To narrow Naspers value gap, stop flinging shares and spaghetti

• Market seems to think larger cash pile means more chances to destroy shareholder wealth

Naspers had a down and up week to May 17. It ended more than 5% up in rand and almost as much in US dollars.

It had ended the previous week worth about R3,199, then lost about 4% on the Tuesday, only to regain 5% on the Wednesday and end the week almost unchanged. In (weaker) rands Naspers is now worth about R1.4-trillion.

The reason for this renewed enthusiasm for Naspers shares was a good set of results from Hong Kong-based Tencent. Naspers has a 31.01% share of Tencent worth about R2-trillion and so Naspers rises and falls on a daily basis with the value of Tencent — though not necessarily to the same degree.

That is because there is more to Naspers than its stake in Tencent. The market value of Naspers has trailed behind that of Tencent when both are measured in dollars. Tencent is up 12 times since 2010 and Naspers has added (only!) about six times to its 2010 value.

Tencent and Naspers have also outperformed the S&P 500 information technology sector, which includes all the big names in US technology stocks (Facebook, Apple, Amazon, Netflix and Google, to which Microsoft could be added). On a day-today basis there is a highly correlated movement between Tencent and the S&P information technology index. Tencent and Naspers are high beta plays on global IT, but with significant alpha (stock specific as opposed to marketwide influences) that adds to returns.

Yet Naspers, while worth R1.4-trillion, is valued at less than its stake in Tencent. Naspers has other assets that would add further to the difference between the sum of Naspers’s parts, its net asset value (NAV) BRIAN KANTOR and its market value. This difference between what Naspers would be worth if broken up and sold off and what it is worth as a going concern is now a mammoth R700bn, give or take a few million rand.

Naspers management, while to be congratulated on the decision to invest in Tencent in the early 2000s, could be accused of wealth destruction elsewhere. Everything else it has done, other than invest in Tencent, has on balance reduced the wealth of its shareholders, who would have done a whole lot better had Naspers done nothing but hold Tencent shares.

Naspers conducts a large investment programme, investing far more than the cash it has received as dividends from Tencent, which amounted to $248m in 2017. According to David Smith of Investec Securities, Naspers injected net cash into its ventures of $3.43bn in 2014, $1.43bn in 2015 and $1.98bn in 2016. In 2017 it extracted cash (reduced debts) by $1.8bn.

Naspers enjoyed a major success when it recently sold its stake in Indian internet company Flipkart for $2.2bn, realising a gain of $1.6bn, or a rate of return of about 21% a year over six years — about 30% or $500m more than the market had apparently thought it was worth. Clearly value adding, but not as value adding as the 41% a year returns generated by its investment in Tencent over the same period.

The proceeds of this sale, as well as the R10bn received from reducing the Naspers share of Tencent to 31%, have since been added to the Naspers cash pile. Were investors of the view that this cash could produce cost-ofcapital-beating returns of the Flipkart kind, the market value of Naspers would benefit and the gap between NAV and market value would narrow. Naspers might then perform more closely in line with Tencent.

But this appears not to be the case. The market appears to be of the view that the stronger the Naspers balance sheet, the more its stake in Tencent is worth and the more cash it has to invest, the more it will be inclined to invest in ventures that destroy value for shareholders. The cash invested by Naspers is expected to earn less than if the cash were returned to shareholders and invested by them.

The large difference between NAV and the market value of a Naspers share reflects in part the losses expected to be incurred in the investment decisions the company will make in future. The market value of Naspers is set lower to compensate shareholders for the danger that their capital will be wasted on a large scale. Only a lower Naspers share price, given the expected waste of cash, can then offer market equalling returns; hence the gap between NAV and the market value.

A further reason why Naspers has lagged Tencent is that Naspers has issued a large number of shares. Shares have been issued not only to fund its investment programme but also to reward its managers. There were 290.6-million Naspers N (low voting) shares in 2006. By 2017 this had grown to 431.5million shares in issue, an increase of 48%. From 2012 to 2017 Naspers issued an extra 46.8-million shares, with 58% of the new issues going to staff.

Tencent has issued very few shares. The value of a Naspers share reflects in part the danger of further dilution of this order of magnitude. Naspers could add market value and close the value gap by adopting a more disciplined approach to its investment and incentive programmes and convincing investors it will do so — to quote its chairman Koos Bekker, were it to hold back on throwing spaghetti at the wall in the hope some will stick. And to align the interests of managers and shareholders by rewarding in some proportion to a reduction in the absolute gap between the NAV and Naspers’s market value.

Perhaps some progress in this regard is being made. In 2018, the performance of Naspers and Tencent has been better aligned, as reflected in a more stable Naspers: Tencent ratio. Shareholders in Naspers will hope for more of this.

NASPERS ENJOYED A MAJOR SUCCESS WHEN IT RECENTLY SOLD ITS STAKE IN INDIAN INTERNET COMPANY FLIPKART