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One of the most followed stories and right in the heart of the debate around tech bubbles and valuations (especially in the emerging markets space) is Naspers. The numbers it reported this morning are unlikely to change that, although the probably should.
There are many segments of the market that have been telling everyone else, with a lot of energy, that you should not buy Naspers and that it is completely overvalued. From an earnings point of view, that is the case, BUT when you have a combination thereof (what the TenCent stake is worth) and what the earnings are worth on their existing businesses, then it becomes clear that South Africans are applying a discount to the Hong Kong price.
In other words, South Africans inside of the Naspers share price believe that the valuations for TenCent are too high. I have seen some analyst reports that suggest the opposite, that Naspers is woefully undervalued, yes, woefully undervalued.
One of the reasons for this divergence of views (which you would not find with a normal industrial company established decades ago) is because of its quick progression from one business to another. Naspers has undergone four technology spurts in 29 years, meaning that there was something new to think about in terms of business evolution roughly every eight to 10 years. Currently that growth spurt is in the form of ecommerce, which Naspers set its starting point as 2008.
It’s worth reiterating therefore that Bob van Dijk, the new Naspers CEO (who is only 41) comes from an ecommerce background, having run eBay Germany. eBay Germany is the second biggest market for that company outside of the US. In fact, in these recent results there is a graphic that points to ecommerce slash mobile. Check it out:
Ironically, in the company’s mind Pay TV is two transformations behind. Pay TV, let us focus on this for a moment, added 1.3-million to be 8-million strong. That is a massive jump and yet it hardly gets too much of a mention. Of those, the Compact bouquet (43% of growth) is the big driver but not as much as before, indicating that people are paying up.
In fact the PVR base increased to 1.1-million. And the BoxOffice product attracts 529 000 rentals a month. At R27 a movie, that translates to R171.4-million per annum. This business is a mere three years old. That is all. So let me get this right, from a standing start, with the existing infrastructure they are able to roll out a business of this magnitude? After all the investment in the TV business is around 1.3 billion for the year, but the profits were only 13 percent higher at 8.5 billion Rand. On revenues of 36.3 billion Rand, increasing 20 percent over the last financial year.
What would you pay for a standalone business of that magnitude? R100-billion? R80-billion? Somewhere in-between? Let us settle at R90-billion for the time being. I think that is fair to value a business at around 10 times trading profit.
The current market capitalisation of Naspers, as per Friday close? R529-billion, so the Pay TV business, which accounts for more than half of its profits is possibly worth only 17% of the current market cap. Give or take a bit here and there.
If you had to value the Pay TV business (which operates across 50 countries) at a say more lofty 15 times trading profits, that business could be worth as much as R127-billion, or nearly one quarter of all of Naspers. What is clearly currently a growth business is seen by Koos Bekker as an old business. Funny how that works. Meanwhile GOtv, its African DTT business, continues to attract many more content starved folks across the continent.
Its internet segment is a little less easy to value. First let us take the obvious one: the TenCent stake. What is that worth to Naspers? Well, that is pretty easy to work out. Naspers owns 33.85% of the Chinese business TenCent that is listed in China. The market capitalisation of TenCent is 1.07 trillion Hong Kong Dollars or at the current exchange rate 1 Hong Kong Dollar to 1.37 Rand, the Naspers stake is R496-billion. No really. Or with the fall today of the TenCent share price, around R488-billion. The difference between the Naspers TenCent stake Friday and the market cap of Naspers Friday was all of R33-billion. Or roughly at the modest valuation of the TV business, around one third of that.
So quite clearly you can see that South Africans apply a discount to the price that people pay in Hong Kong for TenCent. Quite clearly, without a shadow of a doubt, they apply a massive discount to the holding, because obviously they are smarter than the investors in Hong Kong, right? Sounds too arrogant, the TenCent price is what it is, until it changes, it won’t. The simple fact of the matter is that TenCent is not that expensive if the growth rates are maintained, as I previously pointed out:
The previous close was 513.5 HKD. Annualise (you shouldn’t, if the company is growing that quickly) the quarterly earnings and the stock is suddenly trading on 29.5 times. Which is hardly a bargain, but the earnings expectations are going to have to be ramped up. If earnings grow by 50 percent per annum, then it may be quite acceptable to pay 30 times earnings. The PE unwind is simply astonishing. BUT, in order to maintain these lofty rates, TenCent will continue to have to grow their other businesses aggressively. Both their advertising and e-Commerce businesses were disappointing in the prior quarter, when compared to the previous one. Seasonality, Chinese New Year puts a spanner in the works.
OK, so if you believe like me that business (TenCent) is NOT expensive and commands a premium because of the growth rates, then it is fair to say that the major internet portion of Naspers is OK, provided that the growth rates remain. That is the tricky part you see, if growth rates fall, then it is fair to say that TenCent will take a heavy hit.
Then next onto the part of its business that is currently in growth mode, the ecommerce business. Now you will know all the businesses here locally that Naspers own, OLX (which is global), Kalahari.com and PriceCheck. How many times do you use these? And because you are reading this newsletter that means that you are definitely a little more advanced than many here in South Africa, who do not have access to the internet, you are the future of these ecommerce businesses. It is far easier to sit at your desk at home or at work (do not let the boss see you) and buy something than it is to get into your car, fight for parking, fight the traffic and queues and get that item that you want. Plus you can only do that when you are not working.
But the growth in Naspers’ ecommerce business has been nothing short of astonishing. Whilst Jeff Bezos of Amazon.com might be the genius of ecommerce and the first fellow to get it right, Amazon.com remains an unprofitable business. Why? Because it is investing an enormous amount in the infrastructure. Amazon spent US$3.8-billion on infrastructure, everything from automated warehouses to bigger depots. And this is where Naspers is spending all its money, in the ecommerce part of its business. While there was a very impressive 64% increase in revenues to R20.355-billion (from a mere R3.085-billion in 2010), that segment registered a loss of R5.329-billion in this last financial year. Yech. That hardly sounds like a good outcome, it sounds awful in fact.
Why? Because Naspers spent a whopping R5.6-billion growing its ecommerce businesses. The outlook segment tells you all that you need to know, there is going to be more focus on this line of the business, the ecommerce part. And if that entails a larger spend in the coming years, then you have to accept that as a shareholder.
It is not too different as a shareholder of Amazon. Not different at all. You are going to have to have to be really patient as the new part of the business ramps up, the speed at which this is happening is mind boggling. And as such, it is going to be difficult to value from three months, to three months.
We tried to value the above businesses. eBay trades on a price to sales of 3.9 times, Amazon.com on two times. If you use the eBay price to sales metrics, you can see that Naspers’ ecommerce business (which is growing revenue at a rapid rate) is worth close to R80-billion. Using the Amazon.com metrics, it is closer to R41-billion. Either way, this segment is only valued, by those metrics at less than the company’s Pay TV business, which is not where the future is, according to the management and development spend.
On a pure earnings basis the stock is expensive, but remember that, like Amazon.com, when the huge spending on their current business transition has taken place, the company will shift a few gears in that regard.
This article by Sasha Naryshkyine is adapted from the Vestact newsletter and republished with permission.