Prosus, a subsidiary of Naspers, moved swiftly this week to allay investors' concerns about its businesses in Russia and Ukraine, assuring the market that it will be able to weather the storm thanks to its broad geographical investment spread.
Western countries have imposed strong sanctions on Russia over its invasion of Ukraine, which is reducing much of the country and its infrastructure to rubble.
Several multinationals, including McDonald's, Heineken, Richemont and Coca-Cola, have suspended their operations in Russia, and its banks have been banned from the SWIFT international payment system.
This week Prosus, which has investments in internet-based businesses globally, said it had written off $769m (R11.6bn) of the carrying value of its 27% stake in VK, the owner and operator of Odnoklassniki and Moi Mir, two of the three largest Russian social networking sites, with 59-million monthly users.
VK also owns and operates instant messaging service Mail.ru Agent and e-mail service ICQ, and boasts the largest Russian portfolio of online video games.
Prosus asked its directors on VK's board to resign after sanctions were imposed on VK Group CEO Vladimir Kiriyenko and other indirect shareholders.
Prosus CFO Basil Sgourdos said in an investor call this week: “We have run the financial scenarios and we believe that we will be able to weather the storm and continue to execute our strategy.”
Prosus CEO Bob van Dijk said Prosus’s “broad geographic spread and the diversified business profile mitigates risk from a particular geography or business segment”.
Prosus also owns Avito, one of Russia's top eight most visited websites and the second largest online classifieds business in the world with 35-million unique visitors a month.
Its PayU platform also has a presence in Russia, but on a small scale.
Van Dijk said Avito does not have meaningful cross-border commerce and its revenues and a large portion of costs are denominated in roubles. As a result, the decline in the rouble will not impact the business significantly, although it will affect the reported results in dollars. “The sanctions will also impact our ability to extract dividends,” he said.
In the first half of financial 2022, Avito generated more than $300m of revenue and was growing strongly year over year, said Van Dijk.
The business is valued at around $6bn and contributes significantly to Prosus’s free cash inflow from Russia. Van Dijk said it is unclear what the impact of sanctions will be on consumer and advertiser spend.
Until we see an end to this crisis, we’re not expecting revenue or trading profit from OLX Ukraine
— Prosus CFO Basil Sgourdos
Sgourdos said: “OLX Ukraine is the more meaningfully impacted business. While the site is operational, it has seen a drastic decrease in supply and demand. We will of course continue to support this business and the team.
“Until we see an end to this crisis, we’re not expecting revenue or trading profit from this business. In the first half of 2022 OLX Ukraine generated $34.5m in revenue.”
Farai Mapfinya, CEO and chief investment officer at Aequalis Asset Managers, said Avito would likely benefit from the suspension of the SWIFT system because its technology could assist consumers who are unable to make transactions.
“We do not expect a full writedown to Avito's valuation at this point in time, but that may change as the situation unravels,” he said.
“Avito is an intracountry operation with an in-country payment gateway and will not be affected by restrictions on the SWIFT platform. If anything, it's a likely beneficiary from this dire situation on a relative basis, given the nature of their business, online classifieds.”
He expects Prosus to ring-fence its assets in Russia in the short term.
“Cash can't be repatriated, and no new investments are likely possible. In the long run, it depends on the eventual outcome of the conflict and perhaps nonfinancial decisions the company chooses or may be forced to take.”
Peter Takaendesa, head of equities at Mergence, said if there are no specific sanctions on Russian classifieds businesses, “it’s very unlikely that Prosus will write off the value of Avito over the medium term given its local currency growth prospects and alignment with group strategy. However, currency devaluation and cash upstreaming challenges will impair the valuation of their assets in Russia if this situation becomes the new normal.”
He said the overall exposure to Russia and Ukraine will not materially affect the Prosus group directly as those assets represent less than 5% of its value.
“The key driver of the Prosus group valuation remains Tencent, while the profitability trend of the non-Tencent assets will drive the discount investors assign to the group relative to its NAV,” Takaendesa said
Asked about Prosus's future in Russia, given that a number of international companies are pulling out, Van Dijk said: “We employ in Avito 4,000 people, who are our people. And they depend for their livelihoods on the business that we run, and the business benefits ordinary Russians. So for us to rush out and leave those people without their livelihoods in the short term feels like the absolute wrong thing to do. Over time we will see how this influences us, but we can really not comment on this right now.”
