Company Results Analysis 6 December 2017 Recommendation: Overweight JSE Capped SWIX weighting: 10.00% Recommended Exposure of up to: 14.05% JSE Code: NPN Current Share Price: ZAR 348000c USD 26150c NASPERS LTD Sector: Consumer Discretionary Max Sector Weight: 32% Nature of Business: Naspers is a global internet and entertainment group and one of the largest technology investors in the world. The group operates in more than 120 countries and markets which offer long-term growth potential. Naspers builds leading companies that empower people and enrich communities. The group has sizeable investments in Tencent (SEHK 00700), Mail.ru (LSE: MAIL) and Flipkart. Naspers is listed on the Johannesburg Stock Exchange (NPN.SJ) and has an ADR listing on the London Stock Exchange (LSE: NPSN) Stock Data: Market Cap (R'bn) 15 95.6 52-Week High 414 299 No. of shares 439 52- Week Low 192 464 Avg. daily value (R'm) 59 52.7 1 Year TR 83.83% Free-float 92.6% 1 Month TR 4.61% Beta 1.45 Source: Bloomberg ZAR Interim results for the period ending Sep-17 Key Financial Data:* 10% Sep-17 Sep-16 Headline EPS 350.0 HEPS Growth 65.1% 26.2% Historical P/E 47.4 Turnover Growth 5.0% -0.8% NAV 3,839.3 Operating Margin 13.8% 10.1% P/NAV 6.7 Interest Cover 5.5 2.8 Current assets NAV 567.1 Effective Tax Rate 9.0% 13.9% NTAV 2,997.5 ROE 16.2% 15.0% DPS (last 12 months) 42 Debt/Equity 2.3% 15.5% Dividend Yield 0.2% Cash/EPS 0.9 0.8 PEG Ratio* N/A ROC 20.4% 17.7% Share Price 26150 Quality Rating** See *Value Filter and/or **Quality Filter *USD Comments on results: *USD Franco Pretorius Head of Equity Research +27 (11) 996 5200 Franco.Pretorius@psg.co.za Tayla Wesson Equity Analyst +27 (11) 996 5200 Tayla.Wesson@psg.co.za Naspers delivered positive results for the period ending 31 September 2017 supported by growth in the e-commerce business and robust results achieved by Tencent. Group revenue, measured on an economic-interest basis, rose by 33.0% y/y (up by 39.0% on a normalised basis) to $9.0bn. The group s share of equity accounted profits rose by 57.0% to $1.4bn underpinned by the growth in Tencent. Adjusted operating profit rose by 43.0% to $429.0m supported by a decline in development spend. The adjusted operating margin improved to 13.8% from the 10.1% in the previous period. Development spend on the consolidated business was down by 18.0%, thanks to the competitive positions of the early-stage business which required less investment. Excluding the $155.0m investment in Showmax and letgo, development spend on the older assets was down by 12.0%. Net interest fell by 27.0% to $78.0m supported by the lower use of credit facilities and the proceeds from the Allegro disposal. Core headline earnings and core headline EPS grew by 65.0% to $1.5bn and 350 US cents respectively. No interim dividend was declared.
Operational Overview: -Internet business (Contributes 77.0% to group revenue): The internet segment benefitted from solid growth by Tencent and classifieds. Revenue grew by 42.0% y/y (up by 52.0% y/y on a normalised basis) to $6.9bn supported by strong results achieved by Tencent and classifieds. *Ecommerce: Revenue rose by 15.0% y/y (up by 38.0% y/y on a normalised basis) driven by strong performance by payments, classifieds, food delivery and etail. Trading losses rose by 9.0% to $318.0m with equity accounted investments contributing 44.0% to the loss. However, on a normalised ecommerce losses declined by 17.0%. The group s profitable e-commerce businesses contributions to revenue rose by 50.0% y/y (up 36.0% y/y on a normalised basis) and trading profit rose by 55.0% y/y (up by 52.0% on a normalised basis). *Classifieds, excluding the additional investment in letgo, turned profitable during the period. Revenue was up 47.0% (up 38.0% y/y on a normalised basis). Overall user engagement continues to gain traction with monthly active users (MAU) in apps up by 30.0% to 85.4m. The focus for OLX is to continue to expand the monetisation markets with revenue per internet user up by 34.0%. OLX Europe benefitted from tailwinds in the vertical business while OLX Brazil is expected to reach break-even by the end of FY18. Management have highlighted that there is still significant upside potential for the classifieds businesses. Avito achieved strong performance during the period with revenue up by 34.0% while still maintaining margin of above 60.0%. The letgo business in the US continues to gain momentum with the group still achieving solid growth is mobile MAU s despite the recent pull back in marketing costs. *Etail: The B2C etail business continued to improve profitability as its scales. Revenue grew by 16.0% y/y (up 37.0% y/y on a normalised basis) supported by strong growth in gross merchandise value (GMV) by Takealot (72.0%) and Flipkart (43.0%). Flipkart continued its growth acceleration and further strengthened its market position. During August 2017, the group acquired a controlling stake in Takealot South Africa by increasing its investment by $74.0m. Takealot achieved strong results with GMV growth of 72.0% significantly higher from the previous year. *Payments: The PayU division continues to scale rapidly and now operates across 17 markets. with the number of transactions up by 86.0% y/y. Strong growth was achieved in India. As a result of the consolidation in India with Citrus Pay as well as consolidation in other markets. As part of the group s focus on in building its credit business that leverages its payment platform, the group invested $99.0m in Kreditech, a credit scoring business. *Online Food: Naspers has focused on expanding its online food-delivery business. The ifood business continues to grow rapidly. During the period, the group reinvested the ifood s profits to continue scaling the business. The group entered into a $775.0m deal, subject to regulatory approval, to up their stake in Delivery Hero to a 24.0% ownership on a fully diluted basis. Delivery Hero continues to show strong growth with revenues up 64.0% y/y and orders up 48.0% y/y. Delivery Hero is listed on the Frankfurt Stock Exchange with a Naspers share worth 5 680cps.The group also invested in Swiggy, the largest and fastest growing food delivery company in India. *Mail.Ru: Mail.Ru is listed on the London Exchange with a Naspers share worth 5 636cps. Mail.Ru experienced 33.0% revenue growth to RUB26.3bn underpinned by growth in online gaming revenues and advertising.
Advertising revenues rose by 26.0% to RUB10.3bn supported by growth in advertising, social networks, mobile and videos. Massively multiplayer online (MMO) games revenue increased by 53.0% to RUB7.8bn result supported by the success of new games such as HAWK and Skyforge. Internet value-added services (IVAS) returned to revenue growth with revenue of RUB7.3bn, up by 19.0% driven by cross-platform subscriptions. Vkontakte is still the largest social media platform in Russia with 60.0m daily active users *Tencent: Tencent is listed on the Hong Kong Stock Exchange with a Naspers share worth 452 718cps. Tencent delivered solid results with revenue of RMB106.2bn, up by 57.0% y/y supported by the group s growth drivers which include PC and Smartphone games, digital content subscriptions, payment-related services and online advertising. Non-GAAP operating profit rose by 37.0% y/y to RMB 38.6bn. Margins decline impacted by changes in the revenue-mix to low margin products, high channel costs for smartphone games and increased investments in content. Online gaming revenue rose by 36.0% to RMB46.7bn supported by strong revenues from higher average revenue per user (ARPU) from Key PC games, smartphone game users and a higher proportion of paying users. In the second quarter of 2017, revenue from smartphone games outweighed the revenue from PC games. PC gaming revenue is expected to decline in the future. Revenue from online-advertising was up by 52.0% y/y driven by increased traffic growth on video and increased growth in advertising on Weixin mobile browsers and other platforms. Digital-content revenue recorded rapid growth over the period supported by the strong performance of video and music services. Weixin and WeChat achieved 19.0% y/y growth in monthly-active-users (MAU) which reached 963.0m. -Video entertainment (Contributed 15.0% to total revenue) The division achieved revenue growth of 8.0% (up 7.0% y/y on a normalised basis) to $1.80bn on the prior year while trading profit was up marginally to 4.0% (up by 3.0% y/y on a normalised basis). The group achieved 11.0% growth in its subscriber base with most of the growth coming from the lower-end subscription tiers, which still offer significant growth opportunities. Despite the tough macro-economic environment, DSTV South Africa delivered stable results with good profits and cash flows. In South Africa, average revenue per user (ARPU) remained relatively stable at R347.0 with solid increases in the group s personal video recorder penetration. PVR penetration is now 20.0% of the base and has been key in reducing churn. In Sub-Saharan Africa, the financials have stabilised as a result of the turnaround strategy implemented and subscriber growth has returned to a healthy level (+13.0% y/y). ARPU, now $24.0, was impacted by forex movements. Management expect this division to turn to profitability profitably assuming no further currency weakness. -Media (Contributed 8.0% to total revenue): Media24 (excluding Novus) achieved satisfactory results despite the structural decline in revenue streams. Revenue grew by 11.0% (up by 5.0% on a normalised basis) to $315.0m while trading profit increased significantly by 75.0%. The performance of the division was supported by cost saving initiatives. The division remains focused on cost containment measures as well as the migration to digital formats. During September, Napser s unbundled Media24 s investment in Novus to shareholders.
Consensus Forecast: Forecast Date HEPS (cents)* Forward P/E Dividend (cents)* Forward Dividend Yield % 2018-03-31 656 39.3 51 0.2% Growth year 1 61.6% 18.6% 2019-03-31 895 28.8 61 0.2% Growth year 2 36.4% 19.6% 2020-03-31 1 238 20.8 74 0.3% Growth year 3 38.3% 21.3% Source: Bloomberg *USD Company prospects: The group will remain committed to scaling its ecommerce business to achieve profitability and cash generation. Management will focus on implementing cost control management and on repositioning these businesses to help mitigate the impact of increasing competition in the business. The group will continue to look for opportunities to invest in the next wave of growth. The introduction of artificial intelligence and machine learning is a key focus for all spheres of the business. Management highlighted that the current business plan is fully funded.
Recommendation: We feel the share offers value at current levels despite Tencent s stretched valuation. Tencent was a key contributor to performance and remains the dominant factor for investment return given its size in the portfolio. Naspers is currently trading at a 26% discount to the value of its listed investments and at a 32% discount to our estimated sum of the parts (SOTP), translating into our overweight recommendation. Given the evolving nature of many of the group s businesses, determining sustainable growth accurately remains a challenge as high growth has already been priced into Tencent and Mail.ru. Forecasting risk thus remains high. The rump still trades at a negative value, but offers material upside potential supported by an improving return on invested capital (ROIC) profile and the improving trajectory of these assets. The improved disclosure of the group s unlisted assets, together with continued market share gains of these assets, could support the narrowing of the discount. The group s continued investment in letgo remains a drag on the profitability of the classified business. Results of Pay TV South Africa s improved with solid growth in the subscriber base and better cost controls supporting performance. However, the Sub-Saharan business remains under pressure. E merging market risk aversion and changes in venture capital risk appetite could likely have a material impact on the valuation of investments. Portfolio guidance: We feel the share offers value and would recommend an overweight position in a portfolio. Given Naspers 10% cap in the capped Swix index we recommend portfolio exposure of up to 14.0%.
Active Weight Value Quality Confidence Good Neutral Poor NPN 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% NPN Value Profile 0 10 20 30 40 50 60 70 80 90 100 Value Decile
About PSG Wealth recommendations: PSG Wealth provides medium to long term recommendations based on the premium or discount that a company trades at relative to our estimation of intrinsic value. We expect companies to rerate towards their intrinsic value over a one to three year period. The Long-Term Valuation is a quantitative based valuation based on the fundamental performance of each company in the past, as well at their future forecasts. The fundamental features used are based on profitability and includes EPS growth and Return on Equity (ROE). *PEG Ratio: The calculation is based on the normalised historic P/E Ratio / Forecast sustainable average growth over next 5 years. By using the PEG we envisage to outperform by selecting not only companies with low P/E ratios as such, but those companies with P/E ratios low relatively to their EPS growth. Above 140 the Peg ratio will be displayed in red pointing to a possible overvalued situation. 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