Tiso Blackstar Group — Update 20 April 2016

TBGR’s strategy has undergone significant change in the last year, including a major transaction in June 2015, which gave the portfolio its current composition of African media and industrial holdings, both quoted and private. Management has identified media as an attractive and high-value sector in Africa and intends to make that the sole focus of TBGR in future. It believes TBGR is well-placed to take advantage of early-stage participation in potentially high-growth markets, particularly in broadcasting in Kenya, Ghana and Nigeria. The profitable core media holdings in South Africa operate in a more mature market and have a leading position there, especially in print newspapers. Bolt-on opportunities remain in South Africa as well as scope to reduce overheads at TMG, TBGR’s largest single holding. The intended disposals of the now non-core holdings, valued at ZAR2.25bn (c £100m) at 31 December 2015 would enable the group to pay back all its debt (ZAR419m at group level and ZAR765m within TMG or £20m and £37m respectively at 23 March 2016) and leave significant funds for investment. It would also fundamentally change the company, making it a media group and possibly encouraging a re-rating as the basis for valuation moves from assets to earnings.

TBGR is an AIM- and Johannesburg-listed investment company with a portfolio largely composed of media (53%) and industrial investments, including a holding in another South African investment company, Kagiso Tiso Holdings (KTH). A transformative deal in June 2015 saw TBGR acquire the outstanding shares of TMG, South Africa’s second biggest listed media company, and increase its stake in Robor, a specialist steel manufacturer, from 19% to 51%. The steady cash flows from well-established businesses in the industrial and media sectors underpin a portfolio that is focused on finding value in the growing African media market. The portfolio contains a mix of quoted and private investments and the key performance metric is intrinsic NAV, which is calculated conservatively by management and the company’s auditors according to IFRS and International Private Equity and Venture Capital (IPEVC) guidelines.

TBGR has not made any new investments or disposals (other than real estate sales that were already planned at year end) since our initiation note in October 2015. However, management has continued to reduce debt arising from the acquisitions of the Robor and TMG stakes.

The portfolio is valued at ZAR4.8bn before debt of ZAR422m (31 December 2014: ZAR5.1bn and ZAR560m), a decline of 5.1% due largely to a fall in the market values of KTH’s listed investments of 5.6%. In sterling terms, the weak rand has reduced the portfolio by 25.1% from £283m to £212m before debt of £18m (31 December 2014 debt: £31m). More positively, TMG remained profitable in a difficult South African economic climate and both Robor and Consolidated Steel Industries (CSI) (each now deemed non-core) performed well. Robor posted ZAR13m of EBITDA in Q216 vs a loss of ZAR10m a year earlier and CSI increased revenues slightly over the period, on track to beat the target of ZAR2.1bn revenues for the year.

Tiso has confirmed its strategy change to a single sector focus on Media and has consequently identified non-core assets to be sold. The key investments for disposal comprise KTH, Consolidated Steel and Robor, which are earmarked for sale in the short to medium term, which we interpret as being in the next year, although naturally no firm timetable can be given. Proceeds will be applied to strategic acquisitions in the media sector, and are likely also to be applied to debt reduction and share buybacks. The rationale for the strategy shift is that management has identified the media sector as high-value, and given the company’s existing expertise, sees opportunity in the relatively immature markets available and the early-stage entry TBGR could make into many of them. In South Africa the sector is under great pressure and it is expected that opportunities for growth will arise in the coming months as weaker players struggle. Opportunities in other markets are also being evaluated. All possible additions will be assessed in terms of their growth prospects, the value TBGR’s management can add (including by leveraging existing assets) and how they can benefit existing investments too.

TBGR’s interim report showed flat intrinsic NAV over the six months to 31 December 2015 in the face of considerable headwinds in the South African economy. All the operating companies in the portfolio were profitable, offsetting a decline in the value of listed assets held through the stake in KTH. Most importantly, the company announced the change of strategy to become a single sector investment company, focused on media. Once the shift has been executed the share price is expected to be driven by earnings rather than by NAV. We highlight some key points from the results below.

While the South African economy continues to face challenges related to commodity prices, power supply, unemployment and government spending, TMG’s established business seems well-placed to weather the storm. It has remained profitable, moved early to digital, cut costs and maintained high print circulation. Management expects that either consolidation or failure of weaker players will thin out the competition in the South African print sector. Meanwhile in TBGR’s newer markets the International Monetary Fund (IMF) projects strong GDP growth, which should be of benefit to TBGR’s investments there. Reelforge’s estimate for 2014 advertising spend in Kenya, quoted above, was 10% higher than that for 2013. Figures for 2015 are not yet available.

TBGR continues to seek opportunities in sub-Saharan Africa and we would expect to see developments in Nigeria as Lagos Talk is launched and in Kenya as RAG continues to grow. The disposal of assets now considered to be non-core will be a key development. While there can be no certainty at the time of writing over the details of any sales, management says it will conduct them in such a way as to maximise value. These disposals, if they are executed at intrinsic NAV, as management expects, would enable TBGR to significantly reduce debt (a process already underway) and provide funds for future investment in the company’s chosen sector of focus. It has been reported in the press that Brait (BAT), a South African investment company, intends to sell its 25% stake in Prime Media, one of the country’s biggest radio broadcasters. Prime Media has a variety of businesses that might be complementary to TMG’s and we understand that TBGR’s management is assessing the potential opportunity.

The company continues to prepare to move its headquarters to the UK from Malta.

With intrinsic NAV nearly unchanged in rand terms, having risen 0.2% since June 2015, but fallen 16.1% in sterling as the rand has depreciated, the share price discount to NAV has widened to 42% in sterling (5 October sterling discount: 39.5%, current ZAR discount 48%) despite a sustained share buyback programme. NAV per share is now ZAR16.50 or 72p. Management is confident that the disposals of its non-core holdings in KTH, Robor and CSI, along with the remaining real estate portfolio, will be achieved at above estimated intrinsic NAV for those assets. The cash from those transactions would more than offset existing debt and would remove any market uncertainty as to the value of the assets. More importantly, TBGR would effectively become an operating company and likely to be valued as such, rather than as an investment company.

Given TBGR’s presence in media we show P/E ratios for African media companies in Exhibit 7 below to illustrate valuation metrics in the sector. This is not currently an appropriate metric for TBGR and no earnings value is available for TMG alone. We have excluded Naspers, Africa’s most valuable company, because it is very highly rated partly as a result of substantial holdings in Tencent, a Chinese social network, and Mail.ru, an online service provider in Russia. Nation Media Group and Standard Group are both listed in Nairobi and have interests in newspapers and broadcast media. A lack of estimates available for some of the companies below means we have used trailing EPS figures. As the table shows, TBGR is rated well below its South African and Kenyan peers and still would be even at 1x NAV or a share price of 72p. However, transitioning to earnings-based valuation comparisons will only come over time as the company executes its disposals and reorients specifically to media.