Annual report review, reaffirm buy

We saw Naspers release their annual report late last week, it is always a fabulous time to re-look at the company as an investment and see whether the reason you still hold them rings true. On an out and out earnings basis, the company is expensive, that much is true, on an NAV basis you are getting all the rest of the business for free. So it seems that the local market discounts the heavy weighting to Tencent and in doing that suggests that Tencent should be worth less.


Firstly, what do Naspers do now and what do they want to do in the future? A graphic capture from the annual report says it all:





Sounds rather ambitious and difficult to pin down at the same time, equally it is simplistic. The way I view it is simple, Naspers aim to be the champion of media platforms and ecommerce platforms mostly outside of the English speaking world. Their global platform spans all the continents, including the US and Canada, the focus will no doubt be in emerging markets.


The introduction spells that out:

"Naspers is a broad-based multinational media group with principal operations in internet services and ecommerce (especially online classifieds, etail and payments), pay television and print media. We operate predominantly in markets with growth potential. These include Africa, China, Latin America, Central and Eastern Europe, Russia, India, Southeast Asia and the Middle East. Most of our businesses are market leaders in their sectors."

The classifieds business are the likes of OLX, entail, think Kalahari.com, marketplace (swap), think Allergro, pricecheck.com is a comparison platform, Pay U is exactly that, a payments platform whilst the company has stakes in global growth businesses in India (Ibibo and Redbus.in). In amongst many other businesses that are key leaders in their geographies, that includes Souq.com and Flipkart, you might have heard of those businesses. So that is the ecommerce push, the next big growth area that Koos Bekker often refers to.

Next are the two businesses that you know possibly the best in the Naspers stable, the aforementioned Tencent (which trades on a very lofty 54 earnings multiple) and Mail.ru. Mail.ru is listed in the over the counter market in London and trades in Dollars, the current share price is close to 27.95 Dollars, the market cap is 3.32 billion Dollars at that level.


Naspers (through MIH) owns 29 percent of Mail.ru (see -> Mail.ru Shareholder Capital structure) which translates to 962 million Dollars, or at 10.6 to the Rand, 10.2 billion Rand. Interestingly Tencent owns 7 percent of this business, Mail.ru too. As a percentage of the Naspers market cap (545 billion Rand), Mail.ru represents only 1.8 percent. It was more, the share price of Mail.ru understandably has been under significant pressure.


As we pointed out above, the stake in Tencent is worth more than the Naspers market cap. Again this reiterates that the South African investment community think that the Chinese in Hong Kong overpay for Tencent, clearly there is more than a whiff of arrogance in that.


Just for comparison sake, Times Media (which after loads of selling of non core assets) owns Sunday Times, the Sowetan and the Business Day is valued by the market at 2.7 billion Rand or 0.5 percent of the value of Naspers. There was a time when these companies were considered peers, that time is best left to when Aurora touched the spinning wheel and fell into a deep sleep, through no fault of anyone, rather the sheer brilliance of Koos Bekker and some brilliantly timed acquisitions.


Interestingly the print assets, which consist of Media24, Paarl media, Abril (Brazil) and Jonathan Ball publishers still managed to generate EBIDTA of 1.073 billion Rand on 11.692 billion Rand worth of turnover. Pay TV, my favourite and most used Naspers product had revenues of 36.271 billion Rand and EBIDTA of 10.370 billion Rand. What would you pay for those businesses separately?

We suggested in the review of the results, titled Priming ecommerce that the TV assets could be worth between 80 to 100 billion Rand. On the same rating as Times Media group (EBIT of 13.5 times), the print assets are worth 14 billion Rand. Add the TV and the print together and you get a business that is roughly 100 billion Rand. You get that for free.


So what is the conclusion, we could talk about this business all day long. At the one end of the market you have the chattering classes suggesting that Tencent is woefully overvalued. To a large extent the prospects of Naspers in the medium term depend on the success of Tencent. I have seen an analyst report on Tencent that suggests a PE unwind to 2016 of 21 times at the current price, suggesting earnings grow rates of 40 percent plus this year, 30 percent plus next year and nearly 30 percent the year thereafter.


I would say for that reason alone one should continue to accumulate Naspers, Tencent will seem cheap at these levels in the coming years. If we (the collective we being South African) are so "clever" to discount them at current prices, then we should be so lucky that the real discount is inside Naspers. Great to re-look and confirm again.