Investors will be scrutinising the results of Naspers and Prosus next week Monday for signs of a reversal of the global internet group’s fortunes that have seen the share prices of the two interrelated companies more than halve over the last year or so.
The Naspers share price is down 53% since its high of around R3 835 in February 2021 to the current levels of just above R1 800, while Prosus fell 58% from its February 2021 high of just shy of R2 000 to the current R821.
However, it raises the question of what investors should look for when trying to make sense of the complicated results of the two entities, their diverse investments in a myriad of companies, accounting policies, and the unusual holding structure between Naspers and Prosus.
In essence, it raises the question as to which figure in the results will swing investor confidence and support the share price.
Both Naspers and Prosus published trading statements last Wednesday, 15 June, in terms of JSE regulations that state that companies must inform investors if headline earnings and headline earnings per share will change significantly. The JSE defines “significantly” as a change of 20% or more, either higher or lower.
Naspers said in its trading statement that headline earnings per share (eps) will decrease by between 39% and 46% in the year to end-March 2022 compared to the previous financial year, while Prosus said that its headline eps will fall by 40% to 47%.
The companies note that the decrease is “mainly due to the decrease in contribution to headline earnings from associates, including lower fair value gains in the current year, continued investment in growth adjacencies in our ecommerce businesses and increased net finance cost”.
They added that shareholders are reminded that the board considers core headline earnings a more appropriate indicator of the operating performance of the group, as it adjusts for non-operational items.
Interestingly, core headline eps paints a more positive picture.
Prosus expects core eps to decrease by only 14% to 21% and Naspers by 8% to 15%.
On Tuesday, Naspers/Prosus hosted an explanatory briefing for reporters who will report on the results next week. Eoin Ryan, head of investment relations at Prosus and Naspers, aimed to explain, on a background basis, the “key non-standard financial metrics the companies present in their results announcements and how these provide a view of operational performance”.
The content of the briefing was for background only and not for publication.
Respecting the rule of off-the-record meetings, Moneyweb opted to ask the companies questions rather than attend.
Naspers says that it started the briefings a few years ago, in response to questions asked by journalists when Naspers presented its results, and especially after the Prosus listing when Naspers started to engage with new journalists outside of SA who were unfamiliar with the group.
It explained: “We offered a pre-results conversation to run through how we think about financial performance for our group and the numbers we use to assess it. Many of the journalists who participated in previous pre-briefs found them useful for their coverage when our results were then published a few days later, and they continue to attend the pre-brief.
“We’ve been doing this for a number of years now and we’re more than happy to continue to do it while journalists find it useful.”
What to look at
It is difficult to gauge the performance of a very complicated group such as Naspers. Even the trading update looks confusing with earnings per share predicted to increase by between 236% and 243% and headline eps expected to decrease by as much as 46%.
Adding alternative performance figures to the mix does not seem to make things easier, but Naspers points out that many companies also provide appropriate alternative performance measures to enhance the comparability and understanding of their financial performance.
“Since companies across industries are all very different, additional adjustments are necessary to report what management feels is the ‘true’ operational performance,” says Naspers.
“For example, we reported a gain of $2.9 billion in financial 2021 ($619m in 2020), mainly related to fair value adjustments.
“If we didn’t adjust we would show a massive gain, distorting all the operational results of the group. Therefore, normalised, or what we call ‘core’ headline earnings, takes out the noise and provides a consistent operational view year on year.”
It notes that a lot of other companies, such as Aspen, MTN, Discovery, Momentum/Metropolitan, Datatec and MultiChoice also all report “normalised” headline eps, as do global listed companies, including Naspers’s biggest investment, Tencent.
Most investors would think operating income, calculated according to International Financial Reporting Standards (IFRS), and headline eps, defined and calculated according to SA Institute of Chartered Accountants (Saica), are trustworthy figures. Interestingly, headline eps is the only figure required consistently by the Section 8 of the JSE’s listing requirements.
It is, in fact, the formal guideline for local companies.
If operational performance is to be measured, Naspers shareholders should be concerned about the sharp decline in operational profit.
Naspers reported an operational loss of $161 million the financial year to March 2015 – and it increased steadily year after year, increasing to nearly $1.19 billion in financial 2021.
The main reason is that Naspers/Prosus continued to invest in new, growing businesses that are still to show profit. Monday will reveal what is happening here.
Naspers responded that operating profit includes one-off gains and losses and is not illustrative of the sustainable earning performance. “They are true for the year, but not a story of a trend of operating performance.
“Furthermore, we are unique in that associates of many companies do not have a huge bearing on the income statement as they are small stakes in small businesses. We have Tencent, which is a large contributor to our earnings – providing colour on material associates we believe is helpful.”
The experts tend to look at only one figure, the net asset value (NAV).
Marc Talpert, an analyst at Coronation Fund Managers, says Naspers and Prosus are effectively holding companies and that the most relevant measure of performance is what happens to the NAV.
He says the majority of research distributed by sell-side analysts (stockbrokers trying to get orders from fund managers) is based on analysing NAV and tracking the share price relative to the underlying NAV.
“The analysis of the group is very complex, maybe one of the reasons for the big discount to NAV.
“Management could have done a better job in disclosing some of the figures,” says Talpert, adding that the figures are available if you look carefully at the footnotes in the annual report.
He says Coronation judges management’s performance by looking at how they allocate capital towards underlying assets, basically adding up the purchase prices and subsequent investments to see how “effectively management employs capital” and how each individual asset performs in terms of return on investment.
“It’s an arduous job,” he says, “digging though annual reports going back to 2004.”
The bulk of the group’s assets are listed and market prices are readily available, while the value of large unlisted assets can be estimated by looking at their listed peers. Talpert goes further in his analysis by estimating whether the market prices of listed investments reflect their true value.
Naspers and Prosus publish their own NAV calculations. NAV per Naspers share was given as R5 365 on Tuesday (21 June), compared to the share price of R1 800. Prosus gives its NAV as R1 934 compared to its share price of R820.
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