LONDON — In today’s Rational Perspective episode, an update from South Africa’s exponential growth marvel, Naspers, as I get to spend half an hour in London with the group’s CEO Bob van Dijk and its CFO Basil Sgourdos to talk about numbers, strategy, exponential growth and the past decade’s 23% Internal Rate of Return on its investments excluding the astonishing Tencent (over 50% when the Chinese company is included). – Alec Hogg
This is the Rational Perspective, I’m Alec Hogg. And in today’s episode, an update from South Africa’s exponential growth marvel, Naspers. Squeezing your way into the diary of Naspers chief executive Bob van Dijk is a lot more challenging nowadays. As the company’s investments have flourished, so too has the demand on the now 45-year-old who succeeded Koos Bekker as CEO – he did that four years ago. But results time opens a window and today I managed to grab half an hour with van Dijk and Naspers chief financial officer Basil Sgourdos. What follows is a fascinating half-hour with the men who run a business that is so dominant among JSE listings that it now accounts for a chunky one-fifth of the equity portion of South African retirement funding.
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I am Bob van Dijk the CEO of Naspers.
I’m Basil Sgourdos the CFO at Naspers.
Thank you for your time today, gentlemen. Maybe we can start off with the financial results for the year to the end of March. Basil, you’d be the man to talk to on this. The numbers, as you released them, there’s still some confusion. Revenues were up almost 40%, core headline earnings up by more than 70%. What does that actually encompass? What parts of the Group does that account for?
Thanks, Alec so, we internally, for management purposes and for public reporting, we like to focus the market on what we call economic interest numbers. So, what we do is we take 100% of the revenues and profits of our subsidiaries, and then our proportional share of our associates and joint ventures. The reason we do that is quite straight forward. One: The role we play, whether we are a controlling shareholder or a smaller shareholder is fairly similar. We get involved with our founders. We partner with them and we help them grow their businesses. Two: We want the market to get a real feel of the underlying financial drivers of our non-consolidated investments, and if we follow pure IFRS accounting, then all you would see is one line. So, you wouldn’t get a feel for what the revenue entry is doing in those investments and what the profit entry is doing. So, we encourage the market to focus on the economic interest numbers and effectively, represents our share in the underlying businesses across the board.
Are analysts starting to look at those numbers?
Yes, they are. So the analyst community are on it. We’re trying to get the press there too and we’ve actually now just started circulating a brief update so that people can understand why we report things in a particular way.
Bob, you went to New York in December for the first time to have an Investor Day with US analysts. Presumably, to also tell them your story. Has it had any impact?
I would say that the Investor Day was well received. I think we had it as our purpose to really explain to our investors that we are at an inflection point. We’ve been investing in e-commerce businesses, like classifieds, and online food delivery, and payments for a number of years. But these businesses have become sizeable. Classifieds, for example, has turned profitable in the year that was and I think we really wanted to make a reality for investors that we’re at this inflection point where they can tangibly see these historic investments translate into great businesses.
The questions for investors, and we’ll get into some of the meat now, is that you’re still trading at a substantial discount to Tencent. What’s the latest number, Basil?
Well, it depends on how you compute it, and the range is wide. So, it can be anything between 35% – 45%. It is a little bit higher now, driven again by market factors. At the end of the day, that discount matters to our shareholders and it greatly matters to us. The key things that we’re doing around it are, one, making sure we build great businesses, growing our profits, growing our revenues, growing our cash flows, and you’ve seen this in this year’s numbers. It’s one of our strongest set of financial results in the 20 years that I’ve been with the Group. So, it’s a very strong set of numbers, and we hope to stay on that path. The second thing is, with things like our Investor Day, and so forth, we continue to engage with our shareholders to show them the great businesses we’re building.
We’ve called out the great returns that we’re creating. So, if you look at our current portfolio and you look at the money we’ve invested versus the value that the market puts on them – it’s an implied 23% IRR, and then we’re actually able to demonstrate how we lock that in so with the pending sale of Flipkart – that’s 32% locked-in on the books.
Now, what causes this discount is the structural issue. It’s our size on the JSE, and we need to try and think how we address that and there is no easy fix. So, we need to be quite methodical and careful about what we do. There’s lots of work going on, and we’ll continue on this trajectory, so we’ll take some action, we’ll continue to remain focused and disciplined around capital allocation, scale our e-commerce businesses. We’ve got lots of capital now to go and invest around our core opportunities to make e-commerce a bigger part of the portfolio, and in time, the value will come through.
What you can’t ignore is consistent growth in profits, cash flow, and profitability and returns ahead of your cost to capital. In time, the market will recognise that we believe and as long as we continue to remain focused and disciplined around how we structure the Group and move forward.
Bob, you made the point that classifieds has now turned profitable. Other parts of the businesses are also doing well, throwing off a lot of cash. So, why do you need all this money that you’ve cashed in the shares from Tencent and now the Flipkart sale?
The Flipkart sale was still subject to regulatory approval so is not yet completed, but the reason why we thought it was the right thing to do, to improve our balance sheet, is we are driven by opportunity. So, we saw in classified, in food delivery, in payments – significant further growth opportunity. We have scale. We’ve seen the core business turn but we don’t believe it’s the end and we think we can actually strengthen and accelerate the growth in these areas, by further M&A and investing in new businesses that are adjacent.
I picked up my Amazon card this week. It would have nice to have been a Naspers card, a credit card. Are you moving into that area? Amazon seems to be there now, your partners in China, WeChat Pay, is huge. Is that the next step, when you talk about financial services?
So we are very excited about credit opportunity because we see, for example, in a market like India, there are only 30 million credit cards. And, you know, there’s 1.3 billion inhabitants in India. So I don’t think it’s necessarily a card but actually giving people who don’t have credit history an opportunity to finance a purchase or give them temporary relief on credit. We think there’s a huge demand out there and it’s actually not satisfied by cards, at this point in time. And we both organically, as well an inorganically, have invested in credit, exactly as you say.
So, are you likely to go into that market aggressively, into the future? I’m trying to find out what all this, was it $12bn that you’ve got on your balance, is going to be used for?
So, I think credit we see as a big opportunity. In credit, you also want to be deliberate because it’s easy to extend a lot of credit and lose a lot of money, which is something we don’t particularly like. So, we see the opportunity, we will grow it. For example, we’ve invested a substantial amount in a company called Kreditech, headquartered out of Hamburg. We believe in it, and we want to find the right opportunities, and if we find a good return then we’ll invest.
The way you invest, it’s almost like a capital allocator with benefits. You want to be involved. When we last spoke on the Flipkart transaction, you said that the reason why you were quite keen to sell out was because with Walmart coming in, you weren’t going to be able to be that involved in future. Of the investment that you have today, are you involved in all of them?
Yes we are. We are from early stage to late stage, we always have an involvement in the company. For example, in our ventures business, when we invest in pretty young companies often, we will have a board seat and we will also have our team of mobile specialists, search specialists and SEO specialists available to these companies, and they love it.
So, the fact that you have board representation at Tencent would qualify it on this broader criteria of yours that you need to be involved in the business?
Yes, we are a strategic investor in the end so if we don’t have proximity to the business then we’d just be a financial investor.
Basil, perhaps if we can just clarify that bit of capital allocator with benefits. What kind of returns have you generated on the capital you’ve invested, and keeping Tencent out for a minute?
Sure, so if you look at the current portfolio it’s about 23% IRR.
Over what period?
Over a period of 10 years. So we’ve sustained it over a period of 10 years. It’s actually accelerated over the last couple of years. Particularly as we’ve identified the food delivery opportunity early, so we got in way ahead of other investors, and are locking in value there.
And that excludes Tencent?
That excludes Tencent. If you put Tencent in then it’s about 50%.
So, why are you not getting your message through, because 23% is even better than Warren Buffett?
I must say that we’re careful capital allocators. I think Basil mentioned it when we spoke about it earlier. For every investment we do, we probably look at 100 that we don’t do, and I think that allows us to have the kinds of returns on our non-Tencent portfolio that Basil mentioned. I think that discount issue that we touched upon is driven by structural factors and very little to do with capital allocation.
So, that one that you do go for, out of the 100. What has it got? What does the entrepreneur need to show you that you’ll back him or her?
The entrepreneurs we get excited about are people with a vision, with a dream, and they typically think quite big. For example, we’ve invested in a company called Swiggy in India, an online food delivery. When you meet Harsha, he has a vision of being able to provide every Indian with an affordable great meal at any occasion when they may want it. That’s a pretty big deal for a county with 1.3 billion people, but he’s getting there. And I think he’s building this hope of transforming the way people live, and I think that’s the common denominator that we get excited about.
So, are there common denominators between him, between the brothers who had Flipkart, between Pony Ma – these great entrepreneurs that you discovered early?
Yes, I think maybe Flipkart is a good example, Sachin and Binny are not brothers, even though they have the same surname. But in 2007, they decided they were going to build a great online business where they can buy anything, out of Bangalore.
Now, at the time, people didn’t have a credit card at all or even fewer than what I just mentioned. There were no logistics, there was no credible internet, and these guys said, this is what people want – this is what we’re going to do.
So that vision and ambition is actually a common denominator between founders that we’ve backed over time. That’s also one of the things I love about our company is that we are able to support people for the long-term. If they can continue to scale and grow, then we’re in there with them for a long time.
It’s an amazing story, Naspers, which has been well documented but you started off using the newspaper business to invest in pay TV. Then when the newspapers declined, you used the pay TV business to invest in the internet. The internet now, if I read your results correctly, is contributing more to the bottom line than your pay TV.
The profitable internet companies, in total, indeed contribute more than our pay TV business.
So, what’s next, because clearly pay TV is in a declining trend, or one would presume so given the international picture? What would be the next big bet or the next big move?
So, I thin, structurally what you’ll see is more profitable internet businesses funding even newer internet businesses. We see that on a microscale already. For example, in our classifieds business we found a new set of adjacent opportunities like Letgo, where we’re actually using part of our profits of our core business to fund a business like Letgo, which we think will be a next wave of growth.
The entrepreneur there is quite an interesting story.
He is, so Alec Oxenford is the founder or the co-founder of Letgo and he came to us two years ago with a plan saying, I’m going to change the way Americans in particular, trade second-hand goods and I’m going to win this market. It’s probably the most competitive market out there and there’s lot of players. But we’ve worked with Alec before and Alec is actually the founder of our OLX business and he’s done a great job there. When he came with a plan and with a vision, and with a product vision – we said, we’re going to back him. Now, it is the second-fastest growing app in the USA in any category of any app in the market. Close to 100 million downloads and 400 million items sold. So he’s getting there.
You’re not scared who you go up against because presumably there you’re tackling eBay.
The US market is extremely competitive so eBay is a party out there, but there are plenty of others. But so far, I’ve been impressed with the investment we’ve given Alec, he’s been able to outgrow absolutely everybody and we’ll continue to support him.
In the financial services field, who are you going to be going up against there? I told you about my Amazon card. I can hear you’re not too keen to get a MasterCard or a Visa anytime soon. But that’s a market where Naspers, in the past, stayed away from those guys. Now, it seems as though you’ve got the confidence to go head-to-head?
It’s a good question. What we’ve seen is that actually there are a few key factors. One, is that financial services is quite a fragmented business. So, in each country, I think there are strong, local players that can be very sustainable because financial systems in countries are specific. I think it has allowed us to build a PSP business in markets that is incredibly strong like in India.
PSP?
Payment service provider business. For example, we process payments in the whole world of about $25bn every year in PayU. Almost half of that is in India, where we managed to, actually from scratch, build this position of being the payments processor and on the back of all the data we generate from that – we are now about to offer people credit. So, I think there’s still enormous value to be built by becoming a strong local player and then expanding that into other subsegments of fintech.
Basil, what are the features of the results, given that Naspers is such a dominant stock on the JSE, is that your South African share is now down 16%?
We started on this journey 10 to 15 years ago, to build the global footprint and it continues. So we have 84% of our revenues offshore.
Is that excluding Tencent?
No, the 84% includes Tencent.
If you were to take Tencent out of that?
If you would take Tencent out then about 60% is outside of South Africa, and then 40% in South Africa, because of the sizeable video entertainment business in South Africa.
So South Africa is still very important and video entertainment is critical at the moment?
Yes, I think you can’t exclude Tencent, it’s part of the portfolio and it’s a sizeable asset but yes, video entertainment is still growing. We added 1.5 million subscribers this year so that’s a great outcome in a tough macro-climate. We’ve also improved profitability. So we’ve had to absorb this tough Nigerian Naira and Angola Kwanza drop and also, the Rand hasn’t been doing particularly well. But we’ve done that well, and we’ve now reversed two years of declining profitability and started to come out of that – driven by subscriber growth and taking costs out of the business.
So manging to compete with Netflix?
We’ve actually launched our ‘over the top’ product called Showmax and then we have a great product for our existing customers called DSTV Now. That traction is picking up nicely. We continue to play to our strength, which is our local content, and we’re investing quite hard behind that. So, you’re seeing our investment in local content go up substantially, and we’ll continue to do that, going forward.
Bob, from a South African perspective, with almost 20% of the JSE’s All Share Index in your stock. It’s an incredible responsibility.
It is and I think, for us as a Group, we generally, I think, are very much focussed on creating value going forward. I think what we’ve been able to demonstrate is that we’re able to do that with our e-commerce investments, we’re at the inflection point where they’re starting to turn profitable. I think those business have a tremendous amount of runway in them. So, if we continue to deliver, I think, we can continue to have that 20% over time.
It’s been an extraordinary – in fact, it would be nice to do a calculation one day, of what the JSE All Share Index would have done, excluding Naspers. It would certainly have performed a lot differently.
It would look slightly different and I think, indirectly, we’re a great contributor to South African shareholders who have invested in our shares. There’s been a great deal of wealth creation for South Africans, including pension funds, which is incredibly helpful for the country.
But on the other hand, there are now more and more critics saying it’s too exposed. Pension fund portfolios are too exposed to one stock and, of course, in the wake of what happened at Steinhoff, there’s all kinds of questions being asked, on all kinds of areas. I know you’ve seen the criticism of this. How do you respond?
So, we are obviously great believers in the fact that our share has the potential to significantly increase over time. Again, I think we’ve structurally managed to create new, valuable businesses, and I think one of the things that gives me a lot of confidence is that fundamentally, if you look where we invest, where we place our capital, is on new businesses that are technology-based, that makes peoples’ lives better.
If you look at the world, if you take a big step-back in the world, five years ago, the top five companies in the world were basically oil companies and banks. If you look at the top five companies in the world now – they’re all technology companies, and I don’t think that that transition is slowing – I think it’s actually accelerating. I think for a country like SA to have a big stake riding into global technology rise, is exactly what it needs.
Very fortunate for a small country. But you see global investors now, this is no longer a little SA company. This is a major player on the global scene. When international shareholders come at you and pose these kinds of questions like, why are you listed in South Africa? Why don’t you give us our Tencent? Why don’t you unbundle Tencent, and so on and so forth? Is it getting more difficult to answer those questions, or easier?
No, maybe there’s two parts of the answer. I think our listing at the JSE, I think the JSE is a very well-respected exchange that I think foreign investors are very comfortable investing in. So, I don’t think that’s a problem at all. I think our concentration is an issue, because we’ve become so big that some of the shareholders have to sell shares to reduce their limits. So, that’s an issue that we think through solutions about. But foreign investors are very comfortable buying shares on the JSE.
I think the question around Tencent is an interesting one. I remember when I started in my role, I think the Tencent valuation was close to $100bn, and I got those questions every day as well. And I think people should be very grateful that we didn’t sell Tencent or unbundle, because now the value has increased 4.5 times.
Tencent itself, looking ahead. Are you still as confident that it’s got plenty of runway left?
We continue to be extremely excited about Tencent. I think it has one of the most capable teams in the world. The Chinese market is by far the largest internet market in the world. If you look at how quickly they are integrating offline services into an online ecosystem – again, I think China leads in the world. So, they are the biggest market, leading in terms of the offline to online transition, and Tencent is very much at the heart of that, with the best team in the world – what is not to like?
Are you able to learn from that experience and apply it? I’ve just seen your recent moves in South Africa have been interesting with the merger or acquisition of Takealot to put to Kalahari, and now recently, with your fashion acquisitions?
So, interestingly, in the South African market, we’ve done a number of investments there that, I think first of all, Kim runs a great business with Takealot. He’s made good progress and I think he does a good job at delivering good customer service. They deliver quickly, reliably, they have great assortments and still, the penetration of online retail as a percentage of total retail is about 1%. In the UK it’s 15%, or something like that. In China it’s getting to 15%, and it will probably be the highest in the world in a few years. So, I think our bet is that, in the end, for South Africa, this will work as well, and we want to make sure we’re part of this and we drive it to the full potential it has.
But, in both the UK and the US the online retail market has been supported by a very strong Post Office, which in SA isn’t the case. Have you got alternatives to it?
Absolutely so, what Kim has is called Mr D, which is a franchise structure, where independent entrepreneurs can become couriers and get into the business. I think they have, in a way, built their own network of enterprising men and woman who say, there’s a real need here – let’s do this.
Basil, as far as investments are concerned, I’m not sure where I read it, but you back entrepreneurs, as Bob was saying earlier, sometimes from as little as $1m to $1bn. Just unpack that.
Yes, so we look right through the investment cycle and generally the way it works is, we start off initially, quite small. We see that we can add value, that we can help the business move forward. Then as the business starts to scale and as the ambitions scale, we encourage those founders to look beyond their core countries and beyond their core focus to build bigger platforms and businesses. Then we start to up our investment quite significantly. That’s how the classified journey started. It started in payments, and it’s how it started in food delivery. It’s the general lifecycle that we go through.
Was that a learning perhaps from Tencent, because your initial investment in Tencent is fractional compared with what it’s worth today?
It is, and I think it shows two things. I think it’s a willingness to reinvent ourselves. So, when the company started invested in China, internet was young, and when we started investing in the Indian internet, it was very early. When we started getting into classifieds it was very early. But over time, you need to develop the confidence and you see the potential and that’s when you jump in.
So, where to next? When we talk in five years’ time, how would you like to look back on Naspers?
I think what we are passionate about doing is creating businesses that really help consumers’ lives improve and getting them to scale and making them, ideally, global businesses. So, again, with classifieds we’re trying to build… We already are the largest global classified player. Now, I think our products are probably used by about a fifth of the world population. I would love that to be half the world’s population in five years’ time.
Basil, from a broader perspective of the involvement, you’ve been with the Group, as you said earlier, 20 years, is Koos Bekker, who is now the chairman, still intimately involved? Do you guys still talk to him?
Yes, we engage with our board. The board sets the overall direction. We put together our strategies and our plans, and we go back to the board, and tell them our ideas and they give us great guidance and/or input. Everyone of our board members is very involved and committed to the business.
No, Koos, is not one of your board members. Is he the kind of guy that you would still pick up the phone or does he pick up the phone to you?
Absolutely, and I think Bob talks to him regularly all the time. Yes of course he is.
It wasn’t meant to be a loaded question. Koos has been involved right from the outset and many people are saying that his influence is still important. Is he your sounding board still?
So, I think when I took on the role, one thing that Koos very deliberately did, is he took a year off, and in that year, I hardly spoke to him – three or four times in the year. I think what happened in that time was that it gave me the opportunity to settle my relationship with the entire board. Settle my team and when Koos came back from his sabbatical, he’s been the chairman and he’s not involved in any other way than being the chairman. I pick up the phone regularly, he doesn’t get into the operations – he doesn’t want to – and I think that’s a very healthy balance.
And the new team is clearly clicking on. You’ve done a great deal with Flipkart. You’re getting involved with Swiggy, looking at the Indian market, and is that the focus still, these big, emerging markets?
I think we’re looking for where technology can drive structural growth and I think the markets where a lot of the excitement is in growth markets. But we’ve also invested in a market like the US when we see a great growth opportunity. So, I think, we’re not so focussed necessarily on growth markets but I do think most of the opportunity will be in Asia, in Latin-America, and Africa, over time.
Seems to me that South Africa’s retirement funds are in pretty good hands. That was Bob van Dijk and Basil Sgourdos, the chief executive and chief financial officers, respectively, of South Africa’s global internet and entertainment business, Naspers. I’m Alec Hogg. Until the next time, cheerio.
