Business Maverick


The Finance Ghost: MultiChoice and Transaction Capital slam on the brakes

The Finance Ghost: MultiChoice and Transaction Capital slam on the brakes
We Buy Cars logo. (Image: Supplied) | Multichoice Logo. (Image: Supplied) | Unsplash

Higher fuel prices and a higher cost of living prove to be a major roadblock for companies in at least two sectors.

Like a taxi dropping off commuters in the middle of the highway, Transaction Capital’s latest update has presented shareholders with a nasty surprise. Those brake lights (in the form of major recent director dealings) came on just too late for anyone to swerve, meaning most took a direct hit and are feeling the hurt.

Nobody has been spared, with incredible forced selling in the market that must include a number of margin calls. At time of writing, the share price had lost an incredible 70% in just a couple of days.

The only highlight to be found is the Nutun division, thanks to high levels of consumer debt and a business model that has proven to be reliable. The collections business is appropriately growing at a rate that exceeds historical levels. 

WeBuyCars has said that its earnings were likely to be down by up to 20% in the six months to March. The company has blamed this on margin pressure, as the mix of vehicles it is selling has shifted towards lower-priced cars. Again, we see the state of consumers’ pockets clearly reflected.

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Given the strength of the base period, the WeBuyCars result wasn’t as bad as many had feared. This is a maturing business that was never going to continue to grow at the same rate as it did in its early days, especially in a period of rising interest rates and pressure on consumer spending. However, the company is still doing well in other areas, such as increasing the penetration of finance and insurance products. Thankfully, consumers (for the moment) are as serious about insuring their Citi Golfs as they would be about their fancy Mercs and BMWs. 

On to the real gemors: SA Taxi. The headwinds in this business are now “structural” rather than “cyclical” – precisely what shareholders don’t want to see in the context of headwinds. Simply, it means that the company’s problems are no longer a bug, but rather a feature.

As part of trying to reposition SA Taxi as more of an asset-based finance business, Gomo (the F&I platform servicing WeBuyCars) has been structured inside a division that will now be called Mobalyz. Sadly, the tech-style usage of pseudo vowels can’t save this one in the short term. Despite South Africa’s absolute reliance on the taxi industry, it is far from a sure investment in this economic climate.

A perfect storm of challenges – including hikes in the fuel price, increases in vehicle prices, more expensive debt and lower commuter volumes – has caused severe headaches for taxi operators and thus for SA Taxi as a lender to the industry. Taxi operators have been unable to push price increases on to cash-strapped commuters, which means they are absorbing costs themselves. Even using the emergency lane and sometimes the pavement to save two-tenths of a second between the lights can’t fix this problem.

MultiChoice: powerless without TV

Inflation is high. Interest rates are up. The cost of living gets more expensive every day. So why would consumers continue to pay for a service that they can’t access while their TVs have been comprehensively censored by Eskom for two hours (or more) at a time?

MultiChoice shareholders might hate the logic in that argument, but there’s just about nothing they can do about it. Consumer spending pressures are coming through, and the latest update is a clear reflection of that.

The company’s FY23 trading margin in South Africa is expected to be 23%-28%, which is well below previous market guidance of 28%-30%. In Rest of Africa, solid subscriber growth (especially in Nigeria) means that the business is due to return to trading profitability this year. That’s nice, but it doesn’t really help if you make money that you can’t get out of the country – just ask MTN.

And in case you’re wondering, the streaming deal with Comcast in Africa isn’t going to solve the profitability pressure anytime soon. If anything, streaming is notorious for being loss-making in the early years.

Fun in the Sun International

It’s been quite a time for investors in Sun International, with the stock price up a whopping 40% over 12 months, a performance backed up by some impressive numbers. Headline earnings increased ten-fold, and the urban casinos segment has seen a 71% increase in Ebitda.

Sun Slots, while facing some margin pressure owing to rolling blackouts, has still performed well, with income up 20% and Ebitda up 17%. Newcomer SunBet, while still early in its development, is growing strongly across key metrics.

The resorts and hotels business posted Ebitda of R450-million for the 2020 financial year, significantly higher than the R300-million posted in the 2019 financial year. The adjusted Ebitda margin of 17.5% is also a material jump from the pre-pandemic level of 11.7% in 2019.

Not all gambles in the market work out, but this one has been a winner as of late.

Investment holding companies: be careful

Not all investment holding companies are created equal. Far from it, in fact. A good way to tell is by looking at the traded discount to net asset value (NAV), which is the market’s way of telling the directors what everyone really thinks of the portfolio.

Speaking of those directors (and the investment management team), the fees for managing the portfolio are a major driver of the discount to NAV. African Rainbow Capital has been notorious for the management team getting far more benefit than the shareholders, with a recent change to the incentive package still not doing enough to address this.

The performance hurdle of 10% is an improvement, but that’s not saying much. The team could just invest in local government bonds and beat the hurdle.

Sabvest Capital is a standout in this market, delivering exceptional returns for shareholders over an extended period. By investing alongside the Seabrooke Family Trust, there is alignment with the key individuals sitting behind this company. Instead of fancy websites, there is a Berkshire Hathaway feel to the place.

With a 17% compound annual growth rate in NAV over the past 15 years, the last thing anyone cares about is the website. Sabvest trades at a tight discount to NAV, reflecting both the track record and the strong mix of unlisted companies in the portfolio. When the market can’t get those companies anywhere else, the tendency is for the discount to NAV to be lower.

Choose your investment holding company wisely. Pro tip: flashy websites don’t equate to performance. BM/DM


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