While international equities have been quite tumultuous this year, the story of the South African investment firm Nasper (NPSNY -0.49%) and its associated entity, Prosus (BORING 0.33%)continues to improve.
While investors in this conglomerate have had a tough few years, Naspers and Prosus have largely outperformed both KraneShares CSI Chinese Internet ETF (THE WEB -4.42%) as good as Vanguard FTSE Emerging Markets ETF (VWO -0.36%) over the past six months.
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These two companies have a somewhat complex cross-shareholding structure, but they are essentially large co-owners of the same set of assets, with Prosus shareholders owning 57% of the portfolio and Naspers owning around 43%.
The combined company’s biggest asset is its 27.3% stake in the Chinese internet giant Tencent (CZECH -4.71%), which represents approximately 75% of the portfolio. However, Naspers/Prosus also has a portfolio of other growing businesses, including online classifieds and food delivery businesses in Europe and South America, fintech assets in India, and technology companies in India. education in the United States and abroad.
The company’s earnings report for the first half of fiscal 2023 contained good news on just about every front. Assuming the combined company can execute on its plans, its outperformance may be just beginning.
The new sale and buyback strategy is proceeding as planned
Despite management’s best efforts, the discount Naspers/Prosus trades at to their assets has widened over the years, much to the frustration of its investors, including Yours Truly.
Yet Naspers/Prosus’ recent outperformance came after management announced a milestone in June. Starting in June, management began selling small shares of its stake in Tencent and simultaneously buying back shares of Prosus and Naspers. Since Prosus and Naspers shares were trading at huge discounts to the value of their stake in Tencent at the time — not to mention every other asset — this move immediately added to the company’s per-share value.
Since then, management has been able to buy back 7% of the outstanding shares of Prosus and 5% of the shares of Naspers, while selling a lower percentage of Tencent. So while the company’s overall stake in Tencent has fallen, shareholders of Naspers and Prosus now have 1.4% more exposure to Tencent on one per share basis than five months ago.
It’s also helpful that Tencent started buying back its own shares in significant amounts this year, as its share price fell. So Naspers and Prosus are not even losing as much exposure to Tencent as their sales would indicate.
A stock dividend of almost 7% is coming
The news is getting even better, as Tencent recently announced it would divest its 17% stake in the Chinese food delivery and travel platform. Meituan (MPNG.Y -2.95%) to shareholders, probably due to regulatory pressure from the government. Prosus management estimates it will receive about $5.4 billion worth of Meituan stock when the spinoff takes place next March.
This would increase Prosus’ asset base by 4.3%, but given that Prosus shares are currently trading at a 33% discount to its estimated net asset value, the next Meituan dividend will amount to a dividend of nearly 7% of Meituan shares, depending on where Prosus shares are trading now.
Other activities will become profitable by mid-2024
As Prosus/Naspers now sells its stake in Tencent, management hopes to refocus the company on its other assets. It is a collection of wholly owned businesses, as well as significant stakes in other publicly traded companies in online classifieds, food delivery, fintech, education technology and online retail.
This conglomerate setup is reminiscent of Warren Buffett’s Berkshire Hathaway, except for one thing – the other major segments of Prosus are not profitable. So the company had to nurture these businesses, with the only cash coming from Tencent’s dividend or other asset sales. It’s different from Buffett’s Berkshire, which has a profitable operating and insurance business that constantly pumps money back into corporate office for redeployment.
However, given the current economic environment, Prosus management is looking to change that. For the first time, Prosus management gave precise projections on when consolidated operations – those that are its wholly or majority owned businesses – would become profitable.
The profitability target is the first half of fiscal 2025, which is the quarter from March to September 2024.
To this end, management has increased some investments in its most promising markets while withdrawing from others. For example, while Prosus has just bought out the remaining 33.3% stake in iFood in Brazil for an additional $1.5 billion, it has also exited iFood’s Colombian operations. Prosus also exited its OLX auto trading platform in Peru and Ecuador.
While non-Tencent segments have collectively increased their revenue by 35.2% to $5.2 billion over the past six months, despite the strong dollar, their business losses have also fallen from $522 million to $998 million. of dollars. However, management promised that profitability would improve from now on as some one-time investments were accelerated in the past half year.
We will see if the management is able to achieve this profitability target in time; However, given the strong revenue growth in these segments despite economic difficulties overseas, it seems reasonable to bet that these profit targets can be achieved on a larger scale, especially now that management is focused on profits. .
What will this mean for the stock?
If management can get the non-Tencent parts of the business to become profitable, that could be a big deal. Not only will Prosus get a steady stream of profits to buy back shares or make new investments, instead of having to sell more Tencent, but it might lead investors to see the conglomerate as something more than a simple derivative game on Tencent.
If that happens, the outsized gains of the past six months could be a sign of things to come, especially given the still huge reduction in net asset value.
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