The Elephants in the Room

Investing in media can bring value seekers a lot of smoke and mirrors. But Naspers, Africa’s largest company by market capitalization, is an intriguing sum-of-the-parts story in the space — due largely to the massive stake it owns in another biggest in breed: China’s Tencent, Asia’s largest internet business. Naspers has some warts but looks prepared to survive and thrive, with the potential to unlock serious upside.

This South African powerhouse offers real upside potential.

AP. This South African powerhouse offers real upside potential.

There is much to be skeptical about when it comes to the media sector as an investment theme. Old-line companies seem to have a permanent case of anemia, while younger companies suffer from valuations that are, to our thinking, absurd. This does not mean, however, that all opportunity is defunct in the sector — deep value still exists there, it’s just harder to find. We  think that storied South African media conglomerate Naspers presents an intriguing sum-of-the-parts story in an industry where, far too often, there’s no there there.

Naspers recently became the largest company by market capitalization headquartered on the African continent. This caps an impressive decade-plus run of more or less uninterrupted growth in valuation — a run that looks even more impressive when you consider how few traditional media companies have managed anything similar since the digital age really began in the mid to late 1990’s. And Naspers is not a child of the digital age. The company started life in 1915 as the Nasionale Pers, an organization set up by prominent Afrikaners to promulgate the policies of the South African National Party — the most notorious of these being the racialist regime called apartheid. Over the next six decades, helped along by its intimacy with those in power, Naspers grew into one of Africa’s largest media groups. The 1920’s saw it branch out into book publication; by the early 1950’s, they had created a lucrative textbook publishing business alongside a more traditional literary publishing one. Throughout the 1970’s and 80’s the company diversified its market positioning through its acquisitions of English-language publications. These, interestingly, included Drum magazine, the first property Naspers bought that had a primarily non-white audience. In the mid-80’s the company made its initial forays into multimedia, breaking the state monopoly on television broadcasting. Those years were a tumultuous and bloody period for South Africa as well as a period of change for the company: Die Burger, the paper that served as the National Party’s mouthpiece, began to drift away from its political masters with the fall of the Botha government in 1985. In 1992 would come the national referendum that allowed Nelson Mandela and then-President F.W. De Klerk, Botha’s successor, to begin the long process of ending apartheid and fundamentally changing the political landscape of their country

Naspers’ core business remains media, with assets across a variety of platforms. These range from almost 30 South African papers and magazines in English and Afrikaans (including Die Burger and the country’s highest circulation weekly magazine) to MultiChoice, a streaming video platform that reaches customers across the continent, as well as ShowMax, Africa’s most content-rich subscription video service. It also invests in a number of companies across the digital landscape. But over the past decade and a half, under the leadership of Jacobus “Koos” Bekker (regarded as a business visionary across Africa) it has made a series of major acquisitions in various fields of internet enterprise, many of them in firms that are still private or closely held. It owns, for example, a raft of etailers ranging from Poland’s Allegro (an eBay clone), Brazil’s Buscape (more traditional online shopping), and Indian travel portal and fare collator Ibibo. It owns a significant chunk of India’s FlipKart, a company some see as poised for huge success. It owns a majority of big-time Russian classifieds site Avito. It has as well a listed stake in Mail.ru, a leading Russian provider of social media and other digital services. But its biggest stake in digital, and its best in terms of added value, is China’s Tencent. Bekker paid US$32 million for 45.6 percent of the company the year before Naspers itself listed. That stake, the jewel in Bekker’s crown of achievements, has grown in value to the tens of billions — not surprising given that Tencent in the two decades since its founding has become the largest internet business by market capitalization in Asia and the fifth largest in the world. And the true value of Naspers, which we see as standing at a significant discount to current prices, emerges once the various disparate parts of its makeup are carefully considered.

Naspers’ stake in Tencent, despite all the bad news from China, did a roaring business over fiscal 2016, generating US$5.42 billion for Naspers — up some 26 percent year-on-year. No wonder that Bekker’s acquisition is referred to by many as the one of the all-time best corporate investment calls. It’s been diluted from the 45.6 percent Bekker bought down to 34 percent. But given that Tencent itself is currently valued at a whopping US$240 billion, Naspers’ stake in it is worth at current valuations some US$81.6 billion. Naspers’ second-biggest listed investment is a 29 percent stake in Mail.ru, worth US$1.31 billion at current prices. Adding all that up, we arrive at a total value of $88.33 billion, or $205 per share. This means that Naspers, which currently trades at $160.90, with a market cap of $69.56 billion and a meager $333 million in net debt, is trading as of press time at a discount of some 28 percent to its sum-of-the-parts valuation. Indeed, at current prices Naspers is trading at an 18 percent discount to just the value of its ownership in Tencent.

Naspers is arguably cheap in a relative world on a revenue multiple of 11.7. Russia’s Yandex, a search engine big, trades at 20x, which would imply a valuation of US$118 billion — an increase of 70 percent. But even if there’s no movement towards a higher multiple, the company could add huge value just by distributing or selling off its stake in Tencent. And since that stake is owned under a British Virgin Islands company structure, Naspers would face no tax penalty for doing so.

Naspers presents an intriguing sum-of-the-parts story in an industry where, far too oft en, there’s no there there.

It’s also worth noting that despite the historically close tracking between the price of Tencent and the price of Naspers, the two appear to be diverging. This may well be due to the fact that the political situation in South Africa looks to be changing: the ANC, the party that has held the country in a near-monolithic grip since the end of the apartheid era, took the worst drubbing in its history in municipal elections in early August. This seems to have dented investor faith. If the power struggle currently going on between the ANC and its two main political rivals results in a major shift, there is a likelihood — depending on whether the free-market-oriented Democracy Alliance or more left-leaning Economic Freedom Fighters comes out on top —that investor faith could waver further. This could, in turn, create a buying opportunity as Naspers’ valuation widens downward from Tencent’s. After all, the results of a political upheaval in South Africa are not likely to dent the value of China-based Tencent.

The immediate risks here seem to come from the company’s portfolio of ecommerce businesses. That’s the conceptual box holding Avito, FlipKart, Allegro, and their brethren. Hopes for some of these companies remain high. Avito, not-widely known outside Russia, is the world’s third-largest classified site behind Craigslist and China’s 58.com; Flipkart is the top mobile ecommerce platform in India; Allegro outdoes eBay on user engagement metrics. But all this promise has added up to very little earnings power to date. These companies, according to the strategic vision outlined by Naspers, have value in their scalability. It’s an old song in digital, and the recent numbers the group has put up are pretty ugly: a loss of $648 million for fiscal 2016, up 29 percent year-on-year driven by a hefty $845 million spent on operating those assets.

Though that segment is slowly crawling towards overall profitability per the company’s latest presentations, it is nonetheless a collection of highly speculative bets which bring with them significant operating costs. Should Naspers head out on a buying spree to compensate for continued underperformance, those costs might well get out of hand. It is important to note here, however, that the man currently helming Naspers, Bob van Dijk, is one of the people most qualified to effect an ecommerce turnaround. Van Dijk, an eBay veteran, is widely regarded as one of the top ecommerce strategists in the world. This is not a guaranteed fix, of course. And if the hopes the company has apparently invested in Flipkart and Avito prove false, it might prompt a reevaluation of Naspers as a whole. An instructive downside case is China’s answer to Google, Baidu. On current revenue it trades at 5.25x; should Naspers trade down to that multiple, its value would drop to $38 billion, a downside of 55 percent. 

Another obvious risk comes from the gloomy macro picture in China. Their production glut continues and Beijing’s efforts to transmogrify their economy into a consumption-driven one do not yet appear to have borne the kind of fruit the Xi regime would like. Industrial fundamentals keep putting up dispiriting numbers and China’s GDP growth targets — inaccurate though many observers expect them to be — seem nonetheless to be ticking downwards. So if any long-predicted economic implosions occur there, Tencent is likely to feel the brunt and see a withering-away in value, which would be more than catastrophic for Naspers. Of course, investors can always hedge out that exposure and just play the narrowing of the discount.

That said, Naspers has weathered both the tech crash of the early Oughts and the global financial crisis with aplomb. The company’s management may face challenges but there is a demonstrated institutional history of overcoming them. Given the value that Tencent adds, Naspers looks cheap at current prices and positioned for phenomenal growth. It’s an ideal play for value-driven investors: the sum of the parts story is clear cut. And it should have attraction for skeptics of the tech and media industries: in a realm of unicorns, it’s a total workhorse.

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