Shares in South Africa-based Naspers have climbed this year, pulled up more than 30% by the jewel in the crown, the company’s 31% stake in Chinese Internet giant Tencent. But the discount to the overall Naspers portfolio has become even wider. Naspers Chief Financial Officer Basil Sgourdos said in November that the company’s share price was trading at a 50% discount to the value of its assets.
The idea that a digital shift in consumer behaviour could finally start to cut the evergreen discount is tempting. COVID-19 has “accelerated structural shifts in consumer behaviour to online providers”, which greatly benefits operations at Naspers and Prosus, argues Wium Malan, emerging markets analyst with Smart Karma in Cape Town.
Naspers owns 72.66% of Prosus, which trades in Amsterdam.
- There should be a discount to listed net asset value (NAV) of about 25% for Prosus and about a further 20% for Naspers, says Malan.
- Even allowing for that, Malan sees upside of more than 40% in the Naspers share price.
Losses in the non-Tencent part of the Naspers portfolio and the increasing size of the company on the Johannesburg Stock Exchange (JSE) are the main factors driving the discount, says Peter Takaendesa, head of equities at Mergence Investment Managers in Cape Town.
- Naspers has a wide range of social media, classified advertising, fintech and food delivery investments, including Mail.Ru and Avito in Russia, and Swiggy in India.
- But Tencent still contributes about 120% to Naspers and Prosus core earnings. So “all other assets in their portfolio in aggregate terms are still contributing significant losses to the bottom line,” says Takaendesa.
- Naspers, then, is effectively a geared play on a Tencent stake which the Johannesburg market is structurally unable to accurately value.
- Finding solutions on profitability and the size of Naspers in relation to the JSE would go “a long way in reducing the discount sustainably,” says Takaendesa. But he expects it will be many years before those solutions are found.
According to Anchor Capital in Johannesburg, the Naspers discount has averaged 25% over the very long term. That widened to a range of 35%-45% from 2016 to 2019, as the size of Naspers on the JSE became a constraint for investors who can’t hold too much of a single stock.
- Naspers and Prosus combined make up close to 30% of the JSE shareholder-weighted (SWIX) index. That presents “significant concentration risk” for investors who track that index, Takaendesa says.
- Many investors have sought a solution by changing benchmarks to the JSE Capped SWIX index, which limits individual stock weights in the benchmark to 10%, Takaendesa says.
- Still, this creates selling pressure on Naspers shares whenever it performs better than other index shares due to the required quarterly rebalancing.
Prospects for a reduced discount are no better than Prosus, which was spun off by Naspers in September 2019.
The Prosus control structure makes it “immune to outside influence on strategy” and “puts off a universe of active investors who want to have a say on its behaviour,” argues Smart Karma analyst Travis Lundy.
- Naspers owns 900,000 unlisted A-class shares in Prosus, which carry 1,000 times more votes than ordinary shares. These would kick in if its Prosus stake falls to 50%.
- It’s “unlikely that the Naspers board will be comfortable with giving up control of Prosus any time soon,” says Takaendesa.
- The most likely action is further reduction of the Naspers stake in Prosus to about 51% from the current holding just above 70%, he says.
This would go some way in reducing the size of Naspers on JSE, although it would be unlikely to fully resolve the discount issue, adds Takaendesa.
The structural issues at Naspers and Prosus will leave shareholders doubly exposed if Tencent shares take a dip.
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