Bullish sentiment as Naspers readies to list Prosus in Amsterdam

28 Aug 2019

It’s all systems go for the listing of Naspers’ offshoot Prosus on the Amsterdam stock exchange. Given Naspers’ huge size – it’s larger than Anglo American, Standard Bank, FNB, Vodacom and MTN combined – the importance of this listing can’t be understated for SA shareholders. But will the share price take off like a rocket or join the ranks of Uber and Lyft whose listings earlier in 2019 were big disappointments?

Predictions are hard, especially when they concern the future, so the saying goes. But confidence is building that the listing of Naspers’ offshoot Prosus in Amsterdam Euronext in September could bring some relief to JSE investors who have endured a terrible few years.

By now, SA investors know the story: Naspers will list its international assets, which is more or less everything, on the Amsterdam exchange and hold about 73% of a new company, Prosus. Prosus will – theoretically – help remove the outsized holding company discount to its investments, mainly its 31% holding of Chinese internet powerhouse Tencent. It will be part of a bunch of new developed-market indices, and be available to a host of rich, developed-market investors.

What could possibly go wrong?

Suffice it to say, there is a lot riding on this listing. For a start, it’s costing the company about R740-million.

The main problem is that this is a very unusual listing. It’s not an initial public offering, in the normal sense. The company is not raising new capital, or even establishing market value. We, notionally, already know what the market value is, because it is listed in SA, and the new shareholders will be essentially the same as the old shareholders.

And yet, the dynamics of the company will be changing dramatically. The most public optimist up till now is global banker JP Morgan, which published a note to investors on August 26 pointing out how things will shift.

Up until now, the note says, Naspers has been a “sum-of-the-parts story”. In other words, the value has fluctuated in line with the market value of its holdings.

“Its latest announcement may change things – Naspers’ discount has finally begun to narrow. We believe that, apart from the listing, management’s increased focus on value creation, profitability, and transparency will contribute to finally unlocking the Naspers net asset value (NAV) discount.

“At current levels, the stock offers tremendous potential for a rerating”.

How big could that rerating be? JP Morgan doesn’t say, but the implication is that it will be at least as big as the current discount, which means the share price could rise by 30%.

The listing makes sense, JP Morgan says, because:

It reduces Naspers’ weight on the JSE.

The inclusion of Prosus into key developed market indices after the listing could attract substantial new passive and active inflows.

Naspers would be able to mark-to-market the book value of its Tencent holding from $30-million to $130-billion. The entire amount would constitute recognised capital, which can be distributed to shareholders tax-free under Dutch law.

The company could pursue separate listings for each of the core verticals in the future.

“With fundamentals also improving, we think this is an opportune time to get onboard the Naspers story,” the bank says.

It sounds great – it always does when a bank is trying to sell its investors on the idea of buying what it is selling. But there are alternative arguments.

The first concerns the valuation of the company. Currently, Naspers is trading at about 35 times its annual earnings. Normally, that would be considered extremely expensive, but of course, this is an internet stock where the rules don’t apply. For its part, JP Morgan is unphased. The price/earnings multiple is “reasonable” considering the “attractive secular growth and improved profitability in its core verticals”.

The second problem is that investors have known for some time the listing is going to take place, yet the Naspers price continues to track very strongly the Tencent price. More than that, the discount has remained stubbornly extant, improving only marginally in the recent past.

There may be good reasons for this. New investors have not yet been unleashed on to the share. It’s also difficult for South African institutional investors to buy more because they are at their prudential limits. The markets’ usual proclivity for predicting future outcomes is stifled in this case.

What do other investors think? Generally, they are extremely hopeful. Of the investment houses that report to the international monitoring body IBES, there is not a single sell or hold recommendation. And over the past months, investment analysts have been shifting their expectations up.

Charl Wolmarans from Avior Capital Markets says the company is opening up and will be getting exposure to developed market investors. He points out that in Europe, the comparative peers, like Just Eat and Delivery Hero, are much smaller than what Prosus will be.

Anchor Capital CEO Peter Armitage says there should be strong support for Prosus as it comes through into European indexes. SA benchmark followers will also be buyers.

“The key question, however, is what the combined value will be compared to the price of Naspers before”.

There is a school of thought that the Prosus discount will narrow, but that of Naspers might not. In theory, after the Prosus listing, you still own exactly the same thing, just via different structures.

“This is all about trying to play market mechanics as opposed to changing the underlying business. It actually just adds material cost. But it could work for shareholders, other than that pesky forced capital gains tax payment!”

But, generally, the omens look good. BM

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