Prosus and Naspers still reliant on Tencent

While Naspers and Prosus management is correct in saying that the global internet group delivered good results for the first six months of its financial year, a closer look at the figures shows that most of the growth can still be attributed to its investment in Tencent. This investment, which Naspers made decades ago, keeps on delivering.

“The group delivered strong results, with group revenues growing 32% to $13 billion, trading profit growing 42% to $2.6 billion and core headline earnings of $1.6 billion,” says Basil Sgourdos, the group’s chief financial officer.

Listen: Sgourdos discussed Naspers’ interims with Nompu Siziba

Commentary to the results noted that Tencent’s contribution to the group’s trading profit increased during the six months to September, while tables included in the results announcements of both Prosus and Naspers show that nearly all the profit growth over the comparable six months came from Tencent.

Naspers’s results show that while revenues increased by 44% to $2.5 billion – excluding $10.5 billion from equity-accounted investments (mostly Tencent) – the disclosure of trading profit by segment indicates that nearly all of the profit still comes from the equity-accounted investments.

Naspers trading profit (loss) by segment
$ million	Six months to Sep 2020	Six months to Sep 2019	Change
Classifieds	42	63	-33%
Payments and fintech	-34	-35	3%
Food delivery	-166	-273	39%
Etail	32	-17	>100%
Travel	0	-19	100%
Other	-125	-85	-47%
Total e-commerce	-251	-366	31%
Tencent	3 426	2 683	32%
Mail.ru	38	84	-55%
Total social and internet platforms	3 464	2 767	29%
Media	-13	7	-286%
Corporate	-9	-8	-13%
Total trading profit	3 191	2 316	38%
Less equity-accounted investments	-3 278	-2 458	-33%
Total trading profit	-87	-142	39%

Source: Naspers interim results, September 2020

Tencent and other equity-accounted investments contributed nearly $2.8 billion to trading profit, an increase of $674 million compared with the first six months of the previous financial year.

But Naspers still posted a trading loss of $153 million as its newer investments in e-commerce are still suffering losses.

The losses are smaller, especially in the large and growing food delivery businesses. The food delivery segment cut its losses by nearly $100 million compared with a year ago, as revenues doubled to $610 million in the six months under review.

It’s an amazing figure: the millions of small fees to deliver a pizza, burger or Chinese take-out add up to more than $100 million, or an astounding R1.6 billion, per month.

Management points out that trading losses in the e-commerce segments reduced by 22% ($94 million) to $339 million, mainly due to the $96 million improvement in profitability from the food delivery businesses and the first period of profitability from online retailing, dubbed the Etail segment.

Covid-19 impacts

“For the six months ended September, Etail reported a trading profit of $10 million compared to a $37 million loss in the prior period. Covid-19 impacts on trading profit included a 64% lower trading profit from Classifieds, with Payments and Fintech flat on the prior year’s period,” noted management.

However, they say that both these segments recorded a good rise in profitability during the last few months.

The formal results announcement states that performance of the classifieds segment in the first six months differed meaningfully by quarter, with the first quarter taking the brunt of lockdown regulations in key markets. Revenue and profitability dropped, but user activity recovered strongly to equal pre-pandemic levels with a similar improvement in profitability.

Naspers reports that the payments and fintech segment reported good results, despite Covid-19, with revenue growth of 27% to $252 million.

One can argue that the pandemic actually supports a switch to online payments and fintech, as reported by a lot of other businesses.

“We entered the pandemic with financial strength and good momentum, and in the second half of the period, our businesses recovered well from the initial impact of Covid-19 and are now fundamentally stronger than they were going into the pandemic,” says CEO Bob van Dijk.

“The pandemic has accelerated activity in the consumer internet space, benefiting our businesses. We have seen particularly strong growth in food delivery, online payments, etail, and edtech.”

Thus, Naspers reports that the group’s etail businesses performed well during the Covid-19 pandemic. “With many retailers closed or limited in their operations, more consumers are shopping online,” says management, adding that Naspers and Prosus have interests in the leading online retailers in their respective markets.

“Our Etail businesses were well positioned to serve this surge in demand. In addition, they have adapted their operations to satisfy evolving customer needs brought on by this unprecedented situation,” comments management.

SA online shopping

In SA, consumers also migrated to online shopping due to the coronavirus pandemic, with Takealot.com reporting growth of 85% in rand terms.

“In the first quarter, SA operated under strict government lockdown regulations. Takealot.com was permitted to sell only essential goods, while Superbalist and Mr D Food could not operate at all,” noted Naspers.

“The business rebounded in late May when trading restrictions were lifted and all three businesses exceeded their pre-Covid-19 growth rates in the second quarter.”

In a short video broadcast to shareholders, Van Dijk said the group was in a strong financial position relative to many other companies when Covid-19 hit, and the internet-based businesses quickly adapted to the lockdown and emerged stronger.

Well-positioned for accelerated online growth

“Looking ahead, there is still much  uncertainty, but as a global consumer internet group, we are well positioned for the accelerated growth in online,” says Van Dijk.

“We have good financial flexibility, a strong balance sheet and a net cash position of more than $4 billion. We will continue to invest with discipline in food, OLX, Autonet and Edtech, while driving profitability in our more established e-commerce segments,” says Van Dijk.

Read: Prosus on the hunt for deals

Both Van Dijk and Sgourdos referred to the problematic discount of the Naspers and Prosus share prices to their respective underlying net asset value (NAV), saying that management remains committed to addressing the structural issues which have caused a widening of the discount to NAV recently.

Share buybacks

Together with the announcement of the results, Naspers and Prosus also announced more details of Prosus’s intention to repurchase some $5 billion worth of Prosus and Naspers shares in an attempt to reduce the discount to NAV. The repurchase was proposed a few weeks ago.

Read: Prosus to buy up to R82bn in its own, Naspers shares

Share purchases on stock markets will commence this week, on November 24, and end on November 26, 2021, or sooner if competed quicker. Prosus aims to repurchase up to $1.4 billion worth of Prosus N ordinary shares and $3.6 billion of Naspers N ordinary shares.

Read: Naspers’s insurance plan – Prosus

According to the announcement, Prosus has appointed intermediaries to execute the purchases within certain parameters. These intermediaries will make their trading decisions independently from Prosus and Naspers, which will allow for purchases in the open market during open and closed periods.

The Prosus shares will be cancelled, while Naspers shares repurchased will be held as an investment by Prosus.

However, Prosus assures shareholders that it will not exercise any voting rights attached to the Naspers shares.

Local shareholders seem to have welcomed the results and the details of the share buyback, with Naspers shares increasing by 2.8% or R87 to R3 208 on Monday and Prosus by 2.9% or R48 to R1 688, pushing the JSE Top 40 up by just more than 1.2%.