Ann Crotty

In 2004, the Naspers share price moved onto a trajectory that has seen its market capitalisation move from R25 billion to over R300bn. This performance has not only made Naspers’ shareholders – including chief executive Koos Bekker – wealthy, it has also pushed the company into the ranks of the top 10 largest in terms of market capitalisation on the JSE.

As Element Investment Managers points out in its latest quarterly newsletter, since the end of June, Naspers’ market cap has exceeded that of Anglo American. A few months earlier, Naspers had become a bigger company than Sasol.

For the first 10 years of its existence as a listed company, Naspers’ share price had performed in line with its solid earnings performance. Around 2004, Naspers’s market cap was around 50 percent of Sasol’s. This was appropriate in terms of the earnings generated by the two companies.

However, the trend that had emerged in 2004 became more pronounced after 2008, and within a few years Naspers had caught up with Sasol. As its market cap grew exponentially, the relationship between Naspers’s earnings and its share price began to fade.

Element Investment Managers notes that Sasol’s earnings “have always been materially higher than Naspers’s since the latter’s listing in 1994”, and that “Sasol has never recorded a loss in this period while Naspers recorded losses in 2001/02”.

Element Investment Managers points out that Sasol’s current earnings, underpinning its R30bn market cap, are approximately R28bn compared with Naspers’s earnings of below R7bn. Even using the “core” earnings figure of R9.2bn presented by Naspers’s management instead of the International Financial Reporting Standards figures, the comparatively low level of earnings underpin remains stark.

“Whichever of the earnings figures we use for Naspers, Sasol is still earning three times more, yet investors are pricing Naspers today as worth more than Sasol,” Element Investment Managers said, adding that Naspers was a good quality company and had been innovative in many spheres. “But the margin of safety does not appear to be there to warrant an investment at this point.”

The surge in the Naspers share price in 2004 coincided with the listing on the Hong Kong stock exchange of Tencent, in which Naspers has a 34 percent stake. Tencent is the most popular instant-messaging, entertainment and online advertising company in China, and benefits from the severe restrictions on competition from international players such as Facebook and Google. It is regarded as being ahead of its local competitors in terms of new product development.

Tencent’s share price has performed well and has not suffered any adverse reaction to recent signs of a slowdown in that economy. It is currently on a price-to-earnings multiple that is twice the average for the Hong Kong market.

But Tencent’s heavy investment in research and development has meant Naspers has received limited amounts of cash from its 34 percent stake. Last year Naspers received dividends of R510 million, up from R250m the previous year.

However, to ensure it is not overly reliant on Tencent, Naspers invests heavily in the search for the next great internet offering. Last year Naspers spent almost R5bn on research and development. Some of it may help to create a higher margin of safety for investors.

Naspers leapt 2.93 percent to close at R803 yesterday, giving it a market cap of R328bn.