A way to end Naspers executives’ free ride

It’s no secret that Naspers’s ordinary shareholders are unhappy with the company’s remuneration policy and some want to see a radical shake-up.

“I think for management to get options on the full Naspers performance is not a true reflection of value creation,” one shareholder says.

“Tencent is a passive shareholding … value creation is really in the rump of Naspers.”

The spectacular growth of Naspers has been fuelled almost entirely by its stake in Chinese internet operation Tencent. In fact, Naspers’s share price is 98% correlated to Tencent’s, according to some analysts.

It does seem unfair then that executive pay is tied to the performance of this otherwise fantastic investment.

One idea being punted is that management should be remunerated partly through a long/ short equity policy.

The idea is that management would benefit when Naspers’s share price rises more than Tencent’s, with pay based on long positions in Naspers stock and short positions in Tencent.

It’s an aggressive suggestion but it would be a strong incentive for management to close the massive and growing discount that Naspers trades at relative to Tencent.

The discount is now more than 40%.

It’s natural for a holding company to trade at a discount, although analysts say a “fair” discount is usually 20%.

Some holding companies in other countries implemented similar pay structures a year ago. Needless to say, executives at these companies have had a rough year.

In the age of instant entertainment downloads, music stores are becoming increasingly obsolete.

Why then does the Clicks Group insist on holding on to its Musica retail division?

While it remains the country’s leading entertainment retail brand — not hard to pull off when you are the only one running in the race — structural changes in the music industry, with the move to online streaming and downloading, together with a weak release schedule saw Musica sales in 2017 declining by 7% year on year.

As far as CDs and DVDs are concerned, Musica dominates the market with a more than 77% share of the music sector and close to 60% of the movie market. This noncore asset, which was acquired in 1992, has been struggling to keep up growth numbers, affecting the overall performance of the Clicks Group.

In the retail division, where margins grew 10 basis points, Clicks and The Body Shop showed strong growth in operating profit, which was partially offset by a reduction of R28m in Musica’s profit.

Clicks Group CEO David Kneale has assured investors that Musica has plans in the pipeline to derisk the retailer by moving to consignment stock with suppliers, “a business model successfully employed by leading music retailers in the UK and Europe”, he said.

Management maintains that the pressure on discretionary consumer spending and a weak schedule of new music and movie releases were the main reasons behind the weak performance of Musica.

It remains to be seen whether the turnaround strategy will reap rewards.

At R160 per share, analysts still consider it to be an expensive stock and they warn investors to be careful not to confuse a defensive operation with a defensive investment.