CAPE TOWN – Internet and e-commerce company Naspers is investing heavily in future growth and in its 2014 financial year ploughed R7.7 billion into acquisitions and development in its e-commerce and digital terrestrial television businesses. This was a 79% increase on last year’s investment.
As a result of this, core headline earnings for the year were flat at R8.6 billion, while consolidated revenues grew 26% to R62.7 billion.
“We see many growth opportunities in e-commerce and in TV,” says Bob van Dijk, who has succeeded Koos Bekker as Naspers CEO. Bekker will return as chairman in 2015. “There is growth in retail and in online classifieds. We believe that these will deliver a good return over time and this [flat earnings] is the reality of pursuing these opportunities.”
Notable bolt-on acquisitions in the past year include an additional 18% stake in Souq Group, an online retailer, marketplace and payment platform business, with operations in the UAE, Saudi Arabia, Egypt and Kuwait. The R1.2 billion investment brings Naspers’ interest in the company to 47.6%.
Naspers also bought an additional interest in Flipkart Private Limited, an e-commerce site in India, for R1.9 billion. It now has a 17.7% interest in the company.
Neither business is profitable yet, but Naspers is excited by the opportunities.
“Our internet businesses [in countries like Russia, China, India and Brazil] are growing at five to seven times faster than the equivalent businesses in mature markets,” says Van Dijk. “This is driven by the growth of mobile. We see ourselves as a mobile internet business and we think there is significant further opportunity to scale.”
Not everyone agrees. “It’s all just promises,” says an analyst who did not want to be named because his views are so negative. “There are plenty [of analysts] who disagree with me.” He described the results as ‘shocking’ and well below the Bloomberg consensus. “I cannot fathom why a company with a P/E of 50 is returning flat earnings. At levels like these they should be delivering annual growth of 25% or 30%. All they are giving us is the promise of future growth.”
Amazon, he says, is a similar story. In fact the social media market seems to be characterised by high valuations and pricey acquisitions – think of Facebook’s USD19 billion acquisition of Whatsapp.
Naspers believes that online shopping will grow exponentially as mobile devices proliferate. Then CEO Koos Bekker noted in the company’s annual report that smartphone penetration increased 42% globally in 2013; and that over 1 billion smartphones now account for 20% of all mobile devices. “This supports the view that internet is shifting from the PC to mobiles and tablets. In some of our businesses a third of total traffic stems from mobile apps,” Bekker wrote.
As such Naspers has been sharpening its focus on mobile enabled e-commerce over the last three to four years.
It has expanded its footprint significantly through organic and acquisitive growth. For instance Naspers now owns and operates classified sites in some 40 countries in Eastern Europe, Asia, Africa, Latin America and the Middle East. Not all of these are profitable.
The objective is not to be all things to all online shoppers, says Van Dijk. Scale and market leadership is essential to profitability. This is evident in South Africa, which is a blip on the Naspers e-commerce radar, but where a number of smaller sites (36Boutiques; 5Rooms) were closed this year to focus on retail successes like Kalahari and fashion site Spree.com.
Naspers’ internet businesses continued to show the fastest growth, with revenues increasing by 65% to R57 billion. The ramp-up in development spend resulted in slower trading profit growth of 8% to R6.6 billion. China-based Tencent continues to be the gem in the pile reporting earnings up 19%, driven by mobile gaming, online advertising and e-commerce.
The digital television business, which grew at a more modest 20% for the year is no longer the biggest contributor to revenues (the internet business overtook it last year), but it is the biggest contributor to profits, growing earnings by 13% to R8.5 billion.
The print media segment experienced a tough year with flat revenues and declining margins. Media24 managed small revenue growth of 1%, but trading profit declined by 7%.
As a result of heavy investment in its e-commerce footprint the e-commerce division grew revenue by 64% to R20.3 billion, but the division reported a trading loss of R5.3 billion. Van Dijk would not be drawn on when this division would generate a profit. As long as it sees big opportunities in the market Naspers will continue to invest for long-term shareholder value creation, he says.
The company has net debt of R15.4 billion and gearing stands at 23%.
Naspers declared an annual gross dividend of 425c per listed N ordinary share, and 85c per unlisted A ordinary share. The dividend was increased by 10%, down from the 15% increase declared the year before.