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Finweek English Edition - - INVESTMENT - Sean Ash­ton is chief in­vest­ment of­fi­cer and fund man­ager at An­chor Cap­i­tal.

De­spite a phe­nom­e­nal run in the com­pany’s share price (year to date, it has risen 32% fol­low­ing a 52% rise in 2012) and a seem­ingly high val­u­a­tion level, we think there is more to come from Naspers* over the com­ing years.

First, the basics: Naspers is es­sen­tially a col­lec­tion of dis­tinct me­dia busi­nesses in vary­ing stages of growth/de­vel­op­ment, some of which are pub­licly traded in their own right. Ap­ply­ing mar­ket prices to the group’s listed in­vest­ments (ie Ten­cent, Mail.Ru) and what we re­gard as fair value for the re­main­ing as­sets (prin­ci­pally pay TV) yields a value of ~R865/share, or 19% above the cur­rent share price. Naspers has typ­i­cally traded at a dis­count to its sumof-the-parts value, prob­a­bly due to the non-con­trol­ling na­ture of its larger in­vest­ments, but we think the cur­rent dis­count is rea­son­able and the value of the over­all pie should con­tinue grow­ing at 20%+, which should sus­tain con­tin­ued strong share price per­for­mance.

It’s im­por­tant to un­der­stand the ma­jor value driv­ers of this di­ver­sif ied me­dia group. The group’s sin­gle largest as­set is its 35%-held as­so­ciate, Ten­cent, which is the largest In­ter­net com­pany in China. Ten­cent is pub­licly traded in Hong Kong and at cur­rent share prices, Naspers’s share in this busi­ness amounts to R625 per Naspers share, or 70% of our es­ti­mated

value for the group. The fun­da­men­tals of this busi­ness are im­pres­sive: it has 825m on­line user ac­counts (grow­ing 10% year on year), gen­er­ates a 35%+ op­er­at­ing mar­gin and a re­turn on eq­uity of 35%+ and has sus­tained earn­ings growth of 46% per an­num over the past four years. While its growth has been heav­ily re­liant on grow­ing user num­bers and on­line gam­ing (users pay sub­scrip­tion fees for this), it is be­gin­ning to suc­cess­fully di­ver­sify rev­enue streams into e-com­merce and on­line ad­ver­tis­ing – th­ese now com­prise 20% of the to­tal. Ten­cent trades at a high 12-month for­ward P/E ra­tio of 24 times, but it sur­prised on the up­side in the first quar­ter of 2013 by de­liv­er­ing earn­ings growth of 36% and we ex­pect it to sus­tain earn­ings growth of 20%+ for the next few years. Given the growth pro­file, we an­tic­i­pate the rat­ing to re­main high, which should sus­tain strong share price per­for­mance, ul­ti­mately f low­ing through to Naspers.

Stick­ing with In­ter­net-driven busi­ness mod­els, Naspers has been in­vest­ing heav­ily in build­ing e-com­merce plat­forms in Eastern Europe (think Kala­hari.com, Bid or Buy, etc), seem­ingly with the broad ob­jec­tive of build­ing the “Ama­zon.com of emerg­ing mar­kets”. While parts of this are prof­itable (eg Al­le­gro), the group’s sig­nif­i­cantly in­creased level of “de­vel­op­ment spend” in build­ing busi­nesses in the re­gion is sup­press­ing the re­ported prof­its of the In­ter­net seg­ment – group de­vel­op­ment spend­ing was R1.2bn in the 2009 fi­nan­cial year and we es­ti­mate it will rise to >R3bn in this fi­nan­cial year. This re­sults in Naspers ap­pear­ing ex­pen­sive when as­sessed solely on the cur­rent earn­ings mul­ti­ple of ~30 times, but much of this spend­ing is largely dis­cre­tionary (hope­fully in cre­at­ing the next Ten­cent!) and we es­ti­mate that man­age­ment could in­crease bot­tom-line earn­ings by 20%+ sim­ply by scal­ing back this de­vel­op­ment spend­ing to more “nor­mal” lev­els. It is dif­fi­cult to as­sess with cer­tainty the ex­tent of value be­ing cre­ated in the group’s e-com­merce op­er­a­tions in Europe while losses are still in­curred, but we think at least some value can be as­cribed – cur­rently, this is “lost” in the group’s over­all earn­ings base.

The group’s pay TV op­er­a­tions (25% of group value), while no longer the key driver of value, con­tinue to grow both sub­scriber num­bers and prof­its in dou­ble dig­its and gen­er­ate sub­stan­tial cash for the group (EBITDA ~R9bn), which can be used to grow other parts of the com­pany. Fi­nally, while Naspers’s tra­di­tional print me­dia busi­nesses de­tract from the growth story, th­ese as­sets now con­trib­ute less than 5% to the value of the group so are not a ma­te­rial de­trac­tor from the over­all growth story.

*Fin­week is a Me­dia24 pub­li­ca­tion, which is a sub­sidiary of Naspers.

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