First published in Daily Maverick 168

US investment guru Warren Buffett may be chuffed that companies such as Prosus and Naspers are taking his advice and buying back their own undervalued shares for want of anything better, or cheaper, to spend their spare cash on. But perhaps the growing discount to net asset value (NAV) at which Naspers, and now Prosus, are trading illustrates a deeper problem that won’t be resolved by mopping up shares, while creating a cross-shareholding between the two companies.

Prosus’s $5-billion (R80-billion) share buyback programme, announced a week ago, dwarfs anything before it on the JSE. It will repurchase up to $1.27-billion of its own N shares and $3.63-billion of Naspers’s stock in an attempt to create more value for shareholders and narrow the gap between their market capitalisations and the sum of the parts of their investments, the biggest of which remains a 31% stake in Chinese internet and gaming giant Tencent.

They are not alone. Investment holding companies typically trade at a discount to NAV for a number of reasons including lack of transparency, layers of management that add to overhead expenses and complicated financials.

Added to that, both Naspers and Prosus have structures that leave voting control in the hands of two local companies: Keeromstraat 30 Beleggings (Keerom) and Naspers Beleggings (Nasbel). While the N shares that are accessible to investors carry most of the economic value, the A shares, available to a select few, control more than 50% of the voting rights. That’s a deterrent to some big fund managers that are precluded from investing clients’ money in structures like these — the very investors Naspers hoped to draw in when it listed Prosus on Euronext Amsterdam in 2019.

Financial insights platform The Finance Ghost says investment companies are under pressure across the board, suffering significant discounts to NAV as investors lose patience with inefficient structures and underperforming management teams with questionable capital-allocation track records.

“In general, returning capital to shareholders can send a signal that management is focused on shareholder returns rather than empire-building, which is clearly positive,” The Ghost says. “In cases where EPS is being boosted purely for the sake of it, perhaps due to management incentivisation, this carries a negative connotation.”

That’s probably not the case with Prosus. Sure, fewer shares in issue will magnify earnings on a per-share basis when both companies report back following the repurchases. While that may make management look better, sophisticated investors take this into account, rather focusing on free cash flow and other fundamentals in valuing the businesses.

It’s about 14 months since the listing and the gap between the market value of Naspers and Prosus relative to their Tencent stake has widened rather than narrowed. While both companies’ shares have risen strongly this year, they’ve been outpaced by Tencent. Will buying back shares solve the problem?

So far, it hasn’t. Earlier in 2020, Naspers sold another small chunk of its retained stake in Prosus, using the cash to buy back some of its own stock.

Short of unravelling their structure, perhaps what they need are more great deals. But as they discovered, and hence the share buyback, they don’t come cheap at the moment. Prosus has walked away from a few transactions in 2020 as it stuck to its investment principles rather than overpaying for an acquisition.

Naspers and Prosus share the same top management. They get paid very well. Buying back shares doesn’t justify their salaries.

“Prosus operates in high-growth markets and should have no shortage of investment opportunities, especially after an expensive global listing structure was put in place in Europe to take the group to the world stage,” says The Ghost.

The Naspers/Prosus double-discount structure, coupled with excessive executive remuneration in the view of many market analysts, is a major headache that will be difficult to rectify. “If the management team cannot demonstrate an ability to deploy cash into value-adding opportunities, the discount may get even worse.”

Delta probes dodgy accounts

Perhaps there’s a good reason the on-again, off-again merger between Delta Property Fund and Rebosis never occurred. And Rebosis is no doubt glad to be out of it as forensic investigators scour Delta’s accounts.

The two funds announced a second attempt at merging to create South Africa’s biggest black property fund in August 2019 following a previous engagement more than six years ago. Naturally, as part of the renewed courtship, they took a closer look at each other, conducting reciprocal due diligence. Seven months later, they called it off without giving any reason.

Perhaps Rebosis had a glimpse of what was to come.

Delta, whose biggest tenants are the national and provincial governments, received an anonymous tip on its whistle-blower hotline that resulted in it announcing in September that it was investigating certain “circumstances”. That was just weeks after Phumzile Langeni replaced JB Magwaza as chair at its annual general meeting at the end of August.

A week before the AGM, after receiving the preliminary findings of the first forensic investigation, founding CEO Sandile Nomvete quit with immediate effect. Chief financial officer Shaneel Maharaj followed. Chief operating and investment officer Otis Tshabalala chose not to complete his three-month notice period.

This week, Delta said a second forensic investigation into possible procurement irregularities and misappropriation of funds had wound up, with a final report expected shortly.

The investigation, by Mazars Forensic Services, covered the past 2½ years, with further emphasis on the double payment of commissions and improper procurement processes. Delta says it’s still trying to determine the impact of what’s been uncovered on its historical financial statements and how it will affect its share price, which has fallen by 75% over the past 12 months.

In the meantime, JJ Njeke has also resigned as lead independent non-executive director and chair of the audit, risk, and compliance committee. He leaves at the end of November, when the company is expected to release its interim results.

Crisis becomes opportunity for Aspen 

Aspen appears in much better health since selling off a number of non-core businesses, reducing debt and refocusing its efforts on its emerging market businesses. That’s reflected in its share price, which has gained close to 40% from March’s low point.

The recovery was assisted by a rise of more than 11% on Monday after it announced global healthcare group Johnson & Johnson was trialling a Covid-19 vaccine candidate at the Port Elizabeth facility where it has invested more than R3-billion in hi-tech equipment and systems to manufacture state-of-the-art drugs and vaccines.

The rise in its shares this week indicates that investors are pricing in a successful outcome to the clinical trials. If they’re right, the company has the capacity to manufacture 300 million doses a year. While J&J will decide where the vaccines are distributed, it has made a commitment to universal coverage, which means some could stay in South Africa.

With no end in sight to the virus, Aspen’s fortunes clearly appear to have turned. DM/BM