After ignoring shareholders’ calls to unbundle or sell its stake in Tencent, Naspers management has done a U-turn and announced an open-ended share repurchase programme of Prosus and Naspers shares, funded by the sale of Tencent shares.

The daily sale of small numbers of shares in the Chinese company will be “orderly and on-market”. Management has not specified the size of the stake to be sold — it owns just under 29% — it has not specified the time frame over which this could happen — it could be several years — and it has not specified the extent of the share buybacks, but it will ask shareholders for permission to buy back up to 50% of Prosus stock at the coming AGM.

The ultimate objective is to bring the share price and net asset value more in line. Currently, the Naspers share is trading at 40% of net asset value, while Prosus is trading at about 50%.

“We will continue [selling Tencent and buying back shares] until the elevated levels of the discount are less elevated,” said Naspers and Prosus CEO Bob van Dijk. 

This is the third time that Naspers has announced it will sell down its stake in Tencent, but this time it’s different. In both 2018 and in 2021 Naspers sold a 2% stake in the Chinese giant, raising almost $10-billion in 2018 and $14.6-billion in 2021. These funds were ploughed into growing its global e-commerce business. 

This time Naspers will sell Tencent in incremental drips — no more than 3% to 5% of Tencent’s average daily trading volume, an amount that should have no bearing on its share price. 

“When the market sees these block transactions it puts pressure on the price,” explains Van Dijk. “We are not sellers because we have lost faith in Tencent, or China. On the contrary, we are huge believers in Tencent.”

What management is doing, he says, is making use of a market disturbance. 

“The reality that we are facing is extraordinary. Prosus’ operational performance is exceptionally strong, particularly in e-commerce. We are seeing increasing profitability in food delivery, classifieds, payments and ed-tech. Yet the stock price performance says something else. It’s an issue, but also an opportunity. This step is about making use of that market inefficiency.”

The buyback programme is likely to boost net asset value per share for both Prosus and Naspers, he says. “It will also rebalance our asset base towards our fast-growing non-Tencent assets, whose value we expect to increase over time while retaining exposure to Tencent’s significant value creation potential.” 

While this action does not resolve the complex holding structure that investors don’t like, the market did see this as a positive step towards resolving the discount issue and the share price/s responded accordingly: Naspers vaulted by 26.26% to R2,415, and Prosus climbed by 20.3% to R1,058.54. 

“This is positive stuff,” says Zwelakhe Mnguni, CIO at Benguela Global Fund Managers. “But I wonder how much of that cash would end up in shareholders’ hands as there is a risk that management will chase more deals to try to plug the earnings gap left by the Tencent sell-down.”

“Desperate times call for desperate measures, adds Terence Craig, CIO at Element Investment Managers. “This is an indirect admission that the previous strategy to unlock value, buy growth businesses, narrow the discount, was a failure.”

Others were more outspoken, believing they have seen this movie before.

“Management is selling down the group’s most valuable, cash-generating asset, putting permanent pressure on the Tencent share price. The proceeds of the Tencent sale will be used to try and narrow a discount which is already close to a fair level, and will certainly not move much with this management team in place,” says Pieter Hundersmarck, global multi-asset portfolio manager at Flagship Asset Management.

“All this at a time when their growth investments are going to require more capital (not less), and when we are still at the start of an interest rate hiking cycle (which will continue to depress the valuation of their growth investments).”

This has been tried before, he adds. “There will be no serious change at Naspers until new management is put in place, and with investors not allowed to have a say in the structure, this looks unlikely.” 

That said, the e-commerce business is growing  

Naspers announced that group revenue was up by 24% to $36.7-billion in the year to March. This was driven by strong e-commerce growth, which saw revenue jump by 50% to $10.7-billion with profitability in core operations. 

Investment in the e-commerce business is continuing at a pace, with the group investing $6.2-billion over the year in new opportunities and a further $649-million in organic growth. As a result, overall trading profit fell by 6% to $5-billion. 

The company also financed $6.2-billion worth of share buybacks over the year, in its bid to enhance net asset value.

“If I look at the business performance versus market prices, we have had a standout year in everything but the stock market,” says CFO Basil Sgourdos. 

“The trading profit of our core e-commerce portfolio has grown by 21%,” he says. What this means is that the OLX Group is profitable, but not the newer business OLX Autos. Similarly, the Brazilian restaurant business iFood is profitable, but not its extension into groceries or fintech. Indian fintech PayU is profitable, but not its consumer lending business LazyPay or digital credit platform PaySense. 

Management argues that these businesses will all be profitable at scale.

Core headline earnings also fell, down by 16% to $2.1-billion, reflecting a lower contribution from Tencent, post the group’s sale of 2% of its holdings in Tencent, increased investment in growth adjacencies and strategic M&A, and higher finance costs.

The investment in growth paid off, notes Mnguni, but so did the losses. “My concern, as always, is that e-commerce is a low barrier to entry business.”

Not so, counters Van Dijk. Take the group’s South African business Takealot, for instance, which is facing looming competitive pressure from Amazon. The e-retail business grew revenue by 36% in the year and held its trading loss to $7-million, similar to last year. 

“Takealot has built a well-organised logistics and delivery network — at scale. That is not easy to replicate,” he says. DM/BM