EXECUTIVE REVIEW OF OUR PERFORMANCE

MultiChoice Group: Steady margins despite cost normalisation.

During the year ended 31 March 2022 (FY22), MultiChoice Group (MCG or the group) continued to scale its core business platform and expand its ecosystem by increasing the variety of services offered to customers. The group added 0.9m 90-day active subscribers to close the year on 21.8m subscribers, an increase of 5% year-on-year (YoY). The subscriber base in the Rest of Africa maintained its solid growth trajectory, increasing 7% YoY primarily on the back of investment in successful local content productions and live sporting events. The South Africa business reached the 9m subscriber milestone, but growth rates were subdued due to the tough ongoing economic environment and elevated prior year numbers as consumers prioritised video entertainment during the COVID-19-related lockdowns. The 90-day subscriber base comprises 12.8m households (59%) in the Rest of Africa and 9.0m households (41%) in South Africa.

Group revenue increased 3% (7% organic) to ZAR55.1bn, with the stronger ZAR resulting in a reduction in revenue contribution from the Rest of Africa and Technology businesses upon translation. Subscription revenues amounted to ZAR45.3bn, representing solid 5% organic growth. Advertising revenues rebounded after the negative impact of COVID-19 in the prior year, growing 37% YoY (40% organic). Irdeto’s revenues were affected by the COVID-19 pandemic, silicon shortages and supply chain disruptions, which resulted in a 9% reduction on an organic basis.

Despite the ZAR1.1bn impact from the normalisation of content costs that were deferred into the current financial year from the prior year, group trading profit remained flat at ZAR10.3bn (1% organic growth). Trading profit margins were steady at 19%, benefiting from a 14% (24% organic) narrowing in trading losses in the Rest of Africa, the recovery in advertising revenue and a continued focus on cost control across the business. Total content costs increased 9% (13% organic) mainly due to acquisition of rights to popular sporting events such as Euro 2020, the British and Irish Lions Rugby Tour and the Tokyo Olympics, as well as a continued ramp up in local content investment and non-recurring content refunds received in the prior year.

The group’s well-established cost optimisation programme delivered another ZAR1.2bn in cost savings, with major contributions from renegotiated contracts for sports rights and international general entertainment content. Operating leverage was marginally negative as the sharp content cost normalisation was not fully offset by revenue growth.

MCG continued its strategic shift of differentiation through local content. The investment in local content was stepped up to produce 6 028 additional hours, representing growth of 32% YoY and accounting for 47% of total general entertainment content spend. As a result, the total local content library is now approaching 70 000 hours. Further to the five major channels launched in the first half of the financial year, the group expanded its offering by launching two Portuguese-focused channels in Angola and Mozambique. In South Africa, the group’s second major co-production, Reyka, was broadcast to critical acclaim during Sunday night prime time and has garnered international interest. Recipes for Love and Murder, the group’s latest co-production, was launched late in the financial year with positive early audience share.

Core headline earnings, the board’s measure of sustainable business performance, increased by 6% YoY to ZAR3.5bn. This represents a strong recovery from the 26% decrease reported at the half-year as activities normalised in the second half relative to the prior year and a weaker ZAR reduced realised losses on foreign exchange contracts.

Consolidated free cash flow of ZAR5.5bn decreased ZAR0.2m or 3% YoY. This was due to several once-off payments, including the ZAR0.6bn in tax security deposits made in relation to the ongoing Nigerian tax audit, ZAR0.3bn in chipset prepayments to secure the FY23 set-top box supply amidst a global chipset shortage and a ZAR0.2bn prepayment made on additional satellite capacity for the Rest of Africa.

As part of the group’s periodic asset review process, and in line with its conservative accounting policies, a loss on the derecognition of information technology assets amounting to ZAR0.3bn was recognised in the current year.

The group paid direct cash taxes of ZAR3.6bn and remains one of the largest taxpayers in Africa. The amount was lower than the prior year due to a lower third top-up tax payment and reduced profitability in South Africa.

Net interest paid decreased by ZAR36m to ZAR497m. This is attributed to a reduction in USD interest on the group’s transponder leases due to a stronger average ZAR during the year, higher interest rates in South Africa benefiting interest income, offset by an increase in interest paid of ZAR115m related to the working capital and KingMakers term loans.

The strength of the balance sheet remains a core focus in supporting new investment opportunities and providing short-term funding for Rest of Africa. Some ZAR8.1bn in net assets including ZAR6.2bn in cash and cash equivalents, combined with ZAR5.0bn in available facilities, provide ZAR11.2bn in financial flexibility to fund the group’s operations. This strong financial position is after ZAR4bn was utilised to settle the MCG and Phuthuma Nathi (PN) dividends in September and an early ZAR0.5bn repayment of the KingMakers term loan in March to reduce the impact of non-deductible interest costs in future years.

Notwithstanding liquidity constraints in Nigeria, the group continued to extract cash throughout the year. Cash holdings of ZAR2.5bn (FY21: ZAR2.5bn) held in Nigeria, Angola and Zimbabwe remain exposed to weaker currencies.

SEGMENTAL REVIEW

South Africa

The South African business faced an increasingly difficult consumer climate, with FY22 growth rates impacted by rising unemployment levels, intermittent loadshedding and a short disruption caused by the tragic July riots in Durban and Johannesburg. YoY comparisons, reflecting muted growth of 1% or 0.1m subscribers on a 90-day active basis, were also distorted by the boost to prior year subscriptions when consumers prioritised video entertainment services during strict COVID-19-related lockdowns.

Revenue increased 4% to ZAR35.6bn. This was attributed to a ZAR0.8bn recovery in advertising revenue and a 1% increase in subscription revenues, driven by subscriber growth in the mass market and the uplift from annual price increases. The return of live sport and other value adding initiatives, contributed to reducing churn on Premium relative to the prior year. Although the ongoing change in customer mix resulted in monthly 90-day average revenue per user (ARPU) dropping from ZAR277 to ZAR269, the 3% decline YoY is less than prior years and was underpinned by the improved Premium trend, annual price increases and a partial recovery in commercial subscription revenues.

Trading profit declined marginally by 1% to ZAR11.0bn, representing a trading margin of 31%. Profitability was supported by the recovery in advertising revenues and the group’s ongoing cost-optimisation programme but was negatively impacted by consumer pressure in the middle market, as well as a normalisation of content costs and sales and marketing expenses.

SuperSport yet again delivered world-class productions given a bumper calendar of major sporting events. Record viewership was achieved for Euro 2020, the British and Irish Lions and the Tokyo Olympics. SuperPicks, a free-to-play predictor game and the group’s first product collaboration with KingMakers, was launched in Nigeria at the start of the 2021/2022 English Premier League season and already has 0.5m registered users. Content renewals for the year included US golf and all tennis majors, SA athletics, the European football championships, Serie A, the FA Cup and the new United Rugby Championship. SuperSport Schools, now 100% owned by the group, represents an exciting opportunity to develop schools’ sport and the app has already broadcast 5 249 live games of schools sport during FY22.

Growth in Connected Video users on the DStv app and Showmax service is outpacing the market and the unit economics of this business keeps improving. Paying Showmax subscribers were up 68% YoY, while overall monthly online users increased a pleasing 28% YoY. A major driver of this segment has been the ongoing focus on localisation, including expanding local payment channels and the enabling of local billing in various markets. In addition, local content was stronger than ever with titles like DevilsDorp, the Real Housewives franchise and The Wife. Showmax Pro delivered an enhanced customer experience, which included the Tokyo Olympics, Euro 2020 and every English Premier League game.

In terms of product offering, MCG’s Explora Ultra set-top box allows DStv customers to seamlessly enjoy the best of local content, sport, kids entertainment and news, while also offering access to third-party applications such as Showmax, Netflix and Amazon. The announcement of DStv as official launch partner of Disney+ in South Africa is a further extension of the group’s aggregation strategy, bringing customers access to more content, as well as the convenience of addressing all their entertainment needs in one central place. DStv Internet, which was launched in September, is seeing an acceleration in growth rates. The DStv Rewards programme, which supports retention and has been successful in reducing dormancy, is gaining good traction and is approaching a million customers after just 18 months. Digital adoption continues to track well with around 75% of customer touch-points now being managed through the group’s self-service channels. Due to the ongoing global silicon chip shortage, the DStv Streama launch has been delayed and is now expected to launch in the first half of the next financial year.

Rest of Africa

The Rest of Africa business, which benefited from the popularity of local content such as Big Brother Naija and live sporting events, grew its 90-day active subscriber base by 0.9m subscribers to 12.8m. While revenue of ZAR17.9bn reflects a strong 14% organic increase, it is only 4% higher than the prior year due to the impact of translating Rest of Africa’s USD revenues at a stronger ZAR for reporting purposes. Subscription revenue grew at similar rates and contributed ZAR16.3bn. 90-day ARPU improved by ZAR6 on an organic basis to ZAR110, supported by a stable DTH subscriber mix, the success of the GOtv Supa bouquet (DTT) and inflationary price increases in most markets.

Trading losses amounted to ZAR1.2bn, representing a 24% improvement YoY on an organic basis. Strong growth in subscription revenues was somewhat offset by an increase in content costs due to a normalised sporting schedule, increased local content investment and non-recurring content refunds received in the prior year.

Local currency depreciation was less severe, resulting in an overall headwind on reported results of only ZAR0.1bn (FY21: ZAR1.2bn). Major currency movements on average against the USD were the Nigerian Naira (-5%), Ghanian Cedi (-7%), Angolan Kwanza (+5%), Zambian Kwacha (+7%) and the Mozambiquan Metical (+11%). Although liquidity challenges continued in Nigeria, the group successfully repatriated cash throughout the financial year, albeit at a premium to the official rate. Consequently, local cash balances in Nigeria were maintained at ZAR2.3bn (USD155m).

Technology segment

Irdeto, the group’s technology segment, was impacted by global silicon shortages affecting supply chains, as well as COVID-19-related disruptions in large markets such as India. Revenues of ZAR1.5bn were further depressed by the impact of a stronger ZAR upon translation from USD, down 16% YoY (-9% organic). The segment contributed ZAR0.5bn to group trading profit with margins strong at 33%.

During the current year, Irdeto continued to gain market share in media security by winning four new Tier-1 customers, including Sky New Zealand, a leading telecom and media operator in Australasia. Beyond video, Irdeto grew its device security business, expanded its deployment of connected vehicles with Hyundai, and started new projects like providing security software to large logistics companies.

Irdeto’s Trusted Home product was rolled out in South Africa as part of the DStv Internet launch, offering customers enhanced home network security, parental controls and Wi-Fi management solutions. Irdeto was also recognised through numerous industry awards, including the Cybersecurity Company of the Year award at the 2022 Cybersecurity Excellence Awards.

KINGMAKERS

On 29 October 2021, the group increased its shareholding in KingMakers from 20% to 49.23% for USD282m and settled the contingent consideration of USD31m related to the initial 20% investment. USD300m of the transaction was economically hedged at an all-in rate of ZAR:USD14.56, with the remaining USD12m settled out of the group’s USD cash reserves. The transaction was primarily funded by a ZAR4bn term loan concluded in November 2021. The loan has a five-year term and bears interest at the three-month Johannesburg Interbank Agreed Rate (JIBAR) +1.35%. Based on additional liquidity on hand at year-end, a decision was taken to make an early ZAR500m repayment on the loan to lessen the impact of non-deductible interest in future years.

KingMakers delivered USD131m (ZAR2.0bn) in revenues, representing robust growth of 68% YoY. It recorded a loss after tax (excluding amortisation on intangible assets identified on acquisition and MCG purchase price allocation adjustments) amounting to USD19m (ZAR0.3bn) as increased revenues were offset by investment in people, product and technology to further scale the business. Although revenues are still primarily generated in Nigeria, the business is now also active in Kenya, Ghana and Ethiopia. The product and market expansion plans are fully funded through the MCG investment and KingMakers had USD203m (ZAR3.0bn) of cash available at 31 December 2021.

NIGERIA TAX AUDIT

The group has two ongoing Nigerian tax matters, one involving MultiChoice Nigeria Limited and one involving MultiChoice Africa Holdings BV. After receiving assessments from the Nigerian Federal Inland Revenue Service (FIRS), the group disputed these claims and appeared in front of the Tax Appeal Tribunal with both matters being postponed on various occasions.

On 16 February 2022, an agreement was reached with the FIRS that legal proceedings will be stayed and that an integrated tax audit will commence during March 2022 for both the MultiChoice Nigeria and MultiChoice Africa Holdings BV matters. The audit process, which covers corporate income tax, value added tax and transfer pricing, remains ongoing with all parties fully cooperating.

As part of the process, the group has made ZAR0.6bn in tax security deposits on a without-prejudice and good faith basis. These were recorded as current receivables pending the outcome of the audit process.

Based on the latest facts and circumstances available, no tax provision has been made, nor has a contingent liability been disclosed in the FY22 results. The group maintains its position as a law-abiding corporate citizen and continues to engage constructively with FIRS to bring the audit to a timely and fair conclusion.

SHARE TRANSACTIONS

In order to preserve cash reserves, the group transferred a further 3.8m treasury shares (valued at ZAR0.4bn on the date of transfer between two group companies), to fund the current year’s awards to employees under the group’s restricted stock unit (RSU) share plan.

The group’s buy-back programme, implemented in FY20, has now realised ZAR105m in cash savings (calculated as the difference between the average share buyback price and the spot price at the time of transferring the shares into the share trust). Based on the success of this approach, a further 2.5m shares were purchased in the second half of the current financial year at an average price of ZAR121 per share to fund future RSU share awards. As a result, a total of 4.6m shares at an average price of ZAR113 per share remain unallocated for future use at the end of FY22.

SUBSEQUENT EVENTS

Other than the declaration of the dividend after the reporting date, as explained below, there have been no other events that occurred after the reporting date that could have a material impact on the summary consolidated financial statements.

CORPORATE SOCIAL RESPONSIBILITY

The group continued to play its role as a responsible corporate citizen. This included the ongoing investment in the MultiChoice Innovation Fund and the broader African broadcasting industry, as well as initiatives to drive increased employment equity and gender equality across the group’s employee base. MCG also supported South African businesses at the Dubai Expo, raising more than ZAR150m from global investors for these local entrepreneurs in the process.

Sport is another area where the group has a meaningful impact on society. Not only does MCG play a crucial role in the development and broadcasting of schools’ sport through its SuperSport Schools initiative, but it is also stepping up its investment in women’s sport. This includes support for the SA Netball team leading up to the 2023 World Cup in South Africa, where SuperSport will be the host broadcaster and production will be delivered by a world first all-female production crew.

Furthermore, in recognition of the group’s continued contribution to support the communities in which it operates, MCG was one of only two South African companies to be named on the 2021 “Change the World list”, compiled by Fortune magazine. During September 2021, the group also partnered with 13 other global companies to support the Earthshot prize, which seeks to find and fund extraordinary solutions to the world’s greatest environmental challenges by 2030.

DIVIDEND

The board has declared a gross dividend of ZAR2.5bn or 565 SA cents per listed ordinary share for FY22. This dividend declaration is subject to approval of the MultiChoice South Africa Holdings Proprietary Limited (MCSAH) dividend at its annual general meeting on Wednesday, 24 August 2022. The finalisation date for the dividend declaration by the company will be Thursday, 25 August 2022. Subject to the aforementioned MCSAH approval, dividends will be payable to the company’s shareholders recorded in the register on the record date, being Friday, 9 September 2022. The last date to trade cum dividend will be on Tuesday, 6 September 2022 (shares trade ex-dividend from Wednesday, 7 September 2022). Share certificates may not be dematerialised or re-materialised between Wednesday, 7 September 2022 and Friday, 9 September 2022, both dates inclusive. The dividend payment date will be Monday, 12 September 2022. The dividend will be declared from income. It will be subject to the dividend tax rate of 20%, yielding a net dividend of 452 SA cents per listed ordinary share to those shareholders not exempt from paying dividend tax. Dividend tax will be 113 SA cents per listed ordinary share. The issued ordinary share capital as at 9 June 2022 was 442.5m ordinary shares (including 17.0m shares held in treasury). The company’s income tax reference number is 9485006192.

OUTLOOK

As a platform of choice, the group will look to further expand its ecosystem by identifying growth opportunities that leverage its scale and local capabilities. MCG will continue to be a trusted partner for its customers’ evolving needs, enriching their lives by delivering entertainment and relevant consumer services underpinned by technology.

The group will continue to focus on and drive penetration of its video entertainment services across the African continent, offering customers an array of unique and rich media content in a convenient and cost-effective way. More specifically, the year ahead will see the group increasing its investment in local content, targeting an allocation of 50% of total general entertainment spend by FY24. As a key differentiator, local content and select sporting events such as the English Premier league, UEFA Champions League and the 2022 FIFA World Cup will contribute to the uptake of the group’s linear and streaming services.

Returning the Rest of Africa business to profitability in FY23, generating strong cash flows and maintaining a strong balance sheet while innovating and building out our platform remain our key pillars for long-term value creation.

DIRECTORATE

Mr SJZ Pacak retired as an independent non-executive director with effect from 1 April 2021.

Mr JH du Preez was appointed as an independent non-executive director with effect from 1 April 2021.

Mr JA Mabuza, the group’s lead independent director, sadly passed away on 16 June 2021. Mr JJ Volkwyn was appointed as the lead independent director with effect from 1 July 2021.

Mr FLN Letele retired as a non-executive director with effect from 1 December 2021.

No other changes were made to the directorate of the group.

PREPARATION OF THE SUMMARY CONSOLIDATED FINANCIAL STATEMENTS

The preparation of the summary consolidated financial statements was supervised by the group’s chief financial officer, Mr TN Jacobs CA(SA).

The group operates in 50 countries, resulting in significant exposure to foreign exchange volatility. This can have a notable impact on reported revenue and trading profit metrics, particularly in the Rest of Africa where revenues are earned in local currencies while the cost base is largely USD denominated.

Where relevant in this report, amounts and percentages have been adjusted for the effects of foreign currency and acquisitions and disposals to better reflect underlying trends. These adjustments (non‑International Financial Reporting Standards (IFRS) performance measures) are quoted in brackets as organic, after the equivalent metrics reported under IFRS. A reconciliation of non-IFRS performance measures (core headline earnings and free cash flow) to the equivalent IFRS metrics is provided in note 11 of these summary consolidated financial statements. These non-IFRS performance measures constitute pro forma financial information in terms of the JSE Limited Listings Requirements.

The group’s external auditor has not reviewed or reported on forecasts included in these summary consolidated financial statements. The audit report of the group’s external auditor is included in the Independent auditor's report and the assurance report on non-IFRS measures is included in the Assurance engagement report. The auditor’s report does not necessarily report on all the information contained in these summary consolidated financial statements. Shareholders are therefore advised that, in order to obtain a full understanding of the nature of the auditor’s engagement, they should obtain a copy of the auditor’s report together with the full consolidated annual financial statements, available on the group’s website at www.investors.multichoice.com/annual-results and at its registered office.

On behalf of the board