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.