Even as investors appear underwhelmed by Bob van Dijk’s latest attempt to release value trapped in Prosus, the boss of one of world’s biggest tech companies has at least one thing to smile about: an improving performance in the group’s multitude of e-commerce businesses.
In an earnings report for the year to end-March this week, Prosus — the global internet arm of Naspers, SA’s biggest company by market capitalisation — showed that the e-commerce platforms ranging from online food delivery to classifieds delivered a 54% jump in revenue, almost twice as much compared with the rate at Tencent — the money-spinning Chinese internet giant in which it is the biggest shareholder, and which has also overshadowed all else.
That is a good thing. To begin with, it should make investors less sceptical about the path to profitability for the other units, a lack of which has led to the defeatist sentiments behind investors ascribing zero valuation to fast-growing platforms such as classifieds site OLX in India and food delivery group iFood in Brazil.
And during the period, Prosus added eMag, Romania’s largest online store with a growing presence in neighbouring Bulgaria, to the list of businesses that are in the black. The company’s payments and classifieds businesses have been returning profit for the past two years and three years, respectively.
On the whole, Prosus’s revenue of $5.1bn (about R70bn) from businesses other than Tencent is earned from more than 60% of the businesses that are now profitable, and crucially, these businesses logged incoming cash of $126m, compared with -$350m in the previous period, in perhaps an indication of the quality of earnings.
That performance, fuelled by locked-down consumers during the pandemic who flocked to its sites for everything from online education to grocery shopping, has helped almost double the combined valuation of the e-commerce ventures to almost $40bn, according to an independent Deloitte valuation disclosed by Prosus for the first time this week.
There is little doubt these operations, which narrowed combined losses by nearly half in the previous financial year to just more than $400m, are headed in the right direction.
What annoys existing shareholders, who for one reason or another cannot double down on their investments, is that new investors in Prosus can get in at a hefty discount. Take the slightly more than $200bn Tencent stake, add the $39bn valuation for e-commerce ventures, a $1bn minority holding in Russia’s Mail.ru plus almost $12bn in net cash, and Prosus should be valued at nearly $270bn. But the market values it at about $160bn, a valuation shortfall of about 40% that widens further considering that parent Naspers also trades at a discount to its more than 70% holding in Prosus.
Rightfully acknowledging that Naspers shareholders are not getting the full value from these fast-growing assets, Van Dijk has come up with a string of measures to at least narrow, if not crush, it.
The latest among these is a convoluted share swap deal, which, in broad strokes, gives Naspers shareholders the opportunity to swap their stock for those in Prosus to achieve two structural things at the heart of the discount: shrink the parent weighting on the JSE and boost the number of freely traded Prosus shares in Amsterdam. The price of that is a complex cross-shareholding structure that has unsettled investors, prompting Prosus to continuously defend it.
But it is easy to sympathise with Van Dijk’s frustrations over the cold reception to the deal. Had he unbundled more of Naspers’s stock in Prosus, the deal would have triggered billions of rand in capital gains tax. Investors don’t want that.
Similarly, spinning off the Tencent stake would rob Prosus of the front-row seat in emerging e-commerce trends and of money to fund its sound strategic growth path to build the company around fintech, food delivery, education and classifieds — categories that enjoyed booming demand during the pandemic.
For new investors, the 50% discount sign on Prosus won’t be there for long if the e-commerce ventures growth trajectory continues in this direction, and if Van Dijk’s other value-creating steps succeed.
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