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Charlotte van Tiddens, research analyst at DMA ONE, unpacks the complex deal announced by Naspers/Prosus this week – and the implications for the share prices of both stocks. The transaction is the second time management have caught the market by surprise, with the share prices of both stocks rising strongly on the news.
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NPN/PRX Corporate Action – positioning for the simplification
Simplification of cross holding likely to drive structural shift
By Charlotte van Tiddens – CFA at DMA ONE / Research: Quantitative & Equity
Following the announcement on Tuesday to remove the cross-holding structure, we see opportunity for a structural shift in Naspers’ discount relative to Prosus and the underlying portfolio. The transaction will effectively address two issues that have weighed on the discount: 1. The complex cross holding 2. The 10% limit on the Naspers buyback that the market started pricing earlier this year (see figure below). Naspers has been executing the buyback through a subsidiary, the reason for the 10% limit (company law), as doing so at the HoldCo level would push Prosus’ interest beyond 50%.
POSITIONING FOR THE STRUCTURE SIMPLIFICATION
We expect Naspers to outperform Prosus within the next 6 – 12 months. Our investment case is underpinned by the following factors:
- The risk of the transaction not proceeding appears to be negligible.
- Implementation is expected to take place soon if the transaction proceeds (September – Q3 CY23).
- According to the JSE’s listing requirements, a company cannot repurchase more than 20% of its issued share capital within a year. This implies that the new Naspers buyback limit post implementation should be lifted to 20% per year, assuming the required special resolution is passed at the August AGM (currently 10% limit in aggregate, said special resolution was tabled and passed last year but buyback currently being done through subsidiary).
- Since the start of the current buyback program Naspers has repurchased 5% of shares issued. The bulk of this has been done at max. participation, indicating that an annual 20% limit should be sufficient to continue at the current trajectory. Daily participation has been above 15% on 150 of the 190 trading days since the current program started.
In the table below we calculate expected returns for various discount scenarios. The first scenario analysis shows the potential upside if Naspers’ discount to Prosus’ price narrows, keeping Prosus’ price constant. For example, if the discount narrows to 10% from the current level of 12.1%, the expected upside is 2.4%. The second table shows Prosus’ expected return for different discounts holding the underlying NAV constant.
The last section shows Naspers’ expected returns if both scenarios play out. Our calculations are as follows:
- Calculate Naspers’ NAV (not look through) if Prosus’ discount narrows for the specified range.
- Calculate Naspers’ price based on this NAV if the discount range in the first table materializes.
If Prosus’ discount narrows further to 30% and Naspers continues to outperform Prosus up to a discount of 10%, the expected return for Naspers is 11.5%. We attempt to capture the potential upside from: 1. A further narrowing in the discount 2. Underlying NAV growth from a further narrowing in Prosus’ discount.
Naspers’ discount relative to Prosus has narrowed significantly during the last two trading days. In our view, the likely extension of the Naspers buyback could result in further outperformance.
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