Bosses must realise Naspers’s true value
The defence I would make on behalf of Naspers managers is that the difference between the market value of Naspers and the market value of its stake in Tencent and other listed entities has narrowed sharply, to the clear benefit of Naspers shareholders. This difference had widened almost continuously since 2014, and was as much as R800bn in early 2018. It has recently halved to about R400bn.
But the Naspers managers have done much more than hold a stake in Tencent. Had they done nothing more than this, Naspers would be worth an extra R400bn. They have undertaken a very active and ambitiously expensive investment programme. They have invested the growing flow of dividends they receive from Tencent into this programme and have raised much extra equity and debt capital to fund their investments.
Given the difference between the value of Naspers and the value of its listed assets (overwhelmingly Tencent), it is clear the marketplace has a very poor regard for the ability of this investment programme to add value for shareholders. That is to say, to earn returns from it that will exceed the returns shareholders could realise for themselves if the cash derived from Tencent were distributed to them, and the extra equity or debt capital had not been raised on their behalf.
The share market expects Naspers to lose rather than add value with its investments and ongoing business activity. Hence the company is valued at much less than the sum of its parts. But the value gap has closed significantly recently, for which management deserves credit.
The difference between the market value of its assets net of debt and the market value of Naspers itself can be attributed to one of three essential forces and judgments of them.
First is the expected net present value (NPV) of its investment programme. That is the market’s very negative estimate of the difference between what the (large) sum of capital expected to be allocated to investment and the value to shareholders these investments are expected to deliver.
Ideally the expected NPV would have a positive value. In the case of Naspers, given the R400bn value gap, the estimated NPV can be presumed to register a large negative number. The expected cost to shareholders of maintaining the Naspers head office — including the benefits provided to its CEO — also reduces the value of a Naspers share, as it does for all firms.
A further factor adding to the gap between the sum-of-parts valuation and the market value of a holding company might be the differences between the book value attached to unlisted investments by the holding company and the market’s perhaps lower estimate of their value. Listing the assets and/or unbundling them may prove that the market had been underestimating their value, and so help close the value gap.
It would appear that in the opinion of the marketplace, management’s recent efforts in these regards have been more rewarding for shareholders, some R400bn worth. It’s the result, perhaps, of a more disciplined approach to allocating fresh capital that the marketplace has appreciated. It may reflect the more favourable market reaction to a more predictable, less dilutive approach taken by managers, compared to rewarding themselves with additional shares. And also perhaps by a greater apparent willingness to list and sell off subsidiaries capable of standing on their own two feet.
We would suggest to Naspers that incentives provided for managers in the future be based on one critical performance measure: closing the gap between the sum-ofparts value of Naspers — that is its net asset value — and its market value. Shareholders would surely appreciate such an alignment of interests.
Kantor is chief economist and strategist at Investec Wealth & Investment. He writes in his personal capacity.