Naspers: Why we like it

DWAYNE DIPPENAAR Co-portfolio Manager and Mining/Telco Analyst, Laurium Capital

Naspers is a company that many are familiar with due to its large size (R1tn market capitalisation) and stellar performance over the last few years (+18% compounded over five years). The company (incl. Prosus) currently makes up 17% of the FTSE/JSE All Share Index (ALSI) and 22% of the JSE/FTSE Shareholder Weighted Index (SWIX). As such, the company is widely held by most South African asset managers on behalf of South African investors and pension funds and has done very well for these investors over time.

Most of the company’s intrinsic value is made up of a stake in a Chinese internet company called Tencent (listed in Hong Kong), a stake Naspers bought in 2001 for USD33m, which is now worth USD147bn – in other words the investment has generated a +56% annual compound return for shareholders to date.

At the current spot Tencent share price, the stake that Naspers owns in Tencent makes up 147% of Naspers' market capitalisation. At our calculated intrinsic value, Tencent is worth even more at 160% of the Naspers market capitalisation. Naspers is thus currently trading at a 41% discount to our intrinsic value of its underlying assets when using the listed spot prices for Tencent and Mail.ru. When compared to the historic average discount over 10 years of 26%, the discount is currently very wide. The large discount Naspers trades at has become a hefty point of contention in the market, with many market participants debating and speculating, when, if and how, the discount should narrow.

Generally, holding companies that have stakes in an assortment of underlying entities trade at a discount for various reasons. Historically, holding company discounts have varied widely, but the norm is approximately 15% - 20% depending on various factors including management fees, tax structure, control of underlying cash flows and voting structures.

Naspers management has stated that they believe the current discount is too wide, that the discount has historically been around 20% - 25% and for multiple reasons started widening three years ago. They have also said that they are exploring all possible options to close the discount to a more reasonable 20%.

Laurium believe that such a wide discount is not justified and that the discount should narrow going forward. This should be driven by improving cash-flow generation from the rump assets (ex Tencent & Mail. ru) in the company’s portfolio, as well as the management actively working towards getting the discount to a more reasonable level.

Post the new management team taking the helm in 2014, we have seen consistent action from them that should over time continue to drive the discount down. Examples of these would be the sale of Ricardo and Allegro (E-commerce assets in Europe), the sale of Flipkart (E-commerce asset in India), the sale of a stake in Tencent, the unbundling of Multichoice Group (pay-TV in Africa) and the listing of Prosus.

Our view is that management will continue to focus on driving the discount down through multiple options, e.g. doing share buy backs on the Naspers line of stock, which has just been announced. We thus hold Naspers on behalf of our clients across our portfolios, providing exposure to a quality portfolio of emerging market internet assets at a 41% discount, which provides clients with a large margin of safety and enhanced returns from the discount narrowing over time.