Naspers trading update

Naspers issued a trading update on Friday, which saw the share price bounce off a depressed level, having been softer earlier as a result of TenCent numbers being a little shy of estimates. The stock closed at 544 ZAR, 22 ZAR off their all time highs which were reached at the beginning of the month. That is closing high, the all time high is 57790, for now that is. Over the last five years, the stock is up a whopping 192 percent. I can remember when the company was struggling, the stock actually traded below 12 ZAR a share late March 2002. Crazy. But the company was completely different back then. The company actually said in their 2002 final results commentary: "Pay television remains exposed to the vagaries of the rand and is a mature business." Pay TV was the biggest revenue generator back then, "internet" as a segment was one tenth as important. That was 2002.

If you do a simple analysis of the business back then, and then business now, the thing that stands out is that digital TV exceeded even their best expectations. I suspect that the "offering" from the state broadcaster has a lot to do with the attraction of the slimmed down monthly offering from DStv, in particular the sport option. Football has been key to that, who does not love football. In fact that is not true, some guy on the weekend told me that he was not really a football fan, after I politely asked him if he had seen the Zlatan Ibrahimovic goal for Sweden against England. I was more shocked to know that those folks did not actually know who he was. I moved swiftly along into a rugby and cricket conversation, they were easier there. But seriously, in 2002 Naspers had 1.28 million in their pay television. And their commentary was as follows back then, similar to that line in the paragraph above: "M-Net and SuperSport also reported satisfactory earnings growth. However, the pay television market in South Africa is reaching maturity, and subscriber growth will decline in future."


In the 2012 commentary Naspers could not be happier with 5.6 million pay TV subscribers. Of which 4 million are in South Africa, which added a whopping 492 thousand households to their subscriber base through the last financial year. The lower end offerings account for 42 percent of the base now. I guess they underestimated the uptake, like most people really, and I suspect that this small measure would also mean that South Africa has made progress. Yes. Progress. In ten years pay TV revenue for Naspers has increased over four times, pay TV EBITDA is up 14 fold. But that was not the real reason that the business changed and the share price has exploded, rather an inspired purchase of a stake in a Chinese Internet business called TenCent. And that business listed, and from then on in 2004 you were able to put a value to their stake. It was "nothing" in the early days. Really. The TenCent price traded at 4 Dollars, Hong Kong ones. The price as of today, 8 years later is 245 Hong Kong Dollars. An absolutely astonishing return for Naspers shareholders, and genius on the part of Koos Bekker and the rest of the Naspers management team. They have made themselves wealthy, but their shareholders, those people have really got rich. And I guess the best news is that Bekker will stay on until the end of March 2014.

It is the valuation of their internet stakes that have transformed the company. The route chosen was to go to the so called BRIC's and other emerging nations. Naspers have internet businesses in Eastern Europe, Russia, recently the Middle East. One of those, Mail.ru is listed in London, more on that in a second. TenCent is the big one, the Chinese internet business. There is an early days business in India (a JV with TenCent and Naspers), a South East Asian business that has deep enough ties to their pay TV business and several businesses in South America and Latin America. Plus also of course their business here on our continent. I took a screen grab from their Naspers snapshot document that they put out half way through this year. This shows their internet businesses globally:





Now this is important. At least I think it is. In those internet businesses there, how many of the users have English as their first language? Very few. Why this matters is because many South African analysts would not be natural users of their services. Although that should not matter too much, it is a natural bias towards a company whose product we use. I presume that most of you use their product, the TV offering at home. At least if you live in South Africa. The sport is amazing. I would only keep it for that, the rest of my family, not so much. But you get my point about the languages, they are a true emerging market internet company.


The trading update itself for the six months to end September is complicated, there is a once off profit from the sale of Facebook shares by Mail.ru, when Facebook listed I presume. Core headline earnings is however what the board considers the appropriate indicator. And that is expected to increase between 10 to 20 percent from the 921 cents in the prior period. Between 10 and 11 ZAR worth of core earnings. Excuse me, the stock closed at 544 ZAR last Friday, and they are only going to manage 11 ZAR worth of earnings at best? For the full year that number will be lucky to come in at 21 ZAR plus. But that has always been the trickiest part for the analyst community, to judge what Naspers is actually worth. I have tried several times, in our archive you can see our views. The market struggles to value the stock. When the results come late November in a couple of weeks time we will do an analysis of their businesses.