South Africa’s (SA’s) FTSE/JSE Capped SWIX Index (Capped SWIX) gave back some of its October gains during the month (-1.5% MoM), leaving it up only 3.6% YTD. With just one month left in 2019, it looks like it will be another lacklustre year for the SA bourse. Domestically focussed companies with positive performances for the month were hard to find. Mr Price was up (+9.5% MoM) after reporting better-than-expected results, as was Capitec (+3.2% MoM), buoyed by the finalisation of its acquisition of Mercantile Bank. Clicks, which seems almost impervious to the challenges of the local economy, also ended the month higher (+1.9%). Gold shares continued their recent rollercoaster, down 13% MoM, but still up 80% YTD, while platinum shares continued to defy gravity, up another 7% MoM (now more than 150% higher YTD and responsible for two-thirds of index performance YTD). British American Tobacco was also a strong contributor in November (+9% MoM) as the US regulator surprisingly dropped its push for legislation to limit nicotine in cigarettes to non-addictive levels. Local tech heavyweight, Naspers, and its recent spin-off, Prosus, had another disappointing month (-3.1% MoM in aggregate) and are now down 14% in aggregate since Prosus’ September spin-off. Much of that underperformance has come since the October announcement of its bid for food-delivery company Delivery Hero, with these two stocks underperforming their largest holding, Tencent, by about 12% in rand terms since then.
The rand was one of the few currencies to end November stronger against the US dollar (+3.0% MoM) as it survived a ratings downgrade from Moody’s on 1 November, kicking off the month with a relief rally. The rand was further buoyed as the SA Reserve Bank (SARB) resisted pressure to cut interest rates at its November meeting despite SA inflation coming in at 3.7% the day before the meeting – comfortably below the SARB’s 4.5% target. In our view, the SARB seems more focussed on compensating for the government’s fiscal indiscipline rather than encouraging businesses and consumers to save less and invest/spend more. SA government bond yields retreated after the SARB meeting to end the month at 8.45%, only marginally lower than before the Moody’s decision.
Multichoice: 1H20 results
MultiChoice reported a solid set of interim results for the six months to end September, with core headline earnings rising 24% YoY. The progress that was made in reducing the losses in the Rest of Africa (ROA) was particularly notable and was chiefly responsible for the jump in Group earnings. This strengthens our conviction that MultiChoice under-promised on the likely timelines to return ROA to profitability when it communicated with investors at the time it was spun out of Naspers. What was also notable in the recent results, however, was the impact of macroeconomic headwinds it is facing in SA and ROA. Subscriber growth momentum slowed considerably, downtrading to lower priced bouquets continues, while the ability to push through price increases (routine in the past) remains challenging. In ROA, currency weakness was pronounced and offset the progress it made on cutting losses to some extent.
A further point to keep in mind is that the new business strain when MultiChoice is growing subscribers quickly (set top box subsidies mainly) means that short-term profitability is flattered when subscriber growth is subdued, such as 1H20. The outlook was relatively cautious, highlighting the macro headwinds it is facing and an expectation of faster subscriber acquisition in the second-half. We remain positive on the prospects for MultiChoice as it continues to make progress towards profitability in ROA and Group cash generation improves as a result. We believe, at current levels, the market is still implying a negative value on ROA, which provides good upside for the share as this becomes less justifiable. Furthermore, as a highly cash-generative business and with a very strong balance sheet, MultiChoice is expected to be a strong dividend payer in years to come.