Why Naspers is still a buy

How far can Naspers keep climb­ing? Well, the com­pany has hun­dreds of mil­lions of cus­tomers, writes Maarten Mit­tner

Financial Mail - Investors Monthly - - Front Page -

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.

IM

■■

Koos Bekker … step­ping back some­what from op­er­a­tions

Old me­dia and new ... South African as­sets are a bon­sella on top of the Chi­nese In­ter­net busi­ness

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