If one thing stands out from the first set of results that Prosus announced at the start of the weekend, it’s that you need deep pockets to build up an international internet-based conglomerate like this.
The second impression is that there is still a lot of work to do to make it profitable.
While management highlights the 20% increase in revenue and 10% increase in core headline earnings during the six months to September, a closer look at the income statement and a table disclosing the segmental analysis shows that the bulk of the revenues and all the trading profit is still coming from Tencent rather than from Prosus’s own operations.
Only the classified advertisement businesses and the Russian email platform are profitable – all the other online enterprises are still losing money.
Prosus announced that consolidated revenue excluding the equity-accounted investments (mostly Tencent) increased by 17% to nearly $1.42 billion in the six months to September 2019 compared with $1.2 billion in the first six months of the previous financial year.
Unfortunately, the operating loss increased to $176 million compared with $74 million in the comparable period, as the losses at most of its ecommerce businesses increased. Only the internet retail portfolio trimmed losses and only the classifieds portfolio made a profit, but smaller than in the previous year. Total losses of the ecommerce businesses increased by nearly $200 million to $416 million.
Segmental analysis of revenue and operating profit
|Six months to September||Revenue||Trading profit|
|Payments & Fintech||171||199||-24||-38|
|Total ecommerce||1 840||1 908||-220||-416|
|Tencent||6 905||7 800||2 043||2 264|
|Consolidated total||1 211||1 417||-74||-176|
Source: Prosus presentation to analysts and fund managers
It is interesting that the worst result came from the food delivery businesses. Operating losses increased by nearly seven times, from $41 million in the first half of the previous year to $283 million in the six months under review. Management says the losses are due to continued investment in the food delivery businesses to enhance its leading position to take advantage of the potential of the market.
“We strongly believe in the potential of these markets as we expect consumers to increase their spend on online food delivery, moving away from ordering directly by phone, in-home preparation of food and in-restaurant consumption,” says CEO Bob van Dijk in his overview of the results.
He describes food delivery as an industry that will disrupt and transform food and eating.
“The food-delivery industry has evolved beyond simply connecting restaurants and customers and we believe the opportunity here is to disrupt and transform all aspects of the supply chain, from how food is sourced, prepared and ultimately consumed.
“This disruption is likely to have major societal impacts in nutrition, food wastage and employment. We believe the market will continue to grow strongly as technology and innovation drive further disruption, by increasing convenience and reducing costs,” says Van Dijk.
It seems this is the ‘next big thing’ that Koos Bekker went looking for, when he took a year off as CEO of Naspers to travel the world looking for something new and exciting.
Prosus says the value of food orders during the last six months indicated that the total value of orders had grown by 81% on an annual basis and its food delivery businesses increased revenue by 69%.
The figures are huge
Management mentions in the results that one of the investments, iFood in Brazil, processed more than 21.3 million orders in September 2019, up from 9.8 million in September 2018. In India, Swiggy operates in 500 cities and signed up more than 130 000 restaurants to its delivery service.
Management’s comments about the food delivery industry go a long way to explain its determination to add Just Eat to its portfolio. If food delivery turns out to be the next big thing, it makes sense to go big into it.
However, the food delivery businesses still have a long way to drive to deliver profits. The doubling of revenue resulted in the increase in losses from $41 million to $283 million in the comparable six-month periods.
The same can be said of the other ecommerce ventures. Only the online retail offering improved significantly by cutting losses from $83 million to $15 million.
Luckily, Prosus – and Naspers – have deep pockets thanks to their very profitable investment in Tencent.
Basil Sgourdos, chief financial officer of Prosus, pointed out to shareholders that the group has a net cash reserve of $5.4 billion to pursue growth.
The big cash reserve and the fact that Prosus earns interest instead of paying it places the group in a strong position to nurture its fledging online businesses. In essence, Prosus and Naspers are using the success of Tencent to grow the next potential winner for shareholders.
Meanwhile, the normal profit and headline earnings per share figures are meaningless, as are the price/earnings figures for both Prosus and Naspers. These figures largely mirror the profit on selling Tencent shares, or changes in other interests within the group.