The Finance Ghost: The market lowdown on MultiChoice, Santam, Woolworths and Glencore

19 Nov 2023

With the euphoria of the rugby firmly behind us and the Proteas doing what they usually do, there’s a bit of a lull for sports fans. This is a snap back to reality for a business like MultiChoice, which is rather reliant on consumers being willing to pay for sport.

It’s easy to switch a streaming subscription off and on again as required, so I imagine there are some nerves at the MultiChoice head office about the extent of potential cancellations with the two World Cups behind us. We will have to wait for full-year results to see what happens in this regard.

In the meantime, we have the results for the six months to September to consider. If you ignore the termination of non-paying subscribers who previously got a special deal, then there’s a 2% drop in revenue-generating customers in South Africa. The good news is that the DStv Premium subscriber base grew by 5%, which is highly encouraging for the business. If we look at group-level numbers, there was a 2% decrease in the 90-day active subscriber base.

Things don’t get any better as we move down the income statement. Pre-forex trading profit grew by 10% off the back of revenue growth of 4%, but net trading profit was down by 18%, affected by forex losses. Group headline earnings decreased by 5%. These numbers pale in comparison to the 40% drop in free cash flow, with Showmax requiring a substantial investment of capital to help it scale.

For investors to believe in this story, they need to see the long-term potential of Showmax. Streaming economics have been painful for a long time, so even the most patient investors are likely to be tested here. And of course, the ongoing forex nightmares in countries like Nigeria don’t help.

Short-term insurance: another pressure point for SA consumers

When you read company news, you can either interpret it narrowly (apply it only to that company), or you can think more broadly about what else it means.

For example, Santam’s operational update for the nine months to September reflects net earned premium growth of 7%. This is because risk is being repriced by insurance companies in response to substantial loss events in recent years. You can see this as bullish for insurance companies. You can also see it as bearish for retailers, as this is yet another area of household budgets that is coming under fire.

In SA, unfortunately, we have to cut back on groceries before we can cut back on short-term insurance. There really is no choice but to have a reasonable level of asset insurance in South Africa. Read on for a Woolworths update that is a great reminder of what consumers are facing out there.

But before we move on from Santam, the other important point is that the net underwriting margin still isn’t at acceptable levels (it’s currently below the target range of 5% to 10%), so it’s likely that there will be further significant increases in the pricing of insurance.

Woolworths runs out of puff

It’s been a roller coaster ride for Woolworths shareholders in the past year. The 52-week high is R81.13 and the 52-week low is R58.24 per share. Doing business in South Africa is no joke and the global volatility doesn’t do anything to make the journey less nausea-inducing.

Recent performance at Woolworths has mainly been driven by a recovery in the Fashion, Beauty and Home business, as Woolworths Food has been staring down the juggernaut that is Checkers. It’s quite incredible how well Shoprite has done in winning market share across the board, including among higher LSM shoppers who have been Woolworths’ (organic) bread and butter for years before the pandemic.

Despite the competitive pressures, at least Woolworths Food managed to grow turnover by 8.4% in the 20 weeks to 12 November. That’s a lot more than Fashion, Beauty and Home can say, with turnover growth of a paltry 1.4% and excuses around a delayed summer range thanks to South African ports. Price movement in that part of the business was 11.7%, so volumes were sharply negative. In case you’re wondering, inflation at Woolworths Food was 9.4%.

When your boss hands you a 6% increase letter, you can therefore be assured that you’re going backwards in terms of your affordability at Woolworths. The problem is that you’re going backwards based on every retailer, which is exactly why I’m bearish on this sector as a whole. Inflation is hurting most of them.

Glencore gets more steelmaking coal — for a steal?

There’s finally a transaction between Glencore and Canadian mining group Teck Resources. Buckling under ESG pressure, Teck has offloaded its steelmaking coal business (Elk Valley Resources) that generated profit before tax of CA$6-billion in the 2022 financial year. Glencore will acquire a 77% stake for US$6.93-billion in cash. That’s roughly CA$9.6-billion, which implies a value for the entire business of around CA$12.5-billion. Using 2022 numbers, that puts the earnings multiple at just over 2x.

Coal prices have come off sharply this year, so the 2023 performance is likely to be well down on 2022, meaning the multiple isn’t as low as that calculation would suggest. Still, this is almost certainly a mid-single digit price/earnings multiple, especially once we consider that other assets are being plugged into Teck by third-party investors who will invest alongside Glencore and take out the rest of the Teck stake in this business.

Within 24 months of this deal, and assuming the balance sheet will be in suitable shape for such a transaction, Glencore hopes to demerge its business and split out coal and carbon steel as a standalone entity. This will allow those with an ESG tilt to their mandate to invest in the future metals part of Glencore’s business, while yield-focused investors who don’t care about ESG metrics can invest in the “dirty” stuff.

Do you remember how much money people made when Anglo did something similar with Thungela? Glencore is smarter than that, but this is still an opportunity to watch carefully. DM

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.

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Business Maverick

Short-term insurance: another pressure point for SA consumers

Woolworths runs out of puff

Glencore gets more steelmaking coal — for a steal?