Naspers Grows Up: The Year It Stopped Riding on Tencent

For a long time, people saw Naspers as basically a way to get exposure to Tencent. Its own businesses lost money, so the company leaned on Tencent's success to look healthy.

This year, that changed. Naspers' own collection of businesses finally started making real money on their own. The company calls this shift “Prosus plus,” moving from Tencent minus everything else to Tencent plus a profitable business of our own.

Two simple signs of the turnaround:

●     The profit from its own businesses more than doubled.

●     For the first time, those businesses also generated spare cash, about $275 million left over after paying all their bills, instead of burning cash like before.

The Money, in Simple Terms

●     Revenue: The total amount of money from customers was $9.7 billion, up 12%. More people used its apps and services.

●     Earnings before interest, taxes, depreciation, and amortisation (EBITDA): A rough measure of profit from day-to-day operations, was $1.3 billion, up 44%. In plain terms, the businesses are keeping much more of each dollar they earn. This profit has tripled in just two years.

●     Free cash flow: Money left after all expenses and investments was $1.5 billion. Think of this like your salary after all your bills are paid; it's the money the company can actually use to reward shareholders or reinvest.

●     Debt: The company owes about $6.4 billion, which sounds like a lot, but is comfortably manageable given how much it owns and earns. Credit-rating agencies still rate it a safe investment grade.

What's Working Best

●     iFood (Brazil's leading food delivery app) is now also a mini-bank, offering payments and small loans to restaurants, and that side is growing fast and making money.

●     OLX (online buy-and-sell classifieds) is very profitable; it keeps nearly half of every dollar it earns.

●     PayU India (a payments company) recorded a profit for the first time after years of losses.

What Still Needs Fixing

●     Just Eat Takeaway (a European food-delivery app Naspers recently bought) is shrinking and needs to be turned around.

●     iFood is spending heavily to grow, which eats into short-term profits.

What This Means for the Share Price

Naspers has an unusual problem. Its stake in Tencent, plus all its other businesses, add up to more than what its shares are worth on the market. Put simply, you can buy about R100 worth of the company for less than R100, a gap known as a discount that investors have long wanted to see closed. Naspers is working to close it in two ways: it's spending its cash to buy back its own shares, around $46 billion so far, which means each remaining share owns a bigger slice of the company, and it raised its dividend by 34% this year. From here, the share price could rise if the buybacks continue, its businesses keep growing profits, and Tencent performs well. It could potentially fall if Naspers struggles to fix its Just Eat Takeaway food-delivery business, overspends on iFood, runs into trouble in China, or the rand weakens.

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** This article was prepared by BROKSTOCK analyst Maboko Seabi