Prosus and Naspers turning the corner?

Profits from own operations are knocking on the door after years of increasing losses.

The latest results from Prosus and Naspers are significant. With a bit of luck the interim results for the first half of the 2024 financial year will mark a historic point – the point at which the group turned the corner after chair Koos Bekker took a year-long sabbatical to search for the next big idea.

Bekker’s holiday began in April 2014 and turned out to be very expensive in terms of the subsequent investments in food delivery and the related (and increasing) losses. Shareholders have been unhappy at times, placated only by the lucrative returns from Naspers’s investment in Tencent and corporate moves when things really got tough.

The latest set of results is different from the results of the past few years. Things are looking up in that revenues from the different business segments have shown good growth, reducing the overall loss to only a few hundred million dollars.

Prosus

The results posted by Naspers and Prosus are nearly identical due to Naspers’s 43% shareholding in Prosus and the sheer size of the international businesses housed in Prosus relative to the scale of the SA operations housed in Naspers.

Prosus reported that its consolidated group revenue from continuing operations increased by $287 million or 13% to $2.6 billion in the six months to September 2023 compared to $2.3 billion in the first half of the previous financial year.

“This was primarily due to strong revenue growth in classified advertisements, food delivery, and payments and fintech,” says Ervin Tu, recently appointed interim CEO of Naspers and Prosus after the resignation of former CEO Bob van Dijk.

“As a result, trading losses decreased to $110 million from $338 million. The largest contributor of the reduction in continuing operations’ trading loss was the drop of $220 million in the ecommerce consolidated trading loss to just $36 million.

“Our consolidated ecommerce businesses are now of scale and well on track to achieve profitability,” says Tu.

Prosus’s income shows that profit after tax – including the equity accounted share from Tencent, gains on the sale of Tencent shares and some write-offs in the value of other investments – have increased by 34% from $2.5 billion a year ago to $3.4 billion.

The largest part of the improvement comes from interests other than the Tencent contribution, seen when doing a few calculations. Pre-tax profits increased by 68% when taking Tencent out, from $1.49 bilion a year ago to $2.52 billion in the recent six months.

Cash flow

The cash flow statement shows the improvement in the group’s fortunes better than the income statement. Net cash flow from operating activities increased from $42 million a year ago to $904 million.

While net cash flow is reported at a negative $2.7 billion for the six months to September 2023 (positive R3.7 billion in 2022), one should note that the final figure includes $4 billion worth of share buybacks and a net $6.8 billion invested in short-term investments.

Naspers and Prosus CFO Basil Sgourdos said in an early morning discussion of the results that the group’s financial performance was better than that of its peers and that profitability is accelerating.

“Driven by continued strong execution across our ecommerce portfolio, I expect this trajectory to continue at pace. Our classifieds and food delivery segments are both profitable, and PayU is making strong progress towards profitability.

“Core headline earnings have doubled and the impact of the strong improvements in ecommerce and Tencent are also evident in our free cash flow, which has increased six times,” says Sgourdos.

“Our strong and flexible balance sheet, active portfolio management and disciplined capital allocation will underpin our success.”

Tu said in a conference call that the group’s fundamentals are strengthening. “We have made substantial progress against the commitments we made in June last year.

“First, our profit trajectory has improved meaningfully and we are outpacing our peers in revenue growth. We previously committed to achieving profitability across our consolidated ecommerce portfolio during the first half of the 2025 financial year.

“I am pleased to say that we have brought this target forward by six months.

“Second, we continue to invest in ourselves through the open-ended share repurchase programme. Since its launch in June last year, the programme has unlocked $25 billion of value and delivered 7% NAV [net asset value] per share growth. This value will continue to compound over time, particularly as the portfolio moves into profitability.

“Third, we have eliminated the cross-holding [referring to the confusing structure between Naspers and Prosus] and [are] greatly simplifying our operations. We are seeing evidence of the benefits daily.

“Fourth, we will work to better highlight the value of our e-commerce assets. This, in some cases, may mean sales, and in other cases that may mean listing our assets over time,” says Tu.

Analyst’s view

Mike Gresty, fund manager at Anchor Capital, noted the better performance, but also seems to caution against too much optimism.

“I think the speed with which losses have receded in the ecommerce division is a notable positive surprise in these results and the fact that management has accelerated its guidance on reaching profitability in ecommerce from financial 2025 to the second half of financial 2024 should be well received.

“I was, however, dismayed to see it impairing Stack Overflow and other Edtech investments,” says Gresty.

“As much as one might argue these are non-cash items, they are relatively recent investments and very much reflective of the capital allocation decisions of the current management team.

“Right now, with investment appetite very low and the strategy firmly on trying to extract value out of what it has and reducing the NAV discount, I think Naspers and Prosus are narrowly doing well on that score.

“However, these impairments do not help the case for them being superior capital allocators, should we eventually get to see them seek to get back onto the front foot investment-wise.

“For now though, the ‘fix what you already have’ and the ‘self-help strategy’ is making pleasing progress.”

JSE

Neither share price reacted much to the results – Prosus and Naspers both fell just more than 1% on a day during which the only sector to have a bit of shine on the JSE was gold.

Prosus declined to R610, compared to its recent high of R628 following the restructuring to remove the cross holding between Naspers and Prosus.

Naspers fell to R3 400 after its recent strong run from a low of below R2 900 in October 2023.

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