Prosus delivers sterling results, but concerns remain around capital allocation and management incentives

Internet company Prosus reported group revenues of $28.8-billion, up 33% thanks to particularly strong growth in food delivery and e-tail, a trading profit of $5.6-billion, up 44%, and core headline earnings of $4.9-billion, up 39% for its financial year to the end of March. 

In a year that has seen many businesses go under, revenue and trading profit are the strongest since the listing of Naspers and, more recently, Prosus. In addition, the e-commerce business grew its top line at an unprecedented 54% year-on-year, which was 21% faster than the previous year. 

To put it in perspective, Tencent grew its topline by 28% in the same period.

“Our strategy to reposition the group for an increasingly online world meant we were well prepared for the acceleration of online adoption through the pandemic,” says CEO Bob van Dijk.

For the first time, Prosus disclosed its e-commerce net asset value (based on an independent valuation) at $39-billion, which is 24% of the company’s market cap and implies a 21% internal rate of return on $16-billion of investment to date.  

Within the four core divisions, the food segment grew revenues 127% year on year to $1.48-billion. Losses almost halved from $624-million to $355-million, but the group plans to expand this business, possibly driving losses up temporarily. 

Using the platform created by iFood, Swiggy and Delivery Hero, among others, the firms plan to build a broader on-demand delivery ecosystem that will go beyond restaurant delivery to grocery and convenience delivery and increased logistics capabilities. 

“We believe that food represents a significant growth opportunity that is still in its early stages,” says CFO Basil Sgourdos.

While the classifieds business (OLX) has been profitable for the last two years, it was hit hard in the past year but rebounded latterly to ensure a trading profit of $9-million.

The Payments & Fintech segment reported strong financial results for the year with total payment value increasing by 51% to $55-billion, supported by a 38% increase in the number of transactions. The core business, PayU, was profitable for the third year running.

The smallest business group in the portfolio, Edtech, has graduated from the Ventures team to become the fourth pillar in the business along with Food, Classifieds and Payments & Fintech.

Since the start of the financial year, Prosus has invested about $7-billion in new ventures. “This accelerates growth across our existing portfolio and also plants the seeds of future growth,” says Sgourdos.

On the face of it, these are good results with positive growth momentum and a visible path to profitability. This has led a number of sell-side analysts to maintain or upgrade their buy rating on both Prosus and Naspers.

But questions remain as to whether anything has changed at a fundamental level.  

“It is good to see that losses have lessened at some of the e-commerce investments, but this begs the question: if these businesses are getting closer to reaching their potential, why isn’t the market giving Naspers management any credit for it,” asks Pieter Hundersmark, a fund manager with Flagship Asset Management. 

And, he adds, “beyond the nice headlines of growth in the operating companies, what about the cost? This was as the consolidated operating loss widened enormously from one year ago, largely due to the remeasurement of share-based incentive expenses, all while Prosus has underperformed the AEX index of the Amsterdam Stock Exchange, the S&P 500 and the JSE All Share over one year and two years.”

This cuts to the heart of the matter. 

Overshadowing these results is the increasing concern around capital allocation and management incentives. These, along with the cross-shareholding and control structures, are the primary drivers of the Naspers and Prosus share price discounts.

The reality is that Prosus is trading at a 46% discount to management’s net asset value. And that gives pause for thought. DM/BM