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Coronavirus: Prosus shines with increased demand for food deliveries

By David Whitehouse
Posted on Thursday, 16 April 2020 09:59

Virus Outbreak South Africa
A woman returns from shopping in Thokoza, east of Johannesburg on March 30, 2020. Coronavirus is likely to stimulate demand for home delivery. Themba Hadebe/AP

Home food delivery and digital ways to pay for it are suddenly all the rage. That means it’s time for a fresh look at Prosus.

The company, spun off by South African media conglomerate Naspers on the Amsterdam and Johannesburg stock markets in September 2019, is effectively Naspers trading under another label in the hope of attracting a broader investor base. Analysis of both Prosus and Naspers shares is usually dominated by the stake held in Chinese tech giant Tencent – and the discount to the value of Tencent at which they trade.

But the unlisted Prosus portfolio also includes stakes in Swiggy, the leading food delivery service in India, iFood in Latin America and Delivery Hero, which operates in 40 countries. Prosus also owns 100% of PayU, which operates in South Africa, Nigeria, Kenya and 15 other markets globally.

Prosus shares have held up fairly well during the coronavirus pandemic: on 15 April they traded at around 62 euros in Amsterdam, versus 68 euros on 2 January.  Operational improvements in Prosus’s unlisted portfolio can drive the share price higher, regardless of what happens to the discount to net asset value, says Patryk Basiewicz, an equity analyst in London. “The unlisted part is actually very sexy.”

  • Due to coronavirus, the unlisted parts of Prosus “will become cash generative much faster than previously thought,” Basiewicz says.
  • Food delivery capabilities could potentially be expanded to any kind of goods. This will create the possibility of dividends, which will cut the discount. “People will see it as a real investment.”

READ MORE: South African food supply to normalise after unprecedented demand

Opportunity Cost

Basiewicz, who grew up in South Africa, sees Prosus as a buy on a five-year horizon. He notes that five years is now longer than it used to be. The opportunity cost of investing in Prosus holds him back from a strong recommendation. “Everything is cheap and there are lots of companies with potential.”

There needs to be solid performance in the unlisted portfolio over the next six to 12 months to support the investment case, he says. Prosus is likely to be tempted to make acquisitions over the next year – it may be wise to wait and see what they will do. “There are too many moving parts at the moment.” But in the longer term, the pandemic can be “a clear positive” for the company.

The PayU model will need an upgrade:

  • At present PayU is purely geared to the processing of transactions and needs to offer more added value, he says.
  • Basiewicz gives the example of goods which are ordered online, but are either never delivered, or do not arrive in a satisfactory condition.
  • This require chargebacks and refunds, which PayU can’t yet facilitate.“They really need such a system to take full advantage of COVID.”
  • PayU may have to accept some of the risk involved from banks in order to offer the capability, he says. “That step hasn’t been taken.”

In a piece published on Smart Karma, Basiewicz also points to the potential of Prosus’ online educational apps such as Udemy and BYJU.

  • If some online learning outcomes during confinement surprise on the upside, he says, there may be “a permanent shift in supply and consumption of education services.”
  • Though education is only a small part of the portfolio, the apps could be sold to raise cash to develop other businesses, he says.

The onus is now with Prosus management, which “has to show some credible performance metrics” to measure progress. Investors need confidence that they won’t waste cash and dividends would help to reassure them, Basiewicz says.

READ MORE: COVID-19 lockdowns threaten Africa’s vital informal urban food trade

The Bottom Line: Given the favourable positioning of its businesses, Prosus is in a strong position to win over new investors over by putting dividends on the agenda.

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