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CFO’s performance review

In a year that required careful navigation of COVID-19 and other macro-economic challenges, the group delivered pleasing operational results with an acceleration in the subscriber growth rate to 7%.

Tim Jacobs

Chief financial officer

Strong financials were also reported including an increase in core headline earnings per share of 35% and free cash flow of 10%. However, we remain cautious in our outlook given the deferral of costs to FY22 and the uncertain economic landscape that lies ahead.

32%
growth in core headline earnings
10%
growth in free cash flow
 
ZAR12.5bn
in available liquidity
ZAR2.5bn
second dividend declared

90-day active subscribers

Operational performance review

Despite challenging market conditions and consumer pressure, the group recorded subscriber growth of 1.4m 90-day active subscribers.

The group delivered subscriber growth of 7% to reach 20.9m subscribers as at 31 March 2021. This rate of growth is somewhat higher compared to the prior year due to:

  • Increased consumer demand for video entertainment services
  • Easing of electricity shortages in southern Africa
  • Continued improvement in content and complementary product offerings

The 90-day active subscriber base comprises 11.9m subscribers (57%) in the Rest of Africa and 8.9m (43%) in South Africa.

Financial performance review

Our priority remains growing the top line in a challenging macro-economic environment while executing on the group’s robust cost optimisation programme. A further ZAR1.5bn in costs was removed in FY21, with positive operating leverage improving versus the prior year. This freed up capital to expand the group’s ecosystem by investing in BetKing. Trading margins expanded to 19% from 16% in the prior year.

   FY19 
(ZAR'bn)
FY20 
(ZAR'bn)
FY21 
(ZAR'bn)
Organic 
growth 
FY20 
(%)
Organic 
growth 
FY21 
(%)
Ref 
Revenue(1)  50.1  51.4  53.4 
1
Costs  (43.1) (43.4) (43.1) (3) (3)
2
Trading profit(1)  7.0  8.0  10.3  29  44 
3
Net interest paid  (0.5) (0.6) (0.7)         
Taxation  (3.8) (3.4) (4.8)      
4
Non-controlling interests(2)  (1.0) (1.4) (1.9)      
4
Other gains/(losses) 0.1  (0.1) 0.4       
5
Core headline earnings  1.8  2.5  3.3  38  32 
6 
Core headline earnings per share  410  569  767  39  35 
6
TP margin  14.0%  15.6%  19.3%       
3
Effective tax rate(2)  75%  65%  54%       
4
(1)  FY21 includes R72m gains related to fair value movements on Nigeria futures contracts.
(2)  FY19 excludes the impact of the once-off empowerment transaction.
1

Top-line growth increased to 4% from 2% in the prior year. This increase was driven by strong subscriber growth across the continent and annual price increases, despite headwinds in the advertising and commercial subscriber business due to COVID-19. The Technology segment, Irdeto, increased revenues by 5%, a good performance given the impact of US$8m in once-off revenues earned in the prior year.


2

A strong focus on cost containment allowed for a further ZAR1.5bn to be eliminated from the base during the year. Overall costs reduced 3% YoY on an organic basis, in line with the prior year reduction, and resulted in an improvement in operating leverage.


3

Trading margins expanded from 14% to 19% between FY19 and FY21, with stable margins in South Africa and reduced losses in the Rest of Africa being the main contributors. Organic trading profit growth of 44% represented an acceleration from the prior year, but was assisted by ZAR1.1bn in costs which were deferred to FY22.


4

The group’s effective tax rate continues to reduce as losses in the Rest of Africa decrease. This is due to these losses negatively impacting profit before tax and distorting calculations (there are withholding and other taxes paid in the Rest of Africa notwithstanding that the segment is loss making). Non-controlling interests increased in FY21 due to higher profits in South Africa and reduced losses in Nigeria.


5

Other gains/(losses) increased in FY21 due to higher
realised foreign exchange gains being recorded in
the year.


6

Strong trading performance drove core headline
earnings per share up 35% versus the prior year.

Cash generation review

The group delivered growth in free cash flow of 10%, which was mostly reinvested into the group, used to pay MultiChoice Group and Phuthuma Nathi dividends and used to fund the initial investment in BetKing.

FY19 
(ZAR’bn)
FY20 
(ZAR’bn)
FY21 
(ZAR’bn)
FY20 
growth 
(%)
FY21 
growth 
(%)
Ref
Trading profit 7.0  8.0  10.3 
Non-cash adjustments 4.2  4.6  4.2 
1
Working capital investment (1.7) (0.5) (0.6)
2
Cash from operations 9.5  12.1  13.9  28  15 
Capex (1.0) (0.8) (1.6)
3
Lease repayments (1.5) (2.1) (2.5)
3
Taxation paid (3.7) (4.0) (4.1)
4
Other operational cash movements –  –  – 
Free cash flow 3.3  5.2 5.7  59  10 
Add: Net interest received 0.2  0.2 0.2 
Less: Phuthuma Nathi and other non-controlling interest dividends (1.5) (1.6) (1.5)
5
Less: Dividends paid by holding company –  –  (2.4)
5
Less: Share buy-backs –  (1.7) – 
Add: Loans raised 1.4 
6
Less: Investment in associate (1.4)
7
Less: Settlement of share-based compensation awards –  –  (0.5)
8
Less: Other cash movements (0.2) (0.1) (0.1)
Retained free cash flow 1.9  2.1  1.4 
Less: Increase in restricted cash –  (0.5) (0.1)
9
Foreign exchange translation of foreign cash balances 0.7  0.8  (1.9)
10
(Decrease)/increase in cash and cash equivalents 2.7  2.4  (0.6)
1

Non-cash adjustments remain in line with prior years and include depreciation, amortisation, net realisable value adjustments on inventory and non-cash hedge accounting movements.


2

Working capital investment increased due to higher sports rights prepayments being made in the current year.


3

Capex of ZAR1.6bn was higher than the prior year, mainly due to investment into a multiyear programme to upgrade the group’s customer service, billing and data capabilities. The increase in lease repayments was due to the end of a contractual arrangement where lower satellite lease payments were made in southern Africa for the first 36 months of the lease period, and ended midway through FY20.


4

As one of the largest taxpayers in Africa, the group paid direct cash taxes of ZAR4.1bn, slightly higher than the prior year driven by improved profitability.


5

The maiden MultiChoice Group dividend was paid in FY21 at ZAR2.4bn, and dividends to Phuthuma Nathi were the same as the prior year at ZAR1.5bn.


6

Refer to the working capital loan section below.


7

Refer to the investment in BetKing section below.


8

ZAR0.5bn was utilised in the current year primarily to fund the closure of the MCA 2008 share appreciation right (SAR) scheme, which was no longer meeting its purpose as a long-term incentive scheme in the group.


9

Restricted cash relates to initial margin deposits on Nigerian futures which are used to hedge naira currency depreciation. This balance has increased due to higher revenues being earned in Nigeria YoY.


10

The translation of foreign cash reserves, mainly held in US dollar, has decreased the cash balance in the current year compared to prior financial years, due to the appreciation of the South African rand against the US dollar.

Financial position review

We continue focusing on managing the balance sheet and improving cash generation through a disciplined capital allocation approach.

FY19  
(ZAR’bn)
FY20  
(ZAR’bn)
FY21 
(ZAR’bn)
FY20 
growth 
(%)
FY21 
growth 
(%)
Ref
Non-current assets 23.7   25.4   23.4   (8)
1
Current assets 17.3   20.8   18.9   20  (9)
2
Total assets 41.0   46.3   42.3   13  (8)
Non-current liabilities 15.2   18.2   14.3   20 (22)
3
Current liabilities 16.0   18.3   18.6   14
4
Total liabilities 31.2   36.5   32.8   17 (10)
Equity 9.8   9.8   9.5   (3)
Key ratios
Liquidity 1.08   1.14   1.02  
Leverage (including leases) 0.88   0.85   0.54  
5
Return of capital employed 29.5% 30.3% 39.8%
6
Interest cover (times) 33.7   34.2   25.4  
7
1

Non-current assets decreased from the prior year primarily due to the impact of foreign currency translation on property, plant and equipment due to the South African rand appreciating against the US dollar from a closing rate of ZAR17.86 in FY20 to ZAR14.78 in FY21. The group recognised no deferred tax assets on unutilised tax losses. Non-current assets also include the investment in BetKing disclosed later.


2

Current assets decreased due to lower cash balances and the current portion of a less favourable derivative mark-to-market position against the stronger South African rand.


3

The decrease in non-current liabilities is primarily due to repayments of finance leases and the impact of foreign currency translation on leases due to the South African rand appreciating against the US dollar from a closing rate of ZAR17.86 in FY20 to ZAR14.78 in FY21. Non-current liabilities also include the working capital loan raised in FY21 disclosed later

4

The increase in current liabilities is primarily due to a higher derivative liability position due to the South African rand appreciating against the US dollar in FY21, as well as an increase in provisions. Taxation liabilities, lease liabilities and programme and film rights decreased primarily due to the South African rand appreciation against the US dollar and a reduction in uncertain tax positions in the Rest of Africa.


5

Measured as net debt (lease liabilities plus working capital loan less cash) divided by earnings before interest, taxation, depreciation and amortisation (EBITDA). The group retains a low level of gearing, which provides financial headroom to navigate both challenges (COVID-19 and other macro-economic factors) and opportunities into the future.


6

Measured as trading profit divided by average total assets less average current liabilities. Return on capital employed improved to 40% in FY21, driven by increased profitability and the benefit of a reduced US dollar-denominated asset base due to the strong South African rand and dividend payments.


7

Measured as EBITDA divided by net interest paid (interest paid less interest received).

Investment in BetKing

As part of the group’s strategy to expand its entertainment ecosystem, it finalised an investment for an initial 20% shareholding in BetKing, a sports betting group with pan-African ambitions. The transaction was structured with an upfront investment of US$81m (ZAR1.4bn) paid in cash and the potential for further payments of up to US$31m (ZAR0.5bn) should certain earn-out targets be met between December 2021 and December 2023, or the valuation paid being supported by future equity transactions. As the group exercises significant influence through its shareholding and board representation, the business was equity accounted as an associate from 1 October 2020.

Post-year-end, we announced our intention to increase our shareholding in BetKing from 20% to 49%, subject to conditions precedent. We will make an additional investment of US$282m to secure the stake and fund this investment, along with the accelerated earn-out payment, with R4bn in rand-denominated debt.

Share transactions

To preserve cash reserves, the group transferred 4.3m (with a value of ZAR0.4bn on the date of transfer) of the 10.1m treasury shares repurchased in the prior year, to fund awards for the current year under the group restricted stock unit share plan.

Share schemes

The group realigned its long-term incentive plan structures in the current year through three initiatives. Firstly, a new phantom share scheme was created for Irdeto. Irdeto competes globally to attract and retain top software engineering talent and it was deemed more appropriate for Irdeto’s long-term incentive plan to be linked directly to the group’s performance. Secondly, the MCA 2008 SAR scheme was closed as it no longer aligned to the group’s long-term strategy. Lastly, to fully align management incentives to shareholder expectations, all future executive share allocations will now be 100% linked to performance conditions and a new phantom performance share scheme based on the returns generated from strategic investments was created.

Working capital loan

To improve the group cost of capital and reinforce the statement of financial position, an amortising working capital loan of ZAR1.5bn was concluded in November 2020. The loan has a three-year term and bears interest at three-month Johannesburg Interbank Average Rate plus 1.70%. Based on the current low interest rate cycle, the group decided to conclude an interest rate swap in February 2021 at an all-in fixed rate of 5.75% for the remainder of the loan term.

Dividend number 2

The board recommended that a gross dividend be declared at 565 cents per listed ordinary share (ZAR2.5bn).

Financial outlook

We are cognisant of ongoing consumer pressure in what remains an uncertain COVID-19 environment, continued macro-economic volatility in our markets and the need to absorb deferred content costs in FY22. We will look to counter these headwinds through growing and diversifying revenues, tight cost control and by driving operational excellence. Our strong balance sheet positions us well to withstand these uncertainties and deliver value to our customers and shareholders.

Appreciation

I would like to thank the board for its guidance and the group executive committee for its support and leadership during the year. I also wish to express my appreciation for the dedication and hard work of our finance teams across the group. I would like to thank our shareholders for their interest and investment in the MultiChoice Group and finally our customers, without whose support these results would not be possible.

Tim Jacobs

Chief financial officer