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Prosus growing steadily, says management

But operating losses continue to increase and operations are still burning cash.
The main problem the more conservative investor would have with Prosus is its very high valuation. Image: Jasper Juinen, Bloomberg

It would be interesting to speculate how many people who, after reading the Prosus and Naspers results for the year to March and listening to CEO Bob Van Dijk and CFO Basil Sgourdos address shareholders and analysts in a global webcast, are thinking the same thing: would Warren Buffett invest in either company?

The question is pure speculation, but nevertheless relevant.

During the so-called internet and dot com boom of the late 1990s, Buffett admitted that he found it difficult to understand the companies, their business plans, their products and their prospects. Most of all, he said that the valuations of the companies were illogical as investors suddenly ignored traditional valuation methods and figures.

He even, once or twice, doubted his own judgement. The result was that Berkshire Hathaway lagged its peers by far for a year or two. Eventually his reluctance to invest in these new-economy companies proved right and investors in his investment fund prospered again.

While a lot of these small computer, internet and IT companies grew into some of the largest corporations the world has ever seen, most failed miserably. Those that survived, and newer ones that started later, are now regarded as huge successes and credited with reshaping the world.

Where do Prosus and Naspers – with their businesses focused on e-commerce, etail, online payments, fintech, online gaming and email services – fit into this world?

Are they overvalued groups of confusing businesses, or futuristic disrupters with promising prospects?

Prosus management sells the second line, obviously. Van Dijk and Sgourdos mention that Prosus ended its financial year in a position of strength, pointing to accelerating revenue in the group’s businesses and improved profitability “at the core” of these businesses.

A review of the different divisions in the group – running to eight pages in the commentary to the results – tells a story of strong growth in all segments, from online classified advertising and payments to food delivery and online payments. In the webcast to stakeholders late on Monday afternoon, Van Dijk and Sgourdos both mentioned the strong growth in food delivery volumes and revenues.

“Our food delivery segment almost doubled revenues and is now one of the fastest-growing food delivery businesses globally,” they said, adding that it is “reflecting our ability to build scale and strong positions in high-growth markets”.

The results announcement highlights that food delivery orders grew by 102% during the last year, increasing revenue by 105% to around $800 million.

Up from $400 million in financial 2019, the $800 million translates to a lot of pizza boxes and Chinese food cartons.

In short, Prosus is grabbing a dollar here and a couple of cents there every time one of its faceless virtual customers pushes a button on their cellphone.

Unfortunately, the figures show that there aren’t enough customers or enough dollars yet.

“Trading losses in ecommerce rose to $918 million, reflecting our investment in food delivery to grow markets and sustain our leading positions,” according to the results.

Management says that excluding the higher investments in food delivery, payments and fintech (as well as acquisitions and disposals) ecommerce trading losses reduced by 28%.

But still losses.

The income statement shows that Prosus earned revenue of $3.33 billion in the year to March, a credible increase of 25% during a year in which the global economy faced headwinds. However, the operating loss increased by nearly 28% to $593 million compared to $422 million in the previous financial year.

Once again, the investment in Tencent saved the day. Prosus’s share of equity-accounted income from Tencent came to $3.93 billion, an increase of 15% on the previous year.

Prosus is still banking on Tencent’s profits to show a profit itself while it spends cash in the hope that one of its investments turns out to be the world’s next winner.

Prosus burned $475 million in cash during its 2020 financial year financing its operations, with interest income and dividends helping to reduce the net cash utilised in operating to $209 million. It is still way higher than the corresponding figure of $145 million of 2019.

Sgourdos points out that the group has a lot of cash: “We ended the period with a net cash position of $4.5 billion, which positions us well to continue investing in our businesses and pursuing growth opportunities.”

It is nice reserve, enough to keep Prosus going for the next 10 years if it can stem cash outflow at the current rate and improve it slightly.

The main problem the more conservative investor would have with Prosus is its very high valuation.

The results offer investors a few earnings-per-share (EPS) figures to choose from. The best, $2.35 per share, would put the share on price-earnings (PE) ratio of 38 times at the equivalent dollar share price of $89.26. The headline EPS of $1.72 represents a PE of early 52 times.

Prosus and Naspers are two of the biggest companies listed on the JSE – and, by virtue of their big free float of shares on the SA share register, the biggest in the JSE index.

It is a rand hedge and a popular share, because it made investors rich.

But at this price?

Prosus and Naspers share prices

 

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Growing? Growing its operating losses yes. One cannot include TenCent in this team’s evaluation as Prosus has no management, tactical or strategic say in TenCent, nor any call whatsoever on the cashflows of TenCent.

When I did accounting theory, a key principle underpinning equity accounting was that the investor needed to have significant influence in the operations of the underlying asset. The typical need for equity accounting arose from joint ventures or where a multinational could not own the majority of its foreign offices.

One should evaluate Prosus itself standalone excluding the equity accounted TenCent interest, and then add in the TenCent asset at the value one could get selling that stake.

Really??? Growing???

Without tencent … Prosus is bleeding CASH….BLEEDING.

Tencent with retrace to 400 HKD in the short term.

End of comments.

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