Prosus surprised investors with its results and a new plan to unlock value for shareholders – which saw the share chalk up its best gains on the JSE since its listing in 2019. By lunchtime, Prosus was trading some 20% higher than on Friday.
The income statement shows that revenue increased to nearly $6.9 billion in the year to end-March 2022, compared to $5.1 billion in the previous financial year. At the operating level, losses decreased from just over $1 billion to below $860 million.
Including the equity-accounted earnings of $9.3 billion from its big investment in Tencent, and the gain of $12.3 billion from the rather big sale of Tencent shares, pushed profit before tax to $18.7 billion against the $7.3 billion of 2021.
Bob van Dijk, CEO of both Prosus and Naspers, says the Prosus delivered strong growth in the past financial year and increased the scale of underlying businesses to position them for continued growth.
“We invested in our segments and strategic mergers and acquisitions over the year, reflecting our belief in the potential of the businesses we are building,” he says.
Management notes in its commentary to the results say that while the past year was marked by continued global turmoil and uncertainty, which has made for a turbulent operating environment, it was a year of significant progress for Prosus.
“We remained focused on executing our long-term strategy and delivering strong operational growth across our core segments. At the same time, we made strategic investments and laid the foundation for future growth across the portfolio,” it says.
“We are long-term investors and have invested through various economic downturns in volatile internet markets. We will remain disciplined in our capital allocation decisions as there is now a higher bar set on investments.
“We will continue to drive profitability in our core businesses and take action to manage expenses and free cash flow, even while we invest across our portfolio for growth, now and into the future.”
Prosus reiterated its goal of building capabilities, expanding ecosystems and improving competitiveness to accelerate growth and deliver strong returns across its portfolio over the long term.
Of more interest is that it announced new plan to unlock this growth in value for shareholders.
Mike Gresty, chief investment officer of Anchor Capital, says the announcement that Naspers and Prosus will slowly sell more Tencent shares and use the proceeds to buy back Naspers and Prosus shares to unlock value for shareholders is “much more important” that the announcement of the results.
“With Tencent’s agreement, the lock-up that had been in place after the last sale of Tencent shares has been ended, allowing Prosus to sell Tencent shares to fund the proposed buyback.
“The announcement says that sale[s] of Tencent shares will be limited to 3% to 5% of average daily volume. Tencent trades around $1.2 billion worth of shares a day, so we are looking at about $40 million to $60 million a day being raised for the share buyback,” says Gresty.
Prosus owns some 29% of Tencent, which translates to $133 billion becoming available to continue investments in underlying businesses and for share buybacks.
In essence, Prosus and Naspers aim to take advantage of the large discount between the share prices of Naspers and Prosus relative to real value of Tencent.
Naspers and Prosus will sell Tencent at its market price and buy their own shares, which sometimes trade as much as 50% below the companies’ intrinsic value.
“The announcement doesn’t say anything about how much [of Tencent] it would be prepared to sell down,” says Gresty.
“Levels at which Tencent would no longer be an associate, or Prosus would no longer be entitled to a seat on the board of Tencent, will be critical levels that I doubt Prosus would want to breach.
“Obviously, the net asset value [NAV] improvement at Naspers/Prosus level is going to depend on where the discount is when the buyback is done,” he adds, saying the discount was 56% prior to the announcement, which gives an indication of the timing of buybacks.
However, Gresty notes an interesting challenge: “The sale of Tencent shares raises cash in Prosus. This is obviously fine for buying back shares in Prosus itself, but raises the question of how a buyback is funded at a Naspers level.
“Prior to the share exchange in August last year, the Naspers share buyback was done by Prosus buying Naspers shares in the market, resulting in the beginning of a small cross-holding. However, Prosus now owns 49% of Naspers as a result of the share exchange that was done in August last year.
“It cannot go over 50%, as this would trigger Naspers becoming foreign-owned, which requires SA regulatory approval beforehand and would trigger significant capital gains tax consequences for the group.”
He speculates that an alternative would be for Naspers to raise cash by selling some Prosus shares.
“There was also a lock-up on the sale by Naspers of further shares in Prosus after the share exchange. However, this comes to an end in August.”
Gresty says the results for the past financial year show good growth for the group’s e-commerce businesses. “Growth has been strong across all verticals, except Etail, which benefitted from Covid-19 [in the previous year and thus off a higher base].
-“At the interim stage, revenue growth for this division was 53%, so momentum has moderated slightly, but in [the] context of how much negativity there has been about the global macro backdrop, this still looks solid.
“This rate of topline growth is also a lot faster than Tencent,” says Gresty.
Prosus has split out the core figures for each segment, which shows that most are growing volumes well towards profitability.
“It also shows the losses being caused by new growth initiatives – autos in Online classifieds and expansion into grocery delivery in Food Delivery, for example,” says Gresty.
“This is a sensitive area, however, as the recent divergence in performance among listed technology companies has centred on those that are profitable and those that are not.
“No doubt, tolerance for these losses is running low.”
Van Dijk says: “Looking ahead, we will seek to regularly crystallise the value that we are creating. Today, we have announced an open-ended share repurchase programme that will efficiently unlock value for shareholders and increase NAV per share at scale.”
It looks like investors are pleased with this new plan, given the sharp jump in both shares.
Prosus closed the day 18.9% up and Naspers 22.79%.
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