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Naspers sees e-commerce revenue up 37%

‘The success story of lockdown is e-commerce…. We’ve been investing to drive it’ – CFO, Basil Sgourdos.

NOMPU SIZIBA: Naspers came out with interim results today. My colleague, Ryk van Niekerk, caught up with the company CFO.

RYK VAN NIEKERK: Naspers and Prosus announced financial results today, November 23, 2020. Naspers, of course, owns a 73% stake in Prosus, which in turn owns a stake of 31% in the Chinese technology giant Tencent. In the six months to the end of September, Naspers’s revenue rose by nearly 30% to US$13 billion. The group’s headline earnings, however, declined by 6% to around US$1.6 billion.

On the line is chief financial officer Basil Sgourdos. Basil,   thank you so much for joining me. From the results you’ve published today it’s clear that the success story of lockdown is e-commerce. There seems to be an accelerated adoption by many households, and I’m especially surprised by Takealot here in South Africa, which saw revenue growth of 41% to close to R4 billion. How much of this growth can you attribute to the lockdown?

BASIL SGOURDOS: Thanks, Ryk. It’s good to be on your show, and thanks for talking with me. I think what’s happened with the pandemic and Covid is that it’s just accelerated the shift online. We’ve always believed it was going to happen. We’ve been investing to drive it, but the pandemic has moved things online faster. It hasn’t come easily. It’s not like we sat back and just waited for things to happen; we had to work very, very hard to make the best we could of a tough situation. We brought more sellers online, so people who had offline stores, who couldn’t otherwise sell, were now able to sell online. You could either sell through Takealot as a third-party seller, or eMAG Romania. In Mr D, the restaurants could actually now have supplied what they otherwise wouldn’t have had available. So it’s been lots of good work, and we are indeed very happy with the results.

I think a lot of this is going to stay. The behaviour’s being shaped now, and people are seeing the value of the transparency in the pricing, the convenience, the quick delivery. So we’re hopeful that that a lot of this will stay with us going forward.

RYK VAN NIEKERK: How long does it take for an e-commerce industry in a country like South Africa to become profitable, because we’ve seen many of the retailers say that they have seen spikes in their online sales. But I see Takealot is not profitable yet. How do you foresee that trajectory?

BASIL SGOURDOS: I think it takes a long time, Ryk. You need to invest, you need to invest in warehouses, in logistic capabilities, in your tech and your product. And it takes a long time to build the business. Today. e-commerce penetration in South Africa is roughly 2 or 3%, Ryk. In China it’s north of 20%. So there’s a long road ahead.

And, of course, the bigger the business gets, the more warehouses you need, the more infrastructure you need. And we continue to build. It varies from market to market. Takealot hasn’t made a profit for the better part of a decade. We’re getting close now, but we also see opportunities to further expand the ecosystem and then build additional services for our consumers.

RYK VAN NIEKERK: Naspers and Prosus are some of the largest companies on the JSE – South African companies. But, over the last few years, it’s been quite evident that, especially through Prosus, Naspers was trying to make very, very big acquisitions. Just Eat, I think, was around US$6 billion. You haven’t managed to bed one of these transactions down. What is the situation at the moment? Are you still looking for such acquisitions, and how did the onset of Covid and lockdowns impact those opportunities?

BASIL SGOURDOS: Ryk, indeed, we went for just the takeaway. We also went for EBay Classifieds. The reason we didn’t get those is because we had a line that we didn’t want to cross in terms of price – and we remain disciplined. What drives our capital-allocation philosophy is not size, but the returns that we will get, and we’re happy to do small deals, big deals, and anything in between, as long as we see clear line of sight to creating value.

We have in the first six months of this year done about $600 million of M&A. And then, since announcing our results, just in the last month we’ve concluded deals of another $700 million-odd. In total, year to date, assuming those deals close, we’re already at $1.3 billion. So we were able to find good opportunities. We’re very excited about EdTech. It’s an area to which we’ve now allocated $1 billion in fairly short order. We’ve just done another significant investment in a company called Skillsoft, which is listed in the US, and we’ll continue to push there. It’s still very, very early days. The opportunities are meaningfully under-penetrated.

Those are the type of investments we like, because we can get in early, we can add value to our investees and we can help them build sizeable and global businesses.

RYK VAN NIEKERK: So US$1.3 billion in the South African context is maybe very, very significant, but not in the lives of Naspers and Prosus. But to the point, could the focus be more on smaller growing companies than some of the market leaders you’ve been pursuing in the past?

BASIL SGOURDOS: We’ll look across the spectrum. We’ll look at small, medium, large. We look at everything well. We don’t do a lot of what we look at, because we often don’t see a clear path to return; but, where we do, we move and we have the balance sheet with which to write cheques

RYK VAN NIEKERK: Then you are also going to undertake a significant share buy-back, both of the shares of Naspers and Prosus – around R80 billion, which will make it by far the biggest share-repurchase exercise ever in South Africa. Is that purely aimed at reducing the discount to which Naspers trades to Prosus, or would that money not have been better spent on another acquisition?

BASIL SGOURDOS: Ryk, this is not going to fix the discount rate, but it is an opportunity created by the discount. We trade at a meaningful discount to our net asset value. We have a lot of cash on the balance sheet.

We haven’t succeeded in some of the big deals, so we were thinking about where best to invest – and where better than in your existing asset base?

So we are buying into our own business at a steep discount, and that creates meaningful value for our shareholders. Again, it’s just another move in terms of smart capital allocation. The timing is right because we have good financial flexibility. We didn’t have that a couple years back, and it doesn’t limit us in our ability to continue to invest and buy companies and do big things. We have good financial flexibility. So it’s not either/or – it’s both.

RYK VAN NIEKERK: Basil, I’m a journalist. I was a previous employee at Media24 and I think it’s one of the mainstays of the media industry in South Africa. But we’ve seen a lot of titles close in recent months, and actually over the past few years, due to financial pressures. How do you foresee the media titles and especially journalism within Media24 will be affected over the next, say, few years?

BASIL SGOURDOS: Ryk, we remain bullish about journalism, and what we really want to do is drive the shift online. We’ve been doing well in that process. We’re not making lots of money, and we are getting lots of users, lots of traction, lots of activity.

Good journalism is the backbone of any democracy, so we want to do the best we can to protect that.

The future doesn’t lie in magazines and newspapers; it lies online, because that’s where the users are. Ishmet Davidson and the team are doing a lot to innovate products and services.

We’ve seen a massive uptake again, because people are spending more time at home, more time online over the past year. But our print titles have suffered significantly as a result of the shift online, but also as a result of the pandemic. So we remain very committed to the business. It’s going to take time to build, it’s going to lose money for a while still. But I think the long-term future of good journalism lies online, and we want to provide the platform for people to do their jobs well there.

RYK VAN NIEKERK: Basil, thank you so much for your time today. That was Basil Sgourdos from Naspers.

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