Naspers’ problem children


Naspers and Prosus released their full-year results on 27 June 2022, which revealed a decline in trading profit, core headline earnings per share, and free cash flow.

Naspers CEO Bob van Dijk downplayed the earnings decline, saying, “the group delivered strong growth and scale across our businesses, positioning them for continued growth”.

Van Dijk focussed on their 24% revenue growth, saying it represents a “strong and consistent performance in a volatile environment”.

“We invested in our segments and strategic mergers and acquisitions over the year, reflecting our belief in the potential of the businesses we are building.”

Market commentators were not convinced.

Moneyweb’s Simon Brown said the number that struck him was that 125% of the profits come from Tencent.

Tencent contributed $6.273 billion to Naspers’ trading profit, while its eCommerce operations recorded a $1.120 billion trading loss.

The losses in most eCommerce segments, including food delivery, edtech, and etail, increased by over 100%.

Craig Antonie, chief investment officer at AnBro Capital, said outside of Tencent, only the classifieds investments generate positive adjusted earnings.

However, these components are more like a rounding error if they are compared to the Tencent contribution.

“Overall, the rest of the segments lost about $880 million for Naspers over the last reporting period – hardly something to be happy about,” he said.

He said the market has doubts about Naspers and Prosus outside of Tencent, which is why it trades at such a large discount to its net asset value (NAV).

Sasfin Securities deputy chairman, David Shapiro, echoed Antonie’s views, saying Naspers and Prosus shareholders are mainly interested in Tencent.

“Shareholders are not interested in the loss-making food delivery, edtech, or food delivery businesses,” he said.

Naspers CEO Bob van Dijk

Naspers and Prosus under fire

Naspers has been trading at a significant discount to its net asset value for years, putting pressure on the management team to unlock value.

One of the strategies to unlock shareholder value was to list Naspers’ Internet businesses separately under the newly established Prosus.

Naspers claimed that it unlocked around R150-billion of value for shareholders through the Prosus listing, but the significant discount remained.

In another attempt to unlock value and reduce the trading discount to its assets, Naspers investors were asked to swap their stock for shares in Prosus in 2021.

This deal did little to add shareholder value and was described as “idiotic” by hedge fund manager Albert Saporta.

“It’s even more idiotic than the creation of Prosus, which was very idiotic,” Saporta said.

“I had never seen a situation where management would create another structure above the holding company to reduce the discount, which is what Naspers did when they created Prosus.”

“Now, two years down the line, they’ve realised it’s not working, and the discounts are higher than before, and they’ve come up with an even more stupid idea — a cross-holding which will happen after the tender is successful.”

In the latest attempt to unlock value,  Naspers and Prosus have embarked on a share repurchase programme.

The programme is designed to increase net asset value per share, taking advantage of Prosus’s and Naspers’s trading discounts to their underlying net asset value.

The repurchase programme is open-ended and will run as long as elevated levels of the trading discount to the group’s underlying net asset value persist.

The programme is funded by an on-market sale of Tencent shares held by Prosus.

The company said Tencent is supportive of the withdrawal by Prosus of its voluntary restriction on the sale of its Tencent Shares.

Naspers’ management decisions slated by Sean Peche

Ranmore Fund Management founder, Sean Peche, has previously slated Naspers and Prosus management for poor acquisitions and destroying shareholder value.

Peche highlighted that in April 2021, Prosus sold 192 million Tencent shares, which amounts to 2% of its holding, for $14.6 billion.

Tencent’s share price has fallen significantly since then, making it seem like an excellent decision that should be commended.

Not so fast, said Peche.

Prosus agreed not to sell any more Tencent shares for the next three years as part of the deal. It means they suffered a significant hit on their remaining 29% stake in the Chinese tech giant.

Prosus will also remain exposed to the whims and fancies of the Chinese Government, which has caused hardship for tech giants like Tencent and Alibaba.

The worst part is what Prosus management did with the $14.6 billion it made from selling a portion of its Tencent stake.

Last year, Prosus spent $6.3 billion buying back stock at €89.20. These stocks would cost $5.3 billion today, which means shareholders lost $1 billion.

The management team also spent R53 billion buying Naspers shares at R3,318 each. These shares are now worth R37 billion, destroying R16.5 billion in shareholder value.

In August, Prosus announced a $4.7 billion deal buying Indian payment services provider BillDesk.

Peche said BillDesk’s unaudited management accounts showed a profit of $36.8 million and a net asset value (NAV) of $257 million.

It means Prosus paid 131 times earnings and 18 times the net asset value.

“It must be a small, high-growth business. Nope, apparently, 44 billion payments already take place in India with Billdesk generating $92 billion of total payment value,” Peche said.

Considering the significant transaction value and $36.8 million profit, it equates to a net margin of only 0.04%.

“Hang on, don’t you want businesses with pricing power in an inflationary environment because 131 years is a long time to wait just to get your money back before any return,” he said.

Naspers used the rest of the cash from the Tencent sale to buy more Delivery Hero shares a few months ago.

“According to Bloomberg filings, Naspers/Prosus spent €3.1 billion in 2021 buying 26.6 million shares at an average price of €117 per share,” Peche said.

After a recent trading update, which was essentially a profit warning, Delivery Hero’s share price collapsed to €42.

“This means Naspers is down 64% on its Delivery Hero investment last year,” he said.

Peche said with all these billions disappearing, it is good to keep cash away from the Naspers and Prosus management team.

Daily Investor asked Naspers for feedback about Peche’s comments, but the company did not respond.

How individual Naspers/Prosus companies performed

Naspers has three direct investments – 100% ownership in and Media24 and a 42% shareholding in Prosus.

In the last financial year, Media24 made a trading profit of R17 million and Takealot made a trading loss of $7 million.

Prosus, through its significant Tencent shareholding, is where most of Naspers’ value lies.

Prosus has a large portfolio of technology and internet companies, but delving into these companies’ financials is challenging as many are not listed.

The good news is that a handful of these companies are listed, which makes it possible to assess their profitability.

The table below shows the net income margins of Prosus’ listed investments.

The first column lists the most recent net income, and the second shows the company’s average net income since listing.

Net income of listed companies owned by Prosus
Company Most Recent Average Since Listing
Tencent +40.14% +33.99%
Silvergate +45.95% +28.79%
Sinch +5.61% +4.66% -0.37% -1.19% -2.75% -1.13%
Remitly -8.45% -20.57%
Skillsoft -10.94% -58.72%
Udemy -15.52% -19.60%
Delivery Hero -18.79% -53.27%
Similarweb -50,11% -32.91%
Bakkt -464.57% -371.97%

The summary shows that only three of the eleven listed companies are profitable.

Silvergate and Tencent have been exceptional performers.

However, Prosus only made a $0.01 billion investment into Silvergate. Its performance is insignificant in comparison with Tencent.

Prosus’ financial results revealed that, besides Tencent, only its classifieds business is the only good performer.

The classifieds business’ $25 million profit is dwarfed by the significant losses of its other segments:

  • Food delivery – $725 million trading loss.
  • Payments and fintech – $60 million trading loss.
  • Edtech – $117 million trading loss.
  • Etail – $42 million trading loss.
  • Other eCommerce – $202 million trading loss.

The $6.3 billion trading profit from Tencent has to make up for the huge losses of Naspers and Prosus’ other investments.

Considering these figures, it is no surprise that many Naspers shareholders have been begging for Tencent to be unbundled to unlock value.