Naspers has run really hard in rand terms over the last two years, as the chart below shows. For South African investors, the huge share price growth looks a little intimidating, but according to Old Mutual analyst Phillip Short (great name for an analyst!), from a certain perspective, the share actually looks pretty cheap. He argues that if you look at the forward PE for 3/4 years, or the price-to-earnings-growth ratio, Naspers looks a lot more reasonable, mostly because its earnings are set to shoot up thanks to its stake in Chinese firm Tencent. Indeed, he argues that even if you just consider Naspers’ earnings excluding Tencent, the price doesn’t look outrageous, meaning that when you factor in the Tencent bump, it almost looks cheap. Interesting take on a very interesting stock. – FD
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ALEC HOGG: Well, Naspers is one of the JSE’s most expensive stocks. The forward PE ratios are stratospheric, so any move in this share price attracts interest from buyers and analysts alike. The stock has experienced a little bit of a pullback recently. Phillip Short, Investment Analyst at Old Mutual Investment Group joins us for some more insight into Naspers. Phillip thanks for coming onto our show today. The reason why I’m particularly interested here is, in Davos last week I heard Eric Schmidt, the Chairman of Google, mention Tencent, and the magnificent work that they were doing in China. WeChat at any point in time, has 300 million people simultaneously playing on their system, and of course they’re paying money for it. Naspers owns 30 percent of Tencent, which is a phenomenon when you even get the Chairman of Google referring to it, and yet we in South Africa see the Naspers share price continuing to rise, and get worried. Should we?
PHILLIP SHORT: Hi. Good afternoon, Alec. Firstly, definitely not. You mentioned a forward PE. With a forward PE, many people are pessimistic or think it’s expensive. People look at a one-year forward PE, and what that fails to capture is the future growth of the company. To capture that growth – which is its appeal – you have to look at a three forward PE, or a four-year forward PE, or at PEG ratios. If you start looking at those, you’ll see that they’re actually cheaper than quite a number of stocks that we have on our JSE. Granted, the forecast visibility after three years is a little bit…you’ll get quite a range and it’s not as clear as for example, an SAB or a BTI. However, I suppose that’s where we add our values as analysts in an active managed portfolio. As I said, if you start accounting for the growth in PEG ratios, three or four-year PE’s, or even just in discounted cash flows, you’ll see that it’s actually quite undervalued at the moment at current market prices – in Tencent and in Naspers.
ALEC HOGG:   I get that feeling as well Phillip, just listening to the way this has been…it’s a global phenomenon. But if you take the shares that Naspers owns in Tencent, then take the Tencent share price as it is at the moment: if Naspers were to sell all of its shares today, would that account for the current Naspers share price?
PHILLIP SHORT: That’s a good point. The market, to put things in perspective, looks at Tencent and then they look at rump, which is the Naspers business excluding Tencent. As I said, Tencent is currently undervalued and if I look at the rump, it’s the cheapest it’s ever been. It’s currently trading at minus 50 billion rand market cap – the rump – so the market is currently saying ‘Alec, I’ll give you 50 billion rand if you own the rump’. If you look at March FY14 numbers, we’ll be making over one and a half billion rand on free cash flow, so ‘even better, I’ll give you one and a half billion rand and I’ll give you a company worth 50 billion rand’. I think it is extremely cheap and very appealing at the moment.
ALEC HOGG:Â Â The scary thing for investors though, is to see the way the share price has doubled in the past year and I guess nothing goes up forever.
PHILLIP SHORT: Nothing goes up forever, but some things go up for quite a long time and I think the growth that we have left in Tencent and in the rump, still warrants quite a couple of years of good growth. For example, if we look at numbers that came out toward the end of last year from Tencent – and speaking to WeChat – for the first time WeChat has started to monetise its user base in terms of games. The gaming revenue that they showed in Q3…and that’s just with a handful of games, four or five games, was phenomenal. It was truly significant and they haven’t precisely disclosed those numbers on WeChat games. However, if we look for FY14 for example, just on those WeChat games – if you just annualise that number without increasing any more games – you’re getting at a number that’s ten percent of their group revenue for Tencent, so that’s something. You have a user base. You have this platform. You have a user base of 300 million people that you can sell something to tomorrow, and you’re going to have a massive take-up. Another thing they have…their most popular game coming out this year is Blade and Soul, which, if you look at previous games can account for up to ten percent of its market cap. You’re getting a massive game – Blade and Soul – coming out in 2014, which they’ve already started to monetise and you have WeChat games, which they’ve already shown – successfully – that they’re going to be monetising. We’re in for a bumpy year and I think there’s still quite a lot more to running the stock.
ALEC HOGG:  Listening to some pretty wise guys talk about the human brain last week they were saying that perhaps, because of the way we’ve evolved over the last 10,000 years and this hyper growth in things recently we still, as human beings, struggle to understand exponential increase and exponential growth, and that’s what we’re talking about here.
PHILLIP SHORT: Yes, there are a couple of companies out there, definitely in the tech space – and it goes to scale. If you look at Apple, they have a loyal customer base. If they bring out a new product, they have that loyal customer base that will immediately take up their product, although that is more of a hardware product so you’re not going to see as much leverage as you would with Tencent, which is more software. As another example, Tencent has a joint venture with a wealth management company in China. Through WeChat alone…the day they launched their product, which was two months ago, they’ve had six million dollars in sale per day – of that wealth management product – so it’s just a channel to market. If you have 300 million users in whatever format it is…if you can sell them something tomorrow that they weren’t buying yesterday, that platform that you have with the number of users can create that leverage and as you say, can create that exponential growth for, at least, the time being.
