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There have been significant developments at Naspers-Prosus in recent times.
The Great Value Unlock Trade (a cross-holding structure that was highly criticised by asset managers) was implemented, which made Naspers smaller in the local market and Prosus larger in the European market. To add to the complexity around this group in the past year, the deal was executed against a backdrop of souring investor sentiment towards China.
China is the source of Prosus’ war chest. For example, dividends to Prosus from Tencent in the interim period ended September were $571m. The free cash flow in Prosus after acquisitions etc. was only $118m, so you can clearly see how the Tencent dividends are funding an extensive acquisition strategy in other sectors.
In April 2021, Prosus sold 2% of Tencent. The numbers were spectacular, as proceeds of $14.6bn landed in the Prosus bank account and the holding was reduced to 28.9%. This was only the second time that Prosus sold some of the stake in Tencent.
In both those disposals, the proceeds were put to work in investing in the other businesses in the group. Prosus has agreed not to sell any further shares in Tencent for a three-year period, so further cash needs to come from dividends.
There’s also an extensive share buyback programme. The previous $5bn programme was completed in June and the group is in the middle of another $5m programme, of which $1.5bn was completed by the end of September.
The group talks about “expanding reach and impact” and “creating ecosystems” in verticals like used car transactions, credit and digital banking and food and grocery delivery. The current management team is assessed on its ability to allocate capital into these growth sectors, with the market taking a generally sceptical view on the businesses other than Tencent.
If Tencent is included in Prosus’ revenue on an “economic interest” basis (i.e. a proportional share of Tencent’s revenue even though accounting rules don’t allow for this), then revenue would be up 31%. Revenue in the “Ecommerce” segment (basically everything but Tencent and VK, previously called Mail.ru) increased 60% if adjusted for acquisitions, disposals and currency effects.
That all sounds great at first blush but looking further down the income statement demonstrates the issues with these high-growth models. At trading profit level, only Classifieds, Tencent and VK are profitable.
The losses in Food Delivery have accelerated. Revenue has more than doubled but trading losses aren’t far behind, deteriorating by 65% to come in at a loss of $312m for the period. To put this in perspective, Classifieds (the only positive Ecommerce business) generated $108m of trading profit.
The losses in these growth pillars are starting to add up. Core headline earnings only increased by 4% and the relative contribution from Tencent was larger than before, despite the reduction of the stake. This was the likely driver of a 1.8% drop in the share price by early afternoon trade.
The show must go on. Prosus is a massive venture capital fund at heart and the only appropriate strategy is to keep investing for growth, otherwise the management team would be falling on their swords. In the latest period, the group invested $5.2bn in new acquisitions, primarily in EdTech and Food Delivery.
The group participated in further funding rounds in Swiggy and iFood, increased the investment in Delivery Hero and invested in Flink and Oda, both in Europe. The Edtech division reaches over 500 million users and expanded with the acquisitions of Skillsoft, Stack Overflow and GoodHabitz.
There’s activity in the other verticals as well.
In Payments and Fintech, Prosus recently announced the acquisition of BillDesk, which will create a top 10 online payments company globally by total volume (provided regulators give the deal the green light). Prosus has also increased its scale in India and created additional opportunities to expand into digital banking.
The car market is heating up significantly. OLX Autos will merge car buying and finance, with Prosus hoping to build the “most trusted one-stop shop for transacting in cars” – competing in some ways against the likes of WeBuyCars and the Motus-owned platforms in pursuit of a greater share of the lucrative used car market, even though peer-to-peer transactions are a little different to B2C deals.
We shouldn’t ignore the Naspers announcement, even though it is almost identical to the Prosus announcement because the underlying exposures are nearly the same.
The most interesting business held directly by Naspers is the Takealot Group, which consists of Takealot, Superbalist and Mr D. Despite growing revenue by 63% vs. the corresponding prior period, a trading loss of $2m has still been reported.
Based on disclosure in the footnotes around how Naspers increased to a 100% stake in Takealot for $54.8m, we can infer that the valuation of the group is around $1.8bn. To put it in rand terms, that’s around R27bn for a business that is burning R30m every 6 months.
You need a thick skin for growth investing. A thick skin and a steady stream of cash flows from somewhere. The Naspers – Prosus story is entirely dependent on Tencent continuing to pay fat dividends. Luckily, Tencent is a potent business.
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