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Cape Town - The first thing to remember is that Naspers [JSE:NPN] is an investment holding company and a ratings downgrade, therefore, does not necessarily say anything about the underlying investments, Drikus Combrinck, an independent market analyst, told Fin24.
He commented about credit rating agency Fitch cutting its rating on Naspers' senior unsecured debt to non-investment grade or "junk status on Wednesday.
The agency cited a deterioration in the profitability of Naspers due to hefty investment in development. Fitch cut its rating to BB+ from BBB-, it said in a statement.
"The debt of Naspers is very small compared to the value of its investment,” said Combrinck.
“Naspers would like to, but does not need to, raise capital from deep pockets to sustain its investments. So this rating does not change much about the current valuation of the company.”
Combrinck said the ratings agency, for instance, does not even recognise the market value of Naspers’ two big listed investments, namely Mail.ru and TenCent.
“Secondly, being a company that invests in web content, Naspers cannot capitalise its expenditure on web content development as a capital item. Thus they have to expense it directly through the income statement, which from a pure accounting perspective, puts pressure on earnings and operating cash flow.”
He explained that it is, however, not operating cash flow, but cash flow which will bring more revenue to Naspers in the future.
“Fitch does not necessarily see it as such,” he said.
Economist Mike Schüssler said growing too fast can often be a problem.
“In this case, the investments cycle is growing much faster than earnings or possible future earnings as well, in all likelihood,” Schüssler told Fin24.
“Fitch is being conservative as it is only looking at actual cash flow and not value.”
He said the problem is not just a Naspers problem as many firms have seen the value of their stock rise and, therefore, market cap.
“The return on capital does not rise as quickly, and to increase it, firms lend money to grow faster,” said Schüssler.
“The money lent, however, is not normally given, because of market cap, but actual revenue and cash flow.”
So rating and market cap are certainly often in conflict with one another, according to Schüssler.
“Naspers may now reconsider big investment spending and rather focus on growing immediate revenue and medium term revenue and not just long term abilities to grow revenue,” he said.
“Tech companies had a similar problem in the late 1990s as they got easy money, but the revenue took long to follow investment and sometimes never did.”
- Fin24
* Fin24 is part of Media24, a subsidiary of Naspers.
