All in to reduce the discount
CEO Bob van Dijk shows he’s serious about alleviating investors’ concerns regarding the Tencent gap
Meh ... That has mostly been the market’s reaction whenever CEO Bob van Dijk has unveiled a plan to reduce the gaping discount between Naspers’s share price and the value of its stake in Chinese tech giant Tencent.
Not this time, though. Naspers stock rallied more than 20% on Monday after the company announced an “open-ended” share repurchase plan, while its Amsterdam-based subsidiary, Prosus, gained nearly as much. In what Van Dijk calls “a big bazooka idea”, the company will keep selling Tencent shares, bit by bit, and buying back stock of Naspers and Prosus until it has unlocked enough value.
Management kept mum on how long it would maintain this approach and at what level it would call it quits, but said it could sell as much as 2% of Tencent’s issued share capital a year, netting $10bn at current prices.
That’s big money in anyone’s book. Selling something larger than Absa every year, and using the proceeds to buy back shares, is a bold move. And it comes on top of last year’s $6.2bn in share repurchases and another $2.4bn the year before.
The reason? Naspers and Prosus have been trading at levels that made it worth between 50% and 60% less than their stake in Tencent. Eye-watering stuff, but Van Dijk calls it an “opportunity created by a market imperfection that we are going to make use of at scale”.
Both he and CFO Basil Sgourdos say Naspers and Prosus are severely undervalued, so much so that the best thing to spend their huge cash pile, and the funds realised by selling more of Tencent, is on their own stock.
That is simple arithmetic for most market watchers.
“You are reducing the number of shares in issue which increases the value per share so the discount should narrow,” says Argon Asset Management equity analyst Ian Brink.
But after several underwhelming attempts by Van Dijk and his team in the past, they need to show their resolve this time.
“I also think the signalling is important,” says Brink. “Management seems quite determined to reduce the discount and it seems they will persist with the buyback until they have achieved a material narrowing.”
Naspers, the largest primary listing on the JSE, has lost more than half its value in the past year as technology companies fell out of favour on global markets. And tech is what the company is about.
The Tencent stake, held through Prosus, makes it one of the largest tech investors in the world. Over the past decade it has used billions in
Tencent dividends, and more recently share sales, to build up a sprawling portfolio of businesses in food delivery, electronic classifieds, online payments and education technology.
When Naspers and Prosus release results, the report focuses mostly on these “consumer-facing internet businesses”, which include Brazil’s iFood, India’s Swiggy, OLX and PayU.
At a glance, the results for the year to end-March look like a disaster. Trading losses for the Prosus e-commerce portfolio have more than doubled over the past year, from $429m to $1.1bn. A substantial drag on performance, if you consider that the group’s trading profit, which of course includes Tencent, was $5bn, down from $5.6bn last year.
But Van Dijk and Sgourdos are chuffed with the performance.
All of the e-commerce business segments grew revenue by more than 40% and classifieds by more than 90%. Prosus has been piling in loads of cash to accelerate growth in some parts of these businesses.
“The e-commerce portfolio revenue growth was decent and the increased losses were driven by increased investment into the various business lines where the management think they can create value and a decent return on investment,” says Laurium Capital portfolio manager and research analyst Dwayne Dippenaar.
Naspers management like talking about their “core” business and “adjacencies”. The core, they say, is growing more profitable. But the adjacent opportunities cost money to explore and get to fruition.
One such example is OLX, where the regular old peer-to-peer selling business is chugging along with revenue rising by about 40% and trading profit by nearly as much over the past year. But OLX
Autos — yes, big tech companies can certainly be second-hand car dealers too — saw a 173% jump in revenue, but also a much bigger trading loss.
“Now the widening trading loss is a function of the additional investment in autos to scale the business and cement a first-mover advantage — which makes sense,” says Brink. “But what makes investors nervous is the fact they don’t know the shape and time frame for the investment into this growth opportunity.”
For years shareholders in Naspers, and more recently Prosus, have worried that as soon as parts of the business become profitable, more money is piled into other ventures that have often taken years to get into the black, or never managed to do so at all.
“A level of trust in management’s judgment is required and that depends on if you believe management are good allocators of capital,” says Brink.
But are they? Some commentators clearly believe the nearly identical top management at Naspers and Prosus need lessons in capital allocation.
Flagship Asset Management portfolio manager Pieter Hundersmarck calls them one of the worst teams around.
“Management have decided to sell down their best asset [Tencent] at a depressed price, to buy their own shares, all while their ‘growth assets’ will need ongoing capital,” he says.
And executives got paid nearly as much as in the previous year despite the discount almost doubling and the company’s NAV having halved during the period, he adds.
“If you like Tencent, buy the share directly. If you like food delivery, buy the Delivery Hero share directly. If you like classifieds, buy Schibsted directly,” says Hundersmarck.
Schibsted is an online classifieds competitor to Prosus in some markets and a joint venture partner in others.
But over the past few years it was Facebook Marketplace that pulled the rug from under the company’s classifieds businesses. An exception was Avito in Russia, where Facebook owner Meta Platforms has not been able to make substantial inroads.
For years analysts have viewed Avito as one of the best assets in the Prosus portfolio, apart from Tencent. Sgourdos placed a value of more than $6bn on the business before the war in Ukraine and the sanctions against Russian companies and individuals. Sell-side analysts have cut more than $5bn from their estimate of the Prosus unlisted e-commerce portfolio due to uncertainty about Avito. And to toe the line on sanctions, Prosus has put the business up for sale.
But Sgourdos would not be drawn on what now represents value for Avito, saying only: “Who knows what we’ll get for it?”
War and sanctions are not the only threats.
In an environment of higher interest rates and inflation, businesses in the Prosus stable are not only poised for growth as consumers shift their behaviour online, but are also exposed to spending habits becoming more thrifty.
The portfolio is a mixed bag with different business models and footholds in various geographic areas.
“At an overall level I would expect the various operations to continue generating decent growth even in a tough consumer environment as they take market share from traditional business channels and there is a continued move online that has been accelerated by Covid,” says Laurium’s Dippenaar.
Brink, from Argon, agrees that where an online service is priced more attractively than an offline service one could see greater adoption of online as prices increase. “But there is a breaking point at some point, if prices increase by too much and consumers of those services are under pressure, they start reducing their purchases of both online and offline.” To weather that storm, Van Dijk and Sgourdos have a cash pile of nearly $14bn at their disposal, if they don’t spend it all on buying back shares.