Multichoice, which owns DStv, is listing on the JSE at the end of February – but investors are sharply divided about how the market will value the company.
This week, the JSE gave the go-ahead for the listing. Shareholders in media firm Naspers, which owns Multichoice, will receive shares in Multichoice.
A key reason why Naspers is unbundling Multichoice is to create value for its shareholders.
Naspers shares are trading far below what its assets are worth. Its 31% stake in the Chinese digital behemoth Tencent Holdings alone is trading at a value of R1.7 trillion – while the entire Naspers is valued by the market at only R1.38 trillion. That means that investors are getting all of its other assets – including Media24, its Russian and Indian companies, as well as Multichoice, which has 13.9 million subscribers in 50 countries – for free.
By listing it separately, suddenly Naspers shareholders will also own shares in Multichoice – and the unbundling is not expected to affect the Naspers share price at all.
But how much will the Multichoice shares be worth? There are wildly divergent views:
The financial statistics blog South African Market Insights estimates that at a price earnings (PE) ratio of 15, Multichoice could be worth R211 a share. (The PE is what investors are willing to pay for a rand of profit.) This could make it the 21st biggest company on the JSE with a market cap of R94.9 billion.
Byron Lotter, portfolio manager at Vestact, puts a more conservative valuation on Multichoice – valuing it at 12 times profits, which would value the business at R73.2 billion.
“As a Naspers shareholder, you will receive Multichoice shares which at this valuation will trade at around R150 a share. A decent value unlock considering that the whole of Naspers traded at R150 a share in 2009.”
Lotter warns that the business currently has some tough challenges ahead, specifically from streaming services like Netflix. Multichoice has countered that with its own streaming service Showmax, but another big challenge is live sport.
“Live sport is massive and growing. It is the best form of reality television, and it never gets old. The problem for Multichoice is that the rights to these leagues and events are priced in dollars, euros or pounds. (But Multichoice) subscriptions are in rands and other sub-Saharan currencies, which have mostly depreciated in recent years.
“I do feel however that streaming sport is the future and I know Multichoice will be well aware of this. I am sure they are biding their time until they launch a proper pay per stream service,” says Lotter.
Wayne McCurrie of FNB Wealth and Investments says coming to a valuation is difficult as Multichoice’s earnings are quite volatile.
Guided by the company’s last earnings and disclosures, he estimates the company valuation should be around R70 billion.
He notes that the
company’s subscriber numbers went up, but the average income per subscriber
went down as it started offering “discount” packages. There is also some risk
that Multichoice will be forced by government to allow far greater flexibility
to subscribers (allowing them to choose actual channels and not packages),
which is starting to happen overseas. But this a long way off here in South
Africa, McCurrie added.
He expects that as data costs come down the company’s “on demand” side of the business will grow quite significantly, but there could be potential competition from Netflix and others. Nigeria is not generating any profits at the moment and is consuming capital
“Still, overall it’s a very cash flow generative business - even taking Nigeria into account.”
PSG Wealth portfolio manager Schalk Louw estimates a fair value for Multichoice is around R131 a share. That values it at around six times its Ebitda (earnings before interest, tax, depreciation and amortisation). By comparison, Vodacom is trading at seven times.
At Louw’s estimate valuation, Multichoice will rank among the biggest 40 shares in the market (it could push out Truworths).
This is significant: Index funds like the Satrix Top 40, with R282 billion invested in it, track the top forty shares. These funds must invest in all the 40 biggest shares – which will automatically pump a lot of money into Multichoice’s shares.
Apart from this possible boon, Louw is also cautiously optimistic about Multichoice’s outlook as a separate listed entity. “It has already done a lot to become a digital broadcaster, to compete with video on demand.”
But there are still some questions, specifically on its dividend. Multichoice plans to pay a first dividend of R2.5 billion (which is a dividend yield of around 4.3% at an indicative share price of R131/share) to shareholders in 2020, but it isn’t clear whether this will be an annual commitment, says Louw.
Jean Pierre Verster, portfolio manager at Fairtree Capital, estimates that the company is probably worth around R120 a share – but it could even reach R180.
The large spread in the valuation would depend on whether Multichoice takes important strategic decisions, and how they are implemented.
Amid the decline of “linear television” – broadcast TV with fixed schedules - Multichoice would need to take on video-on-demand competitors with its own original content, while also protecting its current income stream of premium package subscribers at the same time. Verster believes this will require some very astute decisions.
But the lack of dependable and affordable broadband access in many of the African countries that Multichoice operates in gives the company some breathing room in the medium-term against competitors like Netflix, he says.
“The right strategy, well implemented, could mean that the share has a lot of upside,” says Verster.
Gryphon research analyst and portfolio manager Casparus Treurnicht says Multichoice is probably best positioned around a PE ratio of approximately 10 times.
“I am not so optimistic that Multichoice will eventually be a major success. They have got too much catch up to do and generally people only subscribe for one service.
“Netflix charges R169 per month for its highest offering, while DSTV charge R809 just for the added benefit of sport. I think they’ve got bigger problems on their way from losing existing revenues.
“It is currently also undergoing changes in order to position itself for streaming and this will need to be accomplished at a lower price point.” Treurnicht believes its existing premium DStv offering could be cannibalised. “They also need to invest heavily for the next couple of years which makes me very sceptical.”
At this valuation, Multichoice probably won’t be included in the JSE’s top 40 index.
Business Insider South Africa is part of 24.com, which is a Media24 company in the Naspers stable.
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