Searching for Growth

MULTICHOICE

One such example is Multichoice Group, a business that secures video content rights and delivers this content to customers through satellite technology. The growing adoption of broadband internet in developed markets has allowed operators such as Netflix to lay siege on offerings such as DSTV. Netflix does not need to layout any physical infrastructure to distribute content – companies such as Telkom have done this for them. As a result, Netflix can reach a large number of customers at lower pricing points. On the face of this evidence, it is easy to disregard Multichoice as an investment opportunity. However, using quantitative tools to generate ideas limits the impact of preconceived notions in an investment process. Upon further introspection of Multichoice, it becomes clear that the investment opportunity rests solely on the prospects in the Rest of Africa -

• Satellite remains the cheapest and most efficient way of distributing long-form video content to the mass market across the African continent and is expected to remain so for some time.
• Multichoice’s Rest of Africa business generates R15bn in revenue from 11 million active users but has delivered -R11bn cumulative losses over the past three years.
• Five years ago, management decided to reposition the business to focus on the mass market, resulting in lower pricing points and significant growth in the number of active users.
• The business has reached scale, and Multichoice can extract significant cost savings by negotiating with content providers.

Netflix, and other similar operators, are expected to continue eating into the subscriber base in SA. But we think that the offsetting profit growth from the Rest of Africa should be more than enough to compensate investors with a three-year investment horizon.

RISK MANAGEMENT

Investing in any company, whether through a value or growth philosophy, is not without risk. The adoption of broadband internet in the Rest of Africa may turn out to be faster than expected. The SA customer base may erode quicker than we expect. The currency translation effects from economies such as Nigeria could also be unfavourable.We believe that it is important to build investment portfolios that are well-diversified to mitigate any macro or stock-specific shocks that may arise unexpectedly. Therefore, we always supplement our fundamental views with a comprehensive, quantitative risk management process to build a risk-controlled portfolio of growth stocks. Firstly, we ensure that no stock contributes a dominant portion of the portfolio’s tracking error. In other words, we diversify the risk we take relative to the benchmark to ensure that we minimise the impact of any one stock on the overall portfolio's performance. Secondly, we ensure that most of the active risk we take in a portfolio is stock-specific and not systematic to minimize macro factors such as currency risk. We expect these risk controls combined with our selection of growth stocks, to increase our probability of outperforming benchmarks over the long run.