Big spender Naspers is worth less than the sum of its parts

A logo of Naspers Ltd. sits on the side of the headquarters of the Media24 Ltd. building in Cape Town on Friday, August 30, 2015 Photo: Graeme Williams/Bloomberg via Getty Images

JOHANNESBURG - When the financial history of SA in the first two decades of the 21st century is written, the role played by Naspers will be a prominent one. Its achievements reflect many of the important themes of our financial times, providing outstanding returns to shareholders that have made Naspers by far the most important contributor to the JSE. Market value rose from R7bn in 2003 to nearly R850bn by the end of 2016.

The value added for shareholders came from participating in the new digital economy and by taking advantage of SA’s access to global markets. The most valuable action of Naspers management was the decision taken in 2001 to purchase 46.5% of Tencent (a Chinese internet business listed in Hong Kong) for 34m. This stake has since been reduced to 34.33%.

For all its past success, the management and directors of Naspers have a very large problem with investors. The market reveals that Naspers would be worth much more to its shareholders if it sold off all its assets and paid off its debts. The assets it has invested so heavily in (in addition to its investment in Tencent) would have significant positive value in other hands, surely many hundreds of billions of rand. Such sales or an unbundling of assets is regarded as very unlikely — hence the lower sum of parts value attached to Naspers.

What the market is telling management is that its impressive investment programme is expected to destroy many billions of rand in shareholder value. That is, the cash to be invested by Naspers is thought to be worth many billions more than the value of the extra assets the company will come to own and manage. This investment programme is very ambitious. In its 2016 financial year the company reported development expenditure of $961m and merger and acquisition activity of $1.5bn. This activity was facilitated by additional equity and debt raised of $4.47bn, of which 2.27bn was applied to repaying existing debts.

Management must believe differently — that the cash it intends to invest on such a large scale will add value for shareholders by returning more than the cost of this capital (achieve an internal return of at least 8% per annum when measured in dollars or 14% in rand). If it achieves such returns, it will add value for shareholders.

But there is room for an important compromise between sceptical investors and confident managers. And that is to separate the Tencent investment from the rest of the business. If all the dividends received from Tencent, of the order of R2.7bn in financial 2017, were ceded directly to Naspers shareholders, these dividends, which have been growing since 2007 at an annual average rate of about 50% in rand and 40% in dollars, would be valued generously, as are all Tencent dividends. The current dividend yield is 0.24% (that is, the price is 400 times the dividend).

If Naspers established a tracking stock that passed on the dividends directly to its shareholders, it would be valued at about 400 times R2.7bn, or R1.08-trillion, about R200bn more than the current market value of Naspers itself. This tracking stock would be a pure clone of Tencent and would be expected to trade on the same dividend-generating basis as Tencent itself.

Shareholders would surely greatly appreciate an immediate R200bn-plus value add — and the growing dividend flows from Tencent — via Naspers. The quality of Naspers management could then be measured much more clearly without the complication and comfort of its Tencent stake.

Kantor is chief economist and strategist at Investec Wealth & Investment. He writes in his personal capacity.

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