Naspers: all good things come to an end

RETURN AND RISK DYNAMICS: UNFAVOURABLE

Company has been standout contributor to returns.

SA investors have experienced solid investment returns over the past decade, with the FTSE/ JSE All Share Index (Alsi) returning almost 10% per annum versus 6% pa inflation. The standout contributor has been Naspers. Its weight in the Alsi has gone up 14 times over the last ten years.

Naspers has been an outstanding investment for those who have held the share from almost any point since its 1994 listing. Much of this excess return can be attributed to its Tencent investment, which has risen 43 times over the past decade.

Most SA investors have Naspers as one of the largest investments in their portfolios. But will Naspers continue to be as good an investment as it, or the broader SA market has been?

We believe the position size of a share in an actively-managed investment portfolio should be guided by the absolute return and risk expectations intrinsic in the share and company itself.

None so blind as those who won’t see

When a share has re-rated to the lofty price-earnings multiple Naspers has over the past few years, the implied margin of tolerance for negative surprises, missteps, trapped value or uncertain outcomes starts to reduce considerably.

There appears to be mounting reasons to indicate the return and risk dynamics for investing in Naspers from this point aren’t so obviously skewed in investors’ favour. We believe there are understated concerns:

Unlocking trapped value is proving difficult: Naspers trades at discount to the value of its Tencent’s stake, even though it comprises other operations. This discount has widened over the past few years, attributed in part to ‘other operations’ in Naspers collectively consuming more cash than they generate. Recently Naspers reduced its Tencent stake to 31.2%, with the cash raised allocated to fund these other operations and none to unlock immediate value for Naspers shareholders.

The probability of another ‘Tencent-type’ return investment for Naspers is low – virtually nil. The investing environment is considerably more competitive; there are many very large tech companies with strong balance sheets and cash to deploy.

The required growth implied by the current share price for Tencent’s average revenue per user is very, very high. It’s more probable Tencent’s overall rate of growth will taper.

Naspers’ opaque voting control structure is archaic and highly disenfranchising to Naspers-N share shareholders.

Naspers’ ownership in Tencent doesn’t entitle it to the usual ownership rights in a standard shareholding; Naspers is only enshrined with a right to an earnings and revenue stream. This unusual ownership structure has some implicit risks and hasn’t been legally tested under Chinese law.

A long-standing investment adage is “buy low and sell high”. The difficulty comes in the counter-intuitive forces which cause investors to want to hold their winners and sell their losers. Naspers has been a great story of investment success for investors. But “trees don’t grow to the sky”.

Delphine Govender is CIO at Perpetua Investment Managers