Amelia Morgenrood.
JOHANNESURG - The latest emerging markets research report from UBS recommend that exposure to South African equities be reduced (from overweight to neutral), and their preferred market remains China, due to its robust earnings outlook.

If this is anything to go by, Naspers is still a good option for South African investors who are of the view that the rand will remain weak, and that the Chinese economy will continue to be strong.

Investing in Naspers, and how much your exposure should be, is a highly debated subject in South Africa. Its investments, its control structure and its management’s ability to apply their capital meaningfully are some of the issues.

Today Naspers is one of the largest and most successful technology investment firms globally, with the emphasis on investment firm.

Should the price to earnings ratio of Naspers be relevant at all, or should the sum of the parts (SOTP) of the underlying investments be the essential figure to watch?

Currently, Naspers trade at a discount of around 40percent to its SOTP valuation and some of the reasons argued are:

  • The high valuation levels of Tencent can lead to significant price fluctuations in the event of disappointing future profits.
  • More sellers than buyers. South African investors have become forced sellers due to their high exposure (by default!) as a result of the share price increase over time. Due to the Steinhoff collapse, investors and fund managers have become more aware of concentration risk.

Nobody wants 20percent of his or her money exposed to just one company, even if this is the weighting of the company in the leading index.

  • Investors can invest in Tencent directly if they are uncomfortable or sceptical about management’s ability to create decent value in the rest of the Naspers portfolio.
  • The investment holding company discount; simply because Naspers hold 31 percent of Tencent and if they want to sell tomorrow, it will probably be at a discount.

Full year results

Naspers recently published a great set of results. Revenue rose 38percent to $20.1billion (R275.38bn), and trading profit rose 47percent to $3.4bn.

It said e-commerce - particularly its classifieds, payments and travel businesses - showed improved profitability. In the year to end-March, the company invested $2.2bn in food delivery businesses Delivery Hero and Swiggy, and fintech companies Kreditech and Remitly. Naspers has acquired Tiger Global Management’s stake in South Africa’s largest e-commerce retailer, Takealot, and now owns an effective 96percent (91percent fully diluted) of the business.

The Tencent holding is worth around R4600 per share.

Online classifieds (OLX, Avito, Mail, etc) are valued at R320 per share.

MultiChoice profits indicate a value around R200 per share.

E-commerce is complicated to evaluate, but if the amount they invested is anything to go by it is R45 per share.

Food delivery and other online ventures like the listed Delivery Hero can be valued at R25 per share.

Some facts and future prospects about their biggest holding, Tencent:

* More than R1bn of the Chinese population are their customers.

* On social networks, they only generate $2 per quarter per monthly active user. Facebook generates $30.

* The latest online game, Fortnite, is free to play, but recorded $223million in revenue from in-game purchases in February alone. Tencent has a 40percent stake in the developer of Fortnite, Epic Games.

* Tencent holds 5percent of Tesla.

An investment case can be argued for South African investors, as this is the only proper global technology counter on the JSE and it is trading at attractive valuation levels.

Furthermore, it is uncorrelated to the South African economy, as the bulk of their assets are offshore. It offers direct exposure to the large and fast-growing Chinese internet industry.

Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. Naspers shares are held in her own capacity and on behalf of clients.