MultiChoice looks to World Cup to ease mid-term pressures

MultiChoice’s  premium and mid-market segments came under pressure this year due to unemployment, indebtedness and high fuel and food price shocks, resulting in a decline in subscribers in the three months to June and a hit to half-year revenues. 

However, the return of some major sports activities, including the local Premier Soccer League and the English Premier League during the quarter to September, made customers renew and upgrade their subscriptions.

But given the continued increases in interest rates, high food and transport prices consumers are not out of the woods yet. 

In the six months to September, MultiChoice’s customers in South Africa grew by 3% to 9.1-million. Revenue decreased 2% to R17.4bn due to a weaker than normal first quarter, when the impact of the football off-season was exacerbated by an extremely challenging consumer climate.

“This has certainly been a tale of two quarters,” said CEO Calvo Mawela.

“The first quarter is always our weakest in terms of growth given the end of football season. However, seasonal pressure was more pronounced this year as consumers were hit by massive price hikes for energy and food and became more discerning with the money they spent. Business regained momentum during the latter part of the second quarter with the return of popular sports.”

He said the group was“putting up a good lineup of content that will make us relevant and attract more customers”.

He added that the company was reviewing its annual price adjustments and would take the economic pressures consumers were facing into consideration. 

“We will look at what form of pricing we think will still be relevant … to keep the subscribers we have. We will look at opportunities for the market to grow and be able to come up with estimates as to how those opportunities will respond to a certain price increase.”

The upcoming Fifa World Cup, starting next weekend, would be an opportunity to drive customer acquisitions, upgrades, retention and reconnections, said Mawela.

Warwick Bam, head of research at Avior Capital Markets, said price increases were a “last resort” for MultiChoice in SA. 

“Consumers are sensitive to price but comprehensive sports coverage remains unavailable on other platforms. There is a tradeoff between content and price but MultiChoice is focused on improving product tiering, reducing client service costs and matching content to its target audience. Local content is a priority and should remain a differentiating feature of MultiChoice versus international streaming platforms,” he said. 

Jarred Houston, equity analyst at All Weather Capital, said: “Affordability challenges in SA mean we are likely to see continued low absolute price increases, with higher increases skewed more towards the middle to lower end packages. There is an extremely strong content slate coming up, including the Fifa Soccer World Cup, which should help support subscriber growth.”

The rest of Africa business, which includes Nigeria, Ghana and Kenya, increased subscribers by 6% to 13-million, with the businesses “rapidly approaching break even”, said Mawela. 

Commenting on inflation in the rest of Africa and its impact on subscription fee increases, Mawela said MultiChoice had a compelling product and the group was “now at a stage where we can put in inflationary pricing in the market. But if it [inflation] increases to 20%, 30%, we need to consider that people are not going to follow if we put such pricing in the market.” 

He said in Nigeria MultiChoice had increased prices by 15% and “we didn’t see any slowdown in subscribers. This demonstrates that we still have compelling products that people see value in.” 

Claude van Cuyck, portfolio manager at Denker Capital, said MultiChoice had so far not been overly challenged by increasing prices in the rest of Africa, given the high levels of inflation.

However, this “becomes a bigger threat” over time, especially if inflation runs above 20%. But the consumer “seems to be prepared to accept the price increases given the perceived value and quality of the product offering. They need to increase prices to protect margin but at some point it will become a delicate balance of protecting group margin at the expense of losing customers.”

The same could be said for South Africa, said Cuyck. “It has, however, been a bit more challenging in SA – this can be seen by the decline in the subscriber numbers in the premium and mass segment of the market [where absolute prices are already high and the consumer is under pressure].”

MultiChoice’s total revenue for the six months to September was up R1.8bn to R28.6bn. The group’s earnings and cash flows for the interim period were adversely impacted by an investment in decoders ahead of the upcoming Fifa World Cup.

“This investment supports the anticipated subscriber growth opportunity around the FWC [Fifa World Cup]) while at the same time mitigating the growing risk of supply chain disruptions from global silicon chip shortages,” MultiChoice said in a statement.  

This working capital investment increased decoder subsidies and reduced group trading profit by R700m and free cash flow by R800m, primarily in the rest of Africa. Overall, group trading profit increased 2% to R6.1bn. The decoder investment shaved three percentage points off the group’s trading margin but is expected to unwind in the second half of the year, MultiChoice said.

Cuyck said the increased investment in decoder subsidies, though impacting cash flows negatively, bodes well for the second half as they should see the benefits in subscriber growth with the World Cup.

However, he is concerned about the high levels of inflation, especially in the rest of Africa, as well as the risks this poses for currency weakness and volatility. Although MultiChoice has been able to offset higher input cost inflation with price increases, “if inflation exceeds 20% in certain regions (as it has) it could make it more difficult to pass through price increases without impacting subscriber volumes. There has been little to no impact thus far, though.” 

He added that the challenges of repatriating dollars out of countries like Nigeria (at the weak parallel naira/$ exchange rate) continued to be a challenge and risk to the group.

MultiChoice has added new services, including insurance business, recording a 17% rise in active policies to 2.6-million and revenue was up 19% to R338m boosted by decoder sales.

The sports betting business, KingMakers, delivered R1.5bn in revenues, up 62%. It recorded a loss after tax amounting to R300m “due to the impact of an ongoing investment in people and technology to further scale the business”, MultiChoice said. The business is growing rapidly in Nigeria, where it is increasing its market share, and is building its presence in other African markets. 

Bam said with the exception of betting, the new services were “unlikely to become significant” to the group as they inherently complement the core product, enhancing existing margins. “Betting has the potential to be significant as the business model is highly scalable, with broad appeal across the continent,” he said. 

Cuyck said “insurance provides an additional avenue and source of revenue for the business that is likely to grow over time. KingMakers is expected to be a meaningful contributor to future incremental growth and profitability over the next five years (albeit currently small).”

Mawela said: “We will look for more opportunities to grow beyond pay television. We will also be bringing additional value-added services to our customers as part of our strategy to build a broader consumer offering.”