Analysis of multi-million rand losses and plummeting book value at Seacom
Seacom has suffered large annual losses and its valuation has fallen since its launch in 2009, but the company said its finances go beyond earnings and valuations.
Seacom was launched in 2009 and was Africa’s first submarine cable system along the east and south coasts of the continent.
It broke Telkom’s monopoly in the submarine cable market and helped bring affordable, uncapped broadband to South Africans.
Seacom gained tremendous support after its launch, but it didn’t take long for cracks to begin to appear in its business model.
Many competing cable systems, including WACS and EASSy, have been launched, driving international connectivity prices down.
Seacom has been forced to seek new sources of revenue, including launching IP VPN, Internet, IP transit, Ethernet and IPL offerings that compete with its wholesale customers.
The company faced a backlash from its major carrier customers, who signed long-term agreements with the company.
Its customers raised concerns about anti-competitive behavior and there was a growing risk of alienating their existing customers.
Although Seacom recognized that competition with its wholesale customers was a challenge, it continued to move up the value chain with new products.
Today, Seacom offers a full suite of ICT products, including connectivity, cloud and security solutions for small, medium and large businesses.
It even created consumer-grade ISP WonderNet to launch fiber-to-the-home services, competing with Afrihost, Axxess and Mweb.
Seacom is privately held and the initial funding for the $375 came from several sources:
- $75 million from developers.
- $150 million from South African private investors.
- $75 million in the form of a commercial loan from Nedbank.
- $75 million from Industrial Promotion Services (IPS) – a branch of the Aga Khan Fund for Economic Development.
Over the years, the shareholding has changed. Seacom is currently owned by the Aga Khan Fund (40%), Remgro (30%), Sanlam (15%) and Convergence Partners (15%).
Remgro’s annual reports provide a window into Seacom’s finances and tell the story of a company with mounting losses and a declining valuation.
Over the past eleven years, Seacom has recorded a total net loss of R283 million. It has only been able to generate profit three times since its launch.
The company’s book value, the present value of its assets minus its liabilities, fell from R2.9 billion in 2010 to zero a decade later.
Embedded value, a measure of value based on expected future earnings, fell by R1.4 billion over the same period.
It is unclear why Remgro reduced Seacom’s book value to zero but maintained its intrinsic value at around R3 million.
Remgro may want to maintain a relatively high intrinsic value for a possible future sale by its Seacom share.
The charts below provide an overview of Seacom’s financial performance since inception. All values are in million rand.
Seacom’s director of sales and marketing, Steve Briggs, told the Daily Investor that the plummeting book value and steep losses are the result of complications arising from technical accounting requirements for a business of Seacom’s nature.
“Poor finances are tied to a decision made at some point not to bear the cost of annual revaluation of major assets, but rather to depreciate them,” Briggs said.
It is coupled with the consequence of the transfers of indefectible rights of use (IRU) carried out by the company, which require raising a balance of deferred income.
He said as such, net profit did not reflect the company’s positive annual free cash flow generation, which is the metric tracked by Seacom’s board.
“The book value of assets also does not reflect their market value,” Briggs added.
Significant losses and falling valuations raise questions about whether Seacom shareholders have benefited from investing in the company.
Briggs explained that Seacom’s shareholder returns are a function of valuation plus dividends at the run rate.
“Seacom has been a regular payer of large dividends due to its cash earnings,” he said.
“Shareholders are comfortable with the return on investment (ROI) of their investment.”
This article was first published on daily investor and is republished with permission.