Ellies Holdings banks on new sales.

CAPE TOWN – Free-to-air TV company Sabido, which owns and is backed by HCI and Remgro, plans to launch a new satellite TV service in October this year.

Sabido will launch the OpenView HD service to South African and later to regional viewers. The service will initially include 15 television channels and operate according to the same advertising led, free-to-air model that is built on. However consumers will need to invest in a satellite dish and set top box to access the new service.

As one of South Africa’s biggest suppliers and installers of satellite dishes and set-top boxes, Ellies Holdings is banking on the new network – and possibly a flurry of activity from industry gorilla Multichoice – to boost sales. It is predicted that the OpenView HD service could attract a million customers within its first year and three to five million customers in three years.

That is a lot of set top boxes.

As a result of this and other cash-hungry opportunities, Ellies management has opted not to a pay a dividend this year, choosing to retain the cash to ‘fund growth’. The share fell 1.8% to 790c on Tuesday as shareholders registered their disappointment.

However Ellies results for the year to April 2013 were strong. Revenue increased 16.4% to R1996m, profit before tax rose 36% to R312m and HEPS rose by 36% to 74cps. The balance sheet is tight, but the company saw a net positive cash movement of R33m, compared to last year’s negative movement of R67m.

The consumer division, which contributes 65% of earnings, saw profits increase by 51.5% and gross margin increase by 2%. According to company financials this is thanks to the Eskom Phase 1 Project Power Save programme, the “Green shop within a shop” concept, and the expansion of Ellies’ domestic and commercial lighting ranges.

But within this division, growth slowed in the second half of the year as Eskom’s power save programme reached its end and another wasn’t rolled out. Also, South Africa’s migration from analogue to digital terrestrial television (DTT) has been delayed by bungling at the department of Communications. Despite exporting DTT products into Africa, Ellies inventory leapt by 32% to R667m as it was forced to stockpile product ahead of the eventual migration.

This is a problem as Ellies is investing significantly in capacity and product development. For instance it is producing around 80 000 set top boxes a month, all of which chokes up much needed cash. “Delays in the fruition of some of the group’s prospects continue to impact on our short-term working capital demands,” the company says.

However small caps analyst at Vunani Securities, Anthony Clark points out that the deadline for migration is looming – it’s December 2015. “The rest of Africa is running ahead of us. At some point government will wake up and it’s going to be a massive scramble to supply those 9m set top boxes it has promised to subsidise.”

The Infrastructure division, which incorporates power infrastructure for among others, solar and wind projects; telecoms solutions, and in future water infrastructure through its post year end acquisition of Botjheng Water, increased revenue by 23%. But the division reflected a decline in PBIT of 9.9%. “Ellies is investing heavily in its new telecoms product – diesel generator optimisation – which led to the 2% gross margin drop,” says Clark. “The technology can deliver significant savings to operators of cellphone masts and they should start to see orders coming through.”

Clark is positive about Ellies’ move into the provision of water infrastructure services. “SA’s water network is on the verge of collapse. It’s the next big crisis in this country and Ellies’ is not the only company to have started to invest in this space.”

He is less complimentary on the decision not to pay a dividend. “This company has been listed a long time. It should be able to maintain a stable dividend payout policy. Yes, working capital is tight and gearing is around 30%, but Ellies is not in a precarious financial position.”

The company is trading on a forward PE of 10.9x, however the share has run hard in the last year, increasing 50% to 990c, before falling back to 790c.

Source: Moneyweb – Sasha Planting