Pressure on Naspers to use its cash pile
Management acknowledges that shareholders are frustrated but is sure it can find good investments
If Naspers does not find good opportunities to deploy its huge cash pile, Africa’s most valuable firm will start returning funds to shareholders, management told investors this week.
After trimming its stake in China’s Tencent and exiting its investment in India’s Flipkart, Naspers is sitting on more than US$10bn in net cash.
It’s a staggering number, but the group’s war chest pales in comparison with those of some of its larger technology rivals. And with companies like Google being so cash-flush, competition for assets is intensifying.
Google, which has about $95bn on its books, announced earlier in June that it is investing $550m in JD.com, a Tencent associate company that is the second-biggest e-commerce firm in China after Alibaba.
Naspers CFO Basil Sgourdos said in a conference call with analysts on Monday: "If we can’t find opportunities to invest at good returns, we will start returning cash to shareholders."
But management is confident the Cape Town-based group will outsmart its rivals, CEO Bob van Dijk said in the analysts’ call, adding that Naspers will continue to look for early-stage investments rather than mature businesses.
"We are still looking for high-growth opportunities and I think it’s fair to say that while there’s a lot of capital pursuing these opportunities, we’ve demonstrated that because we understand certain segments really well, we’re able to catch opportunities quicker than most and derive a great return.
"I think an example is a company like Swiggy, where there are high valuations in this space [online food delivery], but we’ve also managed to catch investment opportunities early and benefit from that."
Naspers put more cash behind Swiggy earlier this month, lifting its stake in the Indian firm to 24%. As Flipkart had done by the time Naspers sold its stake to Walmart, Swiggy has the potential to become a multibillion-dollar business, Van Dijk told the FM.
Naspers hopes that by investing wisely in classifieds, online payments and food delivery businesses, it will be able to show investors that it’s more than just a cheap entry point into Hong Kong-listed Tencent.
It invested $2.2bn in six companies in the year to March — in which core headline earnings rose 72% to $2.5bn — and has invested $394m in the three months since.
The group’s capital allocation is not to blame for the hefty discount at which Naspers is trading, said Sgourdos.
"We understand and acknowledge that the discount is a source of frustration [for shareholders], and it’s equally frustrating for us," he said.
The group has made significant progress to "lock in value", having increased profitability across all segments in the year ended March, allocating capital in a disciplined fashion, and securing returns by selling its Flipkart shares.
It has bolstered the balance sheet through various asset sales to fund growth and has taken steps to avoid shareholder dilution, including not issuing new shares as part of the employee incentive scheme. Further, Naspers has improved disclosure and has done a better job at engaging with shareholders.
"So the discount’s not a capital allocation problem. It’s a structural issue — mainly our size in the JSE," Sgourdos said.
Naspers makes up more than 20% of the JSE’s top 40 index, which means SA funds have concentrated positions.
And as the new JSE capped index has limited the exposure of a single stock to 10%, "SA funds continue to be forced sellers of Naspers".
But Sgourdos was tight-lipped about management’s plan to fix the discount problem, saying only that the options to pursue a secondary listing abroad and unbundle Tencent have been shelved.
"A significant amount of work has gone into uncovering further solutions to solve the structural issue — these are complex matters with significant implications for the long term that require detailed and thorough analyses so that we make the right choices," said Sgourdos.
"There are a couple of good ideas that could have a significant impact, and we’re hard at work on these. If they prove viable, and should our board approve them, we’ll come back and let you know more."
Sasfin Securities senior portfolio manager Nesan Nair says he’d like to see Naspers use some of its cash pile to buy back its own shares. "But management seem to think they can achieve better returns for shareholders through investments — let’s see," says Nair.
Sgourdos said share buybacks will not address the structural problem behind the discount and might only result in a short-term bump in the share price.
Alastair Jones, a UK-based analyst at New Street Research, which rates Naspers as a "buy", says there is clear evidence that management is focused on improving profitability "in an attempt to convince the market to re-assess the excessive holding company discount". The discount stands at about 45%, Jones says in a note.
But Albert Saporta, a director of Geneva-based investment advisory firm AIM&R, which has a small stake in the Internet holding company, is once again disappointed that Naspers has not announced any drastic steps to tackle the discount.
Saporta has written two open letters to Van Dijk in recent months, calling for Naspers to spin off its stake in Tencent to shareholders.
In a blunt response to the FM this week, Saporta says he is planning a third note to the CEO. "I will be writing to [Naspers] soon; they are useless," he says.
Even Paul Theron, CEO of local money manager Vestact, which believes Naspers is materially undervalued, thinks something has to give relatively soon. "Just as much as nature abhors a vacuum, capitalism abhors a value discount," says Theron.
"I’ve got a feeling some greater pressure is going to come [on management]. We’ve seen this many times over in other markets with other companies, so my sense is that much as they’d like to be the captain of their own destiny, that could get taken away from them in time if this gap persists."
He refers to how activist investors coerced Yahoo into selling a portion of its stake in China’s Alibaba. Just as Naspers’s stake in Tencent is worth more than Naspers itself, Yahoo’s stake in Alibaba at the time was worth more than the search engine’s operating business.
In an interview with The New York Times in April, former Yahoo CEO Marissa Mayer said selling Alibaba stock was a "tragic" error that eroded "tens of billions of dollars of upside".
She blamed short-sighted investors for forcing the company’s hand in the wrong direction.
"Sometimes that shortsightedness of wanting to get a return quickly can cause you to miss a much bigger gain," she said.