NASPERS
Analysis of the 2018 Financial Statements
1. Objective of the Analysis
The objective of the financial analysis is to identify sound entities for long-term investment purposes.
For the purposes of this analysis I will have a look at the following:
1.1. An overview of the operations
1.2. Management
1.3. Strategic drivers and key success factors
1.4. Outlook
1.5. Financial information
2. Background
Naspers is a global internet and entertainment Group in business for over 100 years operating in 120 countries with high growth potential, especially in regions such as India, China, Eastern Europe, Russia and the United States.
3. Management
The board of directors reflects to a large extend the demography of South Africa.
4. Strategic Drivers
Judging from the investments made, Naspers is a global player in the online arena and would like to further its interest in this regard. The investment in China was highly successful and it seems as if Naspers is now perusing markets in India, USA, Eastern Europe and Russia.
Locally, Naspers invested in Takealot, an online retail operation, it also invested in Auto Trader, an online second-hand car platform.
The group also invested in Delivery Hero, an online food and delivery business. In India the group made an investment in Bundl Technologies (Swiggy), a first party food delivery.
Naspers acquired a stake in Kredtech, a provider of consumer lending and financial services.
The group also invested in Make-my-Trip, in Flipkart and in Remitly, a global money transfer business.
The group also acquired a 100% in Citrus Pay, an Indian payment technology player.
In an attempt to grow the US online classified market, an investment was made in Wallapop.
The group also invested in education, i.e. Brainly. The Group also invested in a Czech entity, Heureka.
5. Risks
5.1. Management
The risks management identified are as follow:
The group changed its accounting policy with respect to put options
Impairment testing of goodwill and intangible assets
Share-base payments
Equity-accounted investments – Ten Cents
Taxes in developing markets
5.2. Key Audit Matters
The external auditors identified the following matters:
Impairment assessment of goodwill and intangible assets
Valuation of share-based compensation schemes and share-based payments
Accounting for equity accounted investments – Ten Cents
Accounting treatment of current, deferred and other taxes
Change in accounting policy – written put options
5.3. Other Risks
Other risks identified by the investment community are:
Risk of poor investment decisions
Loss of missed opportunities
Adverse market changes
Imposition of adverse compliance regulations
Commercial objectives not attained
Unforeseen liabilities arising from changes in the portfolio
Sales revenue and operational performance not meeting expectations
Anticipated synergies and cost savings not achieved or delayed
Inability to retain key staff
Cyber-security and related risks
Reputable risks resulting van joint ventures
6. Outlook
TenCent operating in China is the biggest investment of Naspers. Ten Cents to have its own problems due to the Chinese government interference, but sound growth is expected over the long term. Noteworthy is that the equity income from Tencent rose from US $ 3,9 m to US $ 11,7 m in 2018.
Management is optimistic to grow classified, food deliveries and fintech business globally.
An attempt will be made to put the ecommerce and video entertainment business in sub-Saharan Africa on a profitable footing.
7. Analysis of financial information
7.1 Segmental information
The biggest contribution to revenue is Tencent, contributing 60% (2017 – 52%) of the revenue of the group. The contribution of Tencent to the trading profits amounts to 108% (2017 – 114%).
Tencent also posts a healthy 44% (2017 – 45%) operating profit margin.
Ecommerce is still incurring losses and the wisdom of such investments is debatable. Management is obviously taking a long-term view on such investments.
Media is under pressure.
In short, Tencent is the backbone of Naspers.
7.2 Liquidity ratios
The cash on hand jumped from US $ 4 007 m to $ 11 369 m, influencing the current ratio favourably to 3,2 (2017 – 1,6). The liquidity ratios are satisfactory.
7.3 Leverage ratios
The debt levels are very modest and financial leverage is to the advantage of the Group.
7.4 Activity ratios
Working capital is well managed, but the group takes long to settle short-term liabilities.
7.5 Profitability ratios
The gross profit of 41% (2017 – 41%) is good, but the net operating profit (before associates, etc) is reason for concern.
The growth in sales amounted to 9% (2017 – 3%) while the expenses only decreased by 2% (2017 – 6% increase) during the year under review.
7.6 Cash flow
The operating cash flow in relation to total liabilities amounts to negative 1,6% (2017 – 0,5% negative), noteworthy.
To service the cash flow needs, the Group will have to use its cash reserves and in time to come, realise some of its investments.
7.7 JSE Statistics
The share price is R2 942,26, up by 161,56% over the last five years, up by 52,65% over the last three years and down by 9% over the last year.
The EPS is 10 988,81 c, the P/E ratio is 26,8, the forward P/E is 30,71 and the dividend yield is 0,22%.
The analysts have a consensus forecast to “Buy” while the 5-year graph in relation to the Top 40 supports this notion.
7.8 Tencent
Tencent is equity accounted for in the financials, i.e. at costs plus share in profits, for an amount of US $ 16 666 m. realistically the figure should be US $ 141 509 m. This implies that the total equity of the group amounting to some US $ 25,7 m is understated with US $ 141,5 m. Looking at the market capitalisation of the shares, the market value is under valued by some R 4 800 per share.
8. Conclusion
Naspers is one of the bigger groups on the JSE and this is attributable to its investment in Tencent in China.
The results of Tencent and its high share price favours Naspers.
The risks associated with the Group are moderate: The legislative framework in China can be an unknown factor.
The group does not generate adequate operating cash and has to realise from its investments to generate cash from time to time.
However, with a conservative balance sheet reflecting low financial risks in terms of debt and with sound growth rates in revenue, while growth in costs is contained to a minimum growth.
The group is perusing other investment opportunities across the globe.
The P/E ratio of 26,8 is high in the South African context, but not nearly as high as in the overseas markets where this Group is operating in.
The company is an attractive candidate for stripping of its assets, owning to the fact hat its shares are highly undervalued.
I will rate Naspers as a buy.
Anton Ferreira
4 February 2019