The big news shocker for the day was the downgrading of Naspers’ senior unsecured debt by Fitch to the status of non investment grade, which is also known as junk. Whilst trying to make sense of the bold move by Fitch, and whether or not it is cause for alarm, Alec Hogg spoke to expert analyst from First Avenue, Nadim Mohamed. Mohamed completes the picture for us, while giving his assurance that little is likely to come of the downgrade. A bit of a rash decision by Fitch or a well founded one? – LF
GUGULETHU MFUPHI: Welcome back to Power Lunch. Joining us now on the line to discuss Fitch Rating’s decision to cut Naspers’ debt to junk, is Nadim Mohamed from First Avenue. Nadim, hopefully you did get to listen in with our conversation with the CFO of Naspers who is in China, and says ‘this won’t have any significant impact on their lending criteria, going forward’. Maybe Fitch made a wrong call because it is not even impacting on the share price.
NADIM MOHAMED: Yes, I think it was a bit of a harsh decision and it was really, interesting how the share price moved today. In the morning, we had Naspers down approximately two-percent on the Fitch rating review, and then we saw Tencent’s result for the quarter come out and they are extremely good, beating most estimates on almost all the measures they leased. Naspers turned the other way and went up two-point-five percent for the day, so interesting there. However, I agree with the CFO that it will have very little impact, in terms of their financing and their structures. Also, I think it was a bit too harsh on Naspers. However, if you think about them, their listed assets just in Mail.Ru and Tencent in China are worth something like 55-billion. Those are shares, which they can liquidate at any point in time and at that position, it’s just $1.5bn. In my opinion, there are no serious defaulters there.
ALEC HOGG: It’s crazy, isn’t it Nadim? If they sold three-percent of their stake, in Mail.Ru and Tencent, – which they wouldn’t do, just to get the Ratings Agency sorted out – that would wipe out all of the debt and they would have, presumably an AAA rating but it was interesting that Basil Sgourdos said to us ‘they have their budgets for the next three to five years, they don’t need to borrow anyway, and so what’s the point of having a Fitch rating’.
NADIM MOHAMED: Yes, the point of that Fitch rating is only if they do need to borrow money in the future. They are, actually quite well funded. I think they have a seven-year bullet structure that expires in 2017 and one in 2020 and that covers most of their requirements, for now. Also, they get a very big dividend from Tencent each year. I think with the way that Tencent is growing that may increase. If you look at the nature of Naspers, the reasons why their earnings have been a bit low in the last few results was because they’ve drastically increased their development spend. It is at a peak right now and, at any point in time, they can decide to reduce that, if it is going to compromise earnings or if they don’t have enough capital to invest in development spend.
The trouble is, because being an internet company that has to be expense, on the income stake, so if it was another type of a company it may well be classified as capital expenditure, so that is why the earnings, sometimes look very compressed and the fee ratio looks sky high. But it is purely because of this aspect of how much development spends do you invest in a year.
GUGULETHU MFUPHI: Nadim, just on a Tencent update out today, as we heard Alec mention at the top of the show were increase in growth there, from a 59 percent on a quarter, on a year-on-year basis. Does this also highlight again that once again exponential growth is something that the market still has to come to terms with?
NADIM MOHAMED: I’ve been very bullish on Tencent for a very long time, and I think this move to mobile just cements their position even further. I was looking at the results today. If you look at their user base between what we call WeChat [unclear 04:09] and they’ve got another one called Mobile QQ, that’s over one billion users on their mobile platform, and that is most of the Chinese internet population. They are dominating this and they are just starting to monetise it through games and e-commerce, and all kinds of interesting applications. I think, right now, we are very much in the growth phase of Tencent. It looks like a very exciting opportunity, from my perspective.
ALEC HOGG: It is interesting that today, Naspers’ market cap has gone through R600bn, and the company that it is often compared with – Richemont, not least because of the Bekker and Rupert kind of factor. They both live in Stellenbosch or near to Stellenbosch. Richemont, which is a much older company… I’m sorry, my apologies. It is not much older but it was much bigger until fairly recently. Richemont is today, worth 530-billion, so Naspers has overtaken Richemont, heading towards maybe becoming the biggest company listed on the JSE, at some point in the future. I guess that would depend on Tencent though, Nadim?
NADIM MOHAMED: Even if you look back in time, it was an investment of, I think it was $20m/$30m, I might be wrong that Koos Bekker made back in the day, in early 2000’s or late 90’s, and that’s compounded so much that the majority of their market cap today. It is amazing what that investment has achieved and that South African investors have been given an opportunity to participate in this.
ALEC HOGG: I’ve been doing some research on that one. It’s a lovely story. In 2001, Naspers wrote off $80m on a Chinese ISP that they had bought. They bought it in 1998. Three years later, they had to write it off – totally – and at the same time, they went and made this investment into Tencent, of $46m. If you talk about grit, you talk about guts, you talk about the belief in their own business model, and had they…most companies would have said ‘oh, my goodness. We’re losing money in China. Let’s stay away’. However, they went and put another 46-million into Tencent, bought 50 percent of it and, as Nadim was saying, it is now worth more than the market cap of Naspers as a whole – an extraordinary story.
GUGULETHU MFUPHI: It certainly takes a lot of guts there, Alec, but thank you so much to Nadim Mohamed, from First Avenue for updating us there, on the latest regarding Naspers.