BROKERS’ NOTES: Buy Naspers, sell Sasol
Rowan Williams of Nitrogen Fund Managers on what the smart money is doing
Rowan Williams, portfolio manager: Nitrogen Fund Managers
We are finally saying we think Naspers is a buy. It’s been a bellwether stock and had a period of outperformance and then a long period of just moving sideways, but that has jolted management and the board into action to really commit to unlocking value.
We see a clear path to a full value unlock in a medium-term horizon — maximum five years but probably more quickly, over three years.
There are some points to make: there is the ongoing buyback programme and the change in management from Bob van Dijk, who was focused on looking to expand the group, to the new CEO, who is looking to unlock value. This was also precipitated by the rump asset (the nonlisted assets) finally moving to cash-flow-positive profitability.
And that looks slightly ahead of schedule: in the the first half it will move to the milestone of profitability.
If the rump is profitable, it can stand separate to Tencent and doesn’t require the Tencent dividend to support it, which would also be a catalyst to its unbundling. The other clear traction is in Tencent itself, which looks cheap on a forward p:e of 14 with its own portfolio of assets it can in turn unbundle, so you have layers of value here. Tencent is a value play and it is also sterilising the selling of shares by Naspers and Prosus by buying their shares. So, in a way, Tencent is returning cash to Naspers shareholders, which is obviously value accretive. And it is a rand hedge.
Sasol unfortunately is facing significant headwinds both from an investor perspective and on an environmental, social and corporate governance basis by having to control emissions, which means additional costs. The coal and gas feedstock for Secunda is drying up, and in the absence of a new find this is going to result in increasing input costs. The other factor is that the quality of its earnings is not high: they look high but cash conversion has been poor, so the real cash earnings are much lower and the multiples are not actually that low.
With the relaxation of exchange controls via regulation 28 changes, South African investors are now able to get their oil and gas exposure elsewhere; they’re not restricted to investing in Sasol, so that’s another reason for the continued selling. Absent a change in the investment case, we don’t see that turning around.
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