Naspers, SA’s biggest listed company, says its e-commerce businesses are on the verge of reaching sufficient scale to become self sustaining, placing the division firmly on track to be profitable by 2025 as scheduled.
Group management has been working for years to close the discount between the behemoth’s market value and the sum of its parts. That mission is now directly tied to executive pay for the current financial year. About two months ago, the group initiated an open-ended share repurchase plan to help expedite the plan.
The biggest challenge facing CEO Bob van Dijk and his team is to show investors that other businesses in the group are viable, can grow faster than Tencent and can be turned into profitable companies that contribute to the bottom line.
“These businesses are getting to scale,” Basil Sgourdos, group CFO of Naspers and Prosus, said in an interview. “Our focus now is on making sure that scale drives margin expansion and in turn starts to pay for the fixed costs and delivers profitability.”
In its latest earnings report for the six months to end-September, the group trumpeted the performance of its e-commerce portfolio, which has shown strong organic revenue growth of 41%.
E-commerce interim revenue, on an economic interest basis, grew 38% to $5.6bn (about R97.2bn) for the group, with growth seen across all four core segments: fintech, classifieds, food delivery and education.
But while the signs are good, profitability remains strained as the group’s businesses are at different levels of maturity. While some are making money, others are still losing it — as much $1bn in the period. To compound the issue, the rest of the company’s businesses, estimated to be worth as much as $50bn last year, are now worth about R33bn, due to a global downturn in the technology sector, the Russia-Ukraine war and regulatory crackdowns in China.
Crystallising value
Still, Sgourdos is confident that the group can repeat some magic from the past and once again create value from its businesses.
“We have a long history of investing in and building businesses, then crystallising value. It’s in our DNA to look for new opportunities, to look for things that others aren’t seeing and then to do the hard work of building, bringing them to scale and to profitability.”
He cites the listing of MultiChoice in 2019 as being emblematic of the group’s successful transition from print to pay television.
“We also did that with the internet. Initially Tencent wasn’t listed and they were focused on the messaging and chat business. In time they built scale on games and now they’re listed, very independent and they built a huge business that stands on its own.”
The Naspers veteran says e-commerce is the next big thing.
“What’s actually driving the losses seen last year and in the first half of this year is investment in growth extensions about those opportunities. As an example, take classifieds: now what we do is we facilitate a buyer and a seller to find each other and then they transact offline. We’re now moving into the transactional side of the business because that’s what consumers and users want, and we can do so in a proper way.”
Spending billions to reach scale is not unusual. E-commerce giant Amazon spent years in the red as Jeff Bezos scaled up and ploughed an eye-watering amount of capital into developing one of the world’s most formidable logistics, payments and loyalty systems with little or no profit.
Extending lines
By investing in the businesses, achieving scale, keeping down costs and being prudent with capital allocation, Sgourdos says the group “can accelerate the path to profitability”.
Part of the investment has been extending the lines of business for its portfolio companies. For example, PayU has traditionally been a payments company, but is now offering lending products.
“So it’s about taking these growth extensions and getting them to do what our core e-commerce businesses have done, get them to profitability over the next two years. And what’s going to drive that is continued growth, expanding our growth margin and then managing our fixed cost base, taking out cost we can take out and running these businesses leaner. That’s what you do at times like this.”
Sgourdos says the same dynamics are at play in the group’s home market, where profit has been hard to come by for its online retail unit Takealot, which posted a $13m interim loss to end-September. The business also comprises clothing business Superbalist and Mr Delivery.
Naspers and its subsidiaries have an estimated $20bn war chest at their disposal for the stated investment.
Yet the group appears to be taking a more conservative approach to how it spends its billions given prevailing market conditions.
In October, the group cancelled an R85bn deal to buy India’s BillDesk in what would have been its largest acquisition. The termination has been hailed as a blessing for Prosus, which had agreed to pay nearly 20 times BillDesk’s annual revenue. Valuations of technology start-ups have been taking a knock on mounting concern about inflation and the possibility of the global economy falling into recession.
That’s not to say the Cape Town-based investor isn’t willing to shell out if a good deal presents itself. It recently took full control of Brazil’s iFood for €1.5bn (about R27.4bn), about half of what it would have paid for the same transaction a year earlier.
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