,200M
Fair Value (Equity) R32,815M
Fair Value (cps) 7478cps DCF about 10x more
Sources: MultiChoice Group Ltd’s PLS & roadshow, Iress & Bloomberg, & Alpha Asset Management workings & assumptions; Ignores BEE dilution at MSCA-level. sensitive to ARPU (&
subscriber-base)
assumptions than to
Key assumptions & notes: Key assumptions & notes (cont.): discount rate!
Flat USD/ZAR assumed with small annual Cost of Equity (CoE):
depreciation of ‘Rest of African’ currencies. Risk-free rate: 9.0% (SA 10-year at
Operating costs contained flat (85% fixed, thus premium due to ‘Rest of Africa’ risk).
this is not too unrealistic). Equity Risk Premium: 5.5%
Effective tax rate = SA corporate tax rate due to Beta: 1.5x
large assessed loss in Africa offsetting any tax
there. Zero debt, thus WACC = CoE.
Capex and Net Working Capital (NWC) ratios CoE is 17.3%.
static. Terminal year growth rate: 0.0%
9Valuation of MCG Shares
(2) Global Relative Valuation Model
Listed Cable TV Comparatives Price Earnings (x) Dividend Yield (%) Free Cash Flow Yield (%) Blended Average
Comcast 14.5x 2.35% 5.5%
Verizon Communications 14.4x 4.42% 2.9%
Cable One Inc 34.1x 0.90% 3.2%
AMC Networks Inc 8.1x 8.6%
Altice USA Inc 9.8%
Shaw Communications 4.43%
DISH Network Corp. 11.2x 15.4%
Median 14.4x 3.4% 7.1%
Mean 16.5x 3.0% 7.6%
Discount 50% 50% 50%
- EM discount** 25% 25% 25%
- Not diversified** 25% 25% 25%
Implied Valuation Multiple 7.7x 4.8% 11.0%
MultiChoice's metrics:
- FY 18E Normal PAT R4,551,120,000
- FY 20E Dividend R2,500,000,000
- FY 19E FCF R6,492,419,896
Implied Fair Value R35bn R52bn R59bn
Discount Factor* 1.17 0.7 0.9
Net Present Value (NPV) R41.1bn R37.8bn R50.5bn R43.1bn
Fair Value (cps) 9830cps
Sources: MultiChoice Group Ltd’s PLS & roadshow, Investing.com, Iress & Bloomberg, & Alpha Asset Management workings & assumptions; Ignores BEE dilution at MSCA-level.
* Discounted factor used where multiple is for a future period for MultiChoice Group Ltd. Thus, bringing a forward valuation to the present day. Based off Group CoE (see DCF Model).
** Subjective discounts
Based off global relatives, less material discounts, MultiChoice appears to be worth c.R43bn or c.9830cps.
10Valuation of MCG Shares
(3) Discretionary Sum-of-the-Parts Model
Assumptions:
Overheads captured in the South African segment (per PLS).
Segmental subjective rates selected:
SA Segment: 5x Price Earnings implies 20% Earnings Yield ~ 5 year life-span (20% x 5 = 100% of
capital earned if profits are flat).
Rest of Africa Segment: Assumed zero value (free optionality for loss-making operations).
Technology Segment: 10.0x PE based off level of IP-embedded in business and global client-base.
Pre-BEE deal dilution at MCSA-level.
MultiChoice Group Ltd fair value appears to be around R42bn or c.9,656cps.
BEE deal’s dilution lowers this value to R40bn or c.9,212cps.
Sum-of-the-Parts (SOTP) FY 18A - Revenue Gross Profit EBITDA Trading Profit Net Profit Price Earnings (x) Fair Value (R'm)
South Africa (R’m) 40100 19678 12375 10839 7804 5.0 39020
Rest of Africa (R’m) 13792 758 -3315 -4316 -2590 - -
Technology (R’m) 3005 2230 533 466 336 10.0 3355
Group overheads Accounted for in SA Segment
Fair Value (Equity) R42bn
Issued Shares 439m
Fair Value (cps) 9,656cps
Implied Price Earnings (x) 6.9x
Implied FY 20E Dividend Yield (%) 5.9%
Sources: MultiChoice Group Ltd’s PLS & roadshow, Iress & Bloomberg, & Alpha Asset Management workings & assumptions; Ignores BEE dilution at MSCA-level.
* Based off FY 18A numbers.
11Valuation of MCG Shares
(1 + 2 + 3)/3 = Equal-weighted Blended Average Fair Value for MCG shares
MCSG: Equal-weighted Blended Fair Value Fair Value (Equity) Fair Value (cps)
Relative Fair Value R43 136 910 491 9 830cps
DCF Model R32 814 816 233 7 478cps
Segmental SOTPs R42 375 600 000 9 656cps
Equal-weighted Average R39 442 442 241 8 988cps
Less: BEE Deal (c.5% of MCSA) -R1 972 122 112 (449cps)
MultiChoice Fair Value R37 470 320 129 8 539cps
Implied FY 19E Price Earnings (x) 6.1x 6.1x
Implied FY 20E Dividend Yield (%) 6.7% 6.7%
Sources: MultiChoice Group Ltd’s PLS & roadshow, Iress, Investing.com, Bloomberg, & Alpha Asset Management workings & assumptions
Assuming an equal-weighted average and carving out a 5% discount due to the Group’s top-up BEE deal (even
though it is done at a subsidiary-level, MSCA produces the majority of the Group profit):
MultiChoice Fair Value:
Low: R32bn or c.7500cps (DCF*) ~ c.7125cps post-BEE
High: R43bn or c.9800cps (Global Relative*) ~ c.9310cps post-BEE
Equal-weighted average fair value (less BEE deal dilution): c.R37bn or c.8500cps.
* Excludes 5% BEE deal done in MultiChoice South Africa.
12End Game Scenarios for the MultiChoice Group Ltd
Evolve itself, sell itself or die
We believe that in the long-term, MultiChoice Group has three likely futures available to it:
Evolve itself into an OTT player:
MultiChoice’s Showmax offering offers a true avenue of growth.
Showmax’s success is far from a certainty, though, given its sub-par scale to global major OTT plays like
Netflix, Amazon and YouTube & its current technology limitations.
Sell itself to a local telcos:
Most global Pay TV players are owned by either telcos or ISP, and some by content providers (e.g. Walt
Disney’s ESPN).
The reason is simple: major synergies exist for these businesses to be part of a larger player with broader
distribution and cheaper costs.
Thus, we believe the MultiChoice Group Ltd makes a logical acquisition target for Vodacom Group Ltd:
Offers Vodacom content to drive the telcos OTT evolution.
Brings scale to MultiChoice and opens the Group up to Vodacom’s subscriber base.
MultiChoice and Vodacom are already partnered via Showmax.
Other telcos in South Africa (e.g. MTN and Telkom) could make potential—though less likely—suitors too.
Die:
If the Group does neither of the above, we expect its subscriber base to steadily wind down as it loses
progressive amounts of market share to global OTT’s.
This erosion implies that the Group will eventually be unsustainable as a business. 13Conclusion on MultiChoice Group Ltd
Large overhang post-unbundling may create an opportunity for a mispriced asset
The MultiChoice Group’s risk are material:
Business sustainability from OTT, growing competition and slimming margins/ARPU’s, &
Currency and results volatility from material leverage (85% of costs are fixed) and foreign currency
exposure (predominantly USD but also other hard currencies).
Despite this, the Group does (currently) have a strong underpin of subscription income and a platform of scale
across South Africa and the African content.
Post-unbundling of MCG, we expect major selling pressure in the market for the script:
Many foreign shareholders may not want this smaller cap company.
Many investors may view the business as unattractive or little more than a “dividend” they are cashing in.
Thus, MCG’s unbundling may offer an opportunity to buy a “reasonable” asset at a bargain price:
Strongly dependent on price action / discovery in the market post-unbundling.
See the next slide for fair value range & recommendation.
14Conclusion on MultiChoice Group Ltd (cont.)
MultiChoice Group Ltd’s Fair Value Range & Our Resulting Market Rating
BUY HOLD 59 165
SELL
Related rating 52 002
42 375
37 470
35 073
32 814
13 482
11 849
MCG market price 9 656
on listing on JSE. 7 477 7 992 8 538
Below DCF Model Relative (PE Model) Blended Fair Value Segmental SOTPs Relative (Dividend) Relative (FCF Yield) Above
Market Cap. (R'm) 32 814 35 073 37 470 42 375 52 002 59 165
Share Price (cps) 7 477 7 992 8 538 9 656 11 849 13 482
15 shares.
Sources: MultiChoice Group Ltd’s PLS & roadshow, Iress, Investing.com, Bloomberg, & Alpha Asset Management workings & assumptions; Share price is based off the assumption that the Group’s listed issued share capital is 439mAppendix A
Sources, further reading & links
MultiChoice Group Ltd website & relevant pages:
Homepage: https://www.multichoice.com/
Pre-listing Statement: https://www.multichoice.com/media/1432/2019-01-21-multichoice-pre-listing.pdf
Roadshow: https://www.multichoice.com/media/1442/roadshow-deck-final.pdf
Comcast’s acquisition of SKY:
The Sky Acquisition And More Comcast: A Deep Due Diligence Dive:
https://seekingalpha.com/article/4208437-sky-acquisition-comcast-deep-due-diligence-dive
Why Comcast wanted Sky so badly: https://www.bbc.com/news/entertainment-arts-45634303
Moneyweb Interview on MultiChoice:
Interview: https://www.moneyweb.co.za/moneyweb-radio/how-multichoice-shares-will-be-distributed-
upon-listing/
Note: Our fair value range differs materially from the one noted here, though the differing view does offer
good context indicating quite how volatile the trading range may be upon listing.
16Disclaimer
Ownership of the Report
This report is the property of Alpha Asset Management (Pty) Ltd, but may be freely distributed so long as in the act of such a distribution no additions to, deletions from and modifications to this report are made. Furthermore, no
party without the express permission of Alpha Asset Management (Pty) Ltd may sell this report or make any direct form of compensation from the redistribution thereof.
Frequency of Next Update
This is a one-off report. There will be no public updates to the views expressed herein.
Disclosures*
A. The analyst is an officer, board member, or director of Alpha Asset Management (Pty) Ltd.
B. The Company is a client of Alpha Asset Management (Pty) Ltd (i.e. this is a Commissioned Report) and Alpha Asset Management (Pty) Ltd has received money in exchange for the production of this report.
C. Analyst holds long or short personal positions in a class of common equity securities of this company either directly or indirectly.
*MultiChoice Group Ltd: None noted, though Alpha Asset Management (Pty) Ltd and AlphaWealth (Pty) Ltd (an associated company) may have clients and/or funds and/or portfolios with underlying exposure to Naspers Ltd (and,
thus, MultiChoice Group Ltd).
Financial Numbers, Forecasts, Valuations and other Assumptions
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Asset Management (Pty) Ltd does not warrant or guaranty its accuracy. The reader relies on this data and information from this report at his/her own risk. Furthermore, in the case of forecasts and valuations, Alpha Asset
Management (Pty) Ltd wholly and completely cannot be held liable for any damage or loss caused by any individual, collection of individuals or business or any other party by said party acting or not acting based on the forecasts
and valuation(s) included in this report. By their very nature, forecasts and valuations may not be accurate and, indeed, may be wholly and completely wrong.
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