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A letter sent this week to the non-executive boards of Naspers and Prosus seeks “constructive engagement” and “sends a strong message to the board” that a significant group of South African and global investors are unhappy, Rajay Ambekar, CEO of Naspers shareholder Excelsia Capital, tells The Africa Report.
Naspers has long traded at a hefty discount to the value of its assets, which include a stake in Chinese tech giant Tencent. Under plans announced in May, Naspers’ Dutch-listed spinoff Prosus will buy 45% of Naspers using its shares. The result in effect will be to move part of Naspers’ market capitalisation from Johannesburg to Amsterdam.
The South African company is in a stronger position than most listed companies to ignore dissenting shareholders.
A dual-class share structure means voting rights are concentrated in the hands of insiders, so protecting the company from direct attack from shareholders. If the investors are going to achieve their aims, it will be through influencing wider stock market perceptions of Naspers and Prosus.
- The Prosus transaction, argues the letter, “introduces elements which serve to increase complexity in the overall company structures, thereby reducing the likelihood of further value unlock, whether immediate or longer-term.”
- The deal will mean “worsening governance outcomes which will do very little to reduce the substantial discounts within Naspers and Prosus and could even widen them.”
- “We believe proceeding with this transaction in its current form despite the express reservations of such a large contingent of shareholders would significantly undermine Naspers and Prosus governance undertakings.”
- There is a lack of visibility over further steps to unlock value. “We believe that the weak share price reaction and widening of the NAV discounts of both companies subsequent to the announcement of the proposed transaction reflect this most disappointing reality.”
- Management incentives in Prosus are “dominated” by the performance of Tencent and take little account of other unlisted companies in the Prosus portfolio, the letter argues. “We believe that this misalignment is not addressed in this proposed transaction and therefore continues to contribute in part to the lack of value attributed by the market to these unlisted investments.”
- “Given that many of us have already expressed these in-principle reservations to the executive management team but have been unable to obtain clear understanding for how these views are being heard, we now wish to escalate our commonly held concerns” with the non-executive boards.
The letter is signed by institutions with a combined assets under management of R3.6trn ($260bn), Ambekar says in Cape Town. The response from Naspers “will shape the way the board is viewed” by the market, he says. Ambekar declined to release the names of the other signatories.
The Africa Report has contacted Naspers to seek a response.
Excelsia’s South Africa equity outlook
Excelsia Capital, founded by Ambekar in 2016, has $170m under management. The firm is an active, value-based investor which believes that markets are not efficient. As of 31 March, the fund’s top holdings were Naspers, Implats, Anglo American, MTN and Sibanye. The performance of its Excelsia Equity 27four fund is ranked at tenth out of 192 funds as measured by CityWire.
The outperformance was driven by taking advantage of the fear that dominated the market in the early stages of Covid-19, Ambekar says. He still sees some areas of value in the market, though is cautious on the outlook for miners despite their low price-to-earnings ratios.
- Iron ore producers are enjoying high margins, but there is an abundance of supply, Ambekar says.
- Supply is more constrained in platinum group metals, suggesting that prices may stay higher for longer, he adds.
- Ambekar is cautious on the outlook for gold. He sees real yields on US 10-year bonds becoming less negative or even turning slightly positive. That scenario is one under which gold has historically struggled, he says.
- Talk of a new “super-cycle” for commodities has left him unimpressed. “There’s no way to argue that commodity prices as a whole are at the start of a super cycle.”
Clearer value is to be found in South Africa’s banks, which are “very cheap,” he says. Bank valuations in the early stages of Covid-19 fell below even those witnessed in the Great Financial Crisis of 2008. “There’s a lot of upside left for banks” as they unwind credit-loss provisions, he says.
Ambekar is positive on construction-related stocks such as cement producer PPC due to a strong outlook for South African construction and infrastructure.
The restructuring of the company’s debts in the Democratic Republic of Congo to remove parent company liability is a “massive positive,” he says. “It removes a big risk.”
Some investors may have been aware of that positive news ahead of time as PPC’s share price rose sharply in the days preceding the announcement. South Africa remains a “leaky market,” Ambekar says. “Regulators should investigate those trades.”
The smart long-term move for Naspers is to engage with shareholders and increase attention to the non-Tencent parts of its portfolio.
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