Financial Mail - Investors Monthly
Why Naspers is still a buy
How far can Naspers keep climbing? Well, the company has hundreds of millions of customers, writes Maarten Mittner
The dust has now settled on the revelation in September that Naspers chairman Koos Bekker had offloaded 70% of his stake in the media giant, netting himself a good few billion rand.
Initially, it seemed Bekker’s decision to lighten his exposure to Naspers caused some jitters in the media company’s share price, which weakened from its April high of R2 029 to under R1 700 in August and September.
But Naspers has since clawed back much of this ground, and was around R1 950/share at the time of going to print. Does it remain a buy? On the face of it, you’d be hard-pressed to suggest a company trading on a price-to-earnings ratio of 108, which had already climbed 27% this year, was still a good punt. Especially after it rose 101% in 2013 and 38% last year.
And yet the analysts are still backing it to grow further.
“We believe the sum of the parts of the company shows it can climb north of R2 000/share,” says Anchor Capital analyst Sean Ashton.
Of 18 analysts who value the stock, 16 rate it a “buy”. On average, they expect the Naspers share to hit R2 366 within a year.
Of course, the biggest factor in Naspers’s trajectory has been China, thanks to its 34% stake in Tencent.
It’s hard to overemphasise Tencent’s reach into the pockets of the largest consumer base in the world. Its WeChat instant messaging platform has 600m users, and the Wall Street Journal said in August that “mobile advertising is expected to be the engine for Tencent’s growth over the next few years”.
Says Ashton: “Naspers is really a China play nowadays, with Tencent its key asset.”
And if you think analysts are bullish on Naspers, they’re gaga for Tencent. Of 48 analysts who cover the Hong Kong-listed company, 42 rate it a “buy”, five a “hold” and only one a “sell”.
In a research note in August, JPMorgan said Naspers “represents one of the cheapest and attractive entry points into Tencent over the ‘mobile age’, particularly given that mobile performance and monetisation is yet to ramp up”.
Though Tencent has lost roughly 25% of its market value since April, Ashton believes it is capable of delivering annual profit growth of 20%-25% over the next few years.
But the main reason analysts are betting on Naspers is that more than 90% of its current R800bn in value is attributable to its 34% of Tencent.
This means that investors in Naspers are getting the rest of its assets, including the highly cash-generative MultiChoice, at a bargain rate.
And there are still some pretty promising assets in Naspers besides Tencent.
For example, Naspers’s e-commerce interests are not profitable yet, but their revenue growth has been steady.
Ashton believes that the group’s e-commerce ventures could become a money spinner over the longer term.
“The scale is sufficient, with a lot of spending on aspects such as e-commerce advertising, which can be pulled back and easily cover the R7bn losses at present,” he says.
Barclays Research analysts also hold this view, pointing out that Naspers operates online classifieds across more than 40 markets. “These assets could be worth R550/share,” they say.
Naspers’s other big foreign venture is in India, where its OLX online classified service is already seen as a thumping success, operationally. Already, OLX is scoring 1,5bn page views a month in India, compared with the Russian Avito interests at 8m page views a month.
These investments form part
❛❛ Naspers’s other big foreign venture is in India, where its OLX online classified service is seen as a thumping success
of the R10bn-plus spending by Naspers in 2015 alone on Internet or e-commerce ventures.
Of course, the profits have yet to emerge from these operations, which means Naspers is still relying on the cash coming from China.
But it is the promise of big things to come that has led Barclays analysts to put a price target of R2 650/share on Naspers.
The often overlooked pay-TV interests in MultiChoice remain a key asset for the group, with a consistent record of growth, says Barclays. “In the second half of 2015 they added 232 000 new users, compared to 309 000 in the second half of 2014.”
There aren’t many naysayers on Naspers, but Inkunzi Investments analyst Petri Redelinghuys is one.
Redelinghuys says it’s clearly overvalued. “Sentiment over the short term can still drive the share, but I think it will eventually settle around R1 800,” he says.
He says the problem with Naspers is that it needs to maintain growth at present levels just to keep pace with its high market valuation.
“It is difficult to see the share going much higher,” he says.
But considering most analysts still rate it a “buy”, this is clearly not a popular opinion.
Ashton says Bekker’s decision to sell 70% of his stake doesn’t appear to have negatively affected Naspers’s prospects. Despite his sale, Bekker remains one of the company’s top 20 shareholders with 4,7m shares, worth more than R9bn at today’s share price.
“It is not a negative to monetise wealth and at the same time take a back seat, as Bekker has done,” Ashton says.
Bekker’s sale wasn’t disclosed on the stock exchange, as directors’ dealings ought to be. However, the company says that because he was on a year-long sabbatical when he sold the shares, there was no obligation to report it to shareholders.
As it stands, there is little clarity on how long Bekker intends to stay as chairman.
But it is reasonable to expect that he will become less involved with the operational aspects of the company as CEO Bob van Dijk takes on more.
One source of difficulty in future may be the company’s archaic control structure.
The way it works is this: the shares that trade on the JSE are Naspers N-shares, which control only 35,8% of the votes in the company.
The remaining 64,1% of the Naspers vote is held by a handful of opaque companies which control all of Naspers’s A-shares, which have 1 000 times the vote of the N-shares.
Those entities are Keeromstraat, Wheatfields 221, Nasbel and Heemstede — but the identity of the owners of those companies remains shrouded in mystery.
Conjecture suggests they include Bekker, former Naspers chairman Ton Vosloo and a raft of former company insiders, including Boetie van Zyl, Cobus Stofberg, a university friend of Bekker, and Jeff Malherbe, who
❛❛ The often overlooked pay-TV interests in MultiChoice remain a key asset for the group
led the opposition to Media24 journalists appearing before the Truth & Reconciliation Commission in 1997.
In the absence of clarity over who sits behind these A-shares, all sorts of wild rumours continue to do the rounds.
Some analysts have expressed disquiet about this structure, saying it needs to be overhauled. This may seem like a sideshow, but it’s important, given that ownership of these entities effectively means control of Naspers.
It remains to be seen whether this structure will be overhauled while Bekker is chairman, given that it remained intact for many years when he was CEO.
But with Bekker taking a step back, perhaps the time is right. News reports say that Bekker has bought a 700 ha wine farm in Tuscany in Italy for US$500m or R6,6bn, which is sure to have made a dent in the estimated R12bn-R14bn he got by selling his stake in Naspers.
For the moment, Naspers investors can afford to sit back and look at the bigger picture, which is this: Tencent remains the key to their fortunes.
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