Naspers: Mind the gap

• Global, South Africa
• Bob van Dijk, Discount to NAV, Euronext Amsterdam, Hong Kong Stock Exchange, JSE, Koos Bekker, Naspers, Prosus, Tencent
• September 17, 2020

Do you have a pension? Do you have South African unit trusts? It’s more likely than not that you are a Naspers shareholder, albeit indirectly.

Naspers made the news this week again, this time for an investment in Food Supply Network for an undisclosed sum. The company operates an independent business-to-business marketplace that improves the process of food delivery and supply to the likes of restaurants and hotels. It’s the third deal by Naspers’ venture funding unit, Foundry. Previous investments were R30m in SweepSouth and R100m in Aerobotics in the agritech space.

As cute as these deals are, they are nothing more than a distraction from a serious problem at Naspers.

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Unpacking the discount to NAV

Naspers is worth R1.3 trillion. It’s a monster. Unfortunately, it would be worth a lot more to shareholders if it ceased to exist and distributed all its assets to shareholders instead.

The simplest way to prove the point is to look at the value of Naspers’ indirect stake in Chinese consumer media giant Tencent. Naspers holds 72% of Prosus and Prosus owns 31% of Tencent. Therefore, Naspers holds an effective 22% of Tencent (72% x 31%).

Now, Tencent’s market cap is $660bn in round numbers. This implies that Naspers has an effective $145bn in value just in Tencent (22% x $660bn).

At a ZAR-USD exchange rate of R16.50, $145bn equates to just under R2.4 trillion. Remember, the Naspers market cap is only R1.3 trillion. That’s right – Naspers is trading at a whopper of a discount to its underlying investments.

This gap is known as a discount to NAV (net asset value) and is a concern for numerous investment holding companies, but the situation is particularly bad at Naspers.

Mind the gap

In the analysis above, we’ve ignored everything else owned by Naspers directly or indirectly through Prosus. There’s a R1.1 trillion discount just on the Tencent stake.

Prosus was unbundled by Naspers and listed in Amsterdam to hold the international consumer internet businesses in the group. The idea was to split this from the South African assets, thereby closing the gap to NAV and attracting international investors who didn’t want exposure to South Africa. Prosus owns companies like Olx and PayU, with minority stakes in multiple companies including Udemy and Mail.ru – a genuinely global portfolio.

Let’s start with the latter rationale. Frankly, nobody buying Naspers was doing it for the South African assets. The local investments include 85% in Media24 and 96% in Takealot, which in turn owns Mr D and Superbalist. Media24 manages to eek out a trading profit of around R120m. Takealot isn’t separately disclosed unfortunately, but you can be confident that it’s still a loss-making business. It’s a rounding error in the group context.

If the rest of the South African assets weren’t scaring anyone away, then did the unbundling achieve its goal and close the gap?

In a scathing editorial piece a week ago, the Financial Mail pointed out that the discount of R1 trillion before the unbundling has widened to nearly R2.5 trillion (taking all the assets into account). That’s because not only does Naspers continue to trade at a massive discount, but now Prosus is trading at a discount too!

Naspers shareholders now have the joy of a double-discount on the more valuable global assets. The Naspers share price performance of around 24% year-to-date could’ve been so much better this year.

In USD, Naspers is not even up 7% this year. Compare that to Tencent with a share price rally in USD of over 36% and you’ll understand why people get upset.

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Governance isn’t a highlight either

The management team led by CEO Bob van Dijk comes under relentless criticism for the way they’ve destroyed shareholder value outside of Tencent.

The worst part is that Tencent was acquired back in 2001 in the move of the century by Koos Bekker. This means van Dijk and his team had nothing to do with Tencent but have become fabulously wealthy as a result of it.

Part of the problem is the special high-voting shares held by a group of insiders led by Koos Bekker. This prevents the real control of Naspers changing hands, even when new shareholders come onto the register. It’s a structure that is widely used in investment holding companies centred around well-known business leaders, but it causes a significant discount to NAV.

It also only works when the market backs the holders of the special shares to consistently generate shareholder value. This clearly isn’t the case here.

You get paid to do this stuff?

If you open the Naspers remuneration report, you’ll see total numbers for 2020 next to CEO Bob van Dijk and CFO Basil Sgourdos of 15,977 and 9,165 respectively.

Ok, not such a big deal – R16m for a CEO and just over R9m for a CFO isn’t the end of the world, is it?

Unfortunately, those numbers are in US Dollars. Van Dijk made over R200m in 2020 just by himself.

Investec estimates that the executive remuneration has a present value equal to 12% of the sum-of-the-parts valuation. That’s absolutely shocking. In other words, if the valuation of the underlying investments was R100, the colossal sums paid to the execs would bring the valuation down to R88.

What should be done?

PSG recently unbundled Capitec to shareholders, thereby closing the gap to NAV and forcing management to find new investments to create value. The problem at Naspers is that management can rest on their laurels, continuing to play with the dividends from Tencent instead of giving the shares to shareholders.

The reality is that van Dijk and his executive team need to go. Their remuneration is farcical and is destroying shareholder value. Unfortunately, for as long as Koos Bekker protects that team, they will continue to enrich themselves beyond their wildest dreams at the expense of shareholders.

If you would like to have exposure to Tencent, then do your homework and choose your entry point carefully. If the Naspers discount starts to unwind then Naspers could outperform Tencent. If the current situation carries on, you would likely be better off in Tencent directly, or even Prosus for some global diversification.

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