Behind the Naspers share surge

2017-05-25 11:34
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Cape Town - It is nothing new for the Naspers [JSE:NPN] share price to surge, as it did again recently, breaching R2 800 per share for the first time this week.

For investors this creates questions, like what is driving the share price, is it over-valued and what - if any - could its ceiling be?

Fin24 asked a number of experts to put it into perspective:

Performance

Kirk Swart, share analyst at Overberg Asset Management, says Naspers is trading at a valuation that commands tremendous earnings growth going forward.

"To say whether it is overvalued or not, an investor should ask if Naspers can keep delivering earnings growth in excess of 30% per year for the next few years. This mainly boils down to whether Tencent can continue to grow as aggressively. To date, it would seem that Tencent has done that," says Swart.

He adds that the IT and online media space has room to grow - and grow tremendously.

"With a world population of over 7 billion people, Tencent has a massive potential market. The market seems to think Tencent will be able to keep growing earnings as aggressively as they have done in the past. Many analysts have a target price of R3 000 per share," says Swart.

In his view, what investors should however note is that the business does not have a moat around it.

"The world of today is moving a lot faster than the world of yesterday. Every day there is a new cellphone app or game or online service. It is a very low cost thing to produce and can be replicated fairly easily. Consumers also tend to move from one app to the next, one fashion to the next," cautions Swart.

"Buying Naspers at a 100 price to earnings ratio, investors believe that Tencent will continue to be the market leader and will continue to design media services that consumers will find fashionable for years to come."

The meteoric rise of the Naspers share price over the last 17 years

(Source: Morningstar)

READ: Tencent results beat estimates as WeChat, games power growth

Driving the price

Swart's OAM colleague Gielie Fourie points out that Tencent has just posted record quarterly sales (up 55%) and profit for the first quarter of 2017. It topped all analysts’ estimates.

"This trend is expected to continue. There is a major (and logical) risk that this trend cannot continue indefinitely. There are always limits to growth," adds Fourie.

In his view, the Naspers share price is not overvalued.

"We think the share price could rise to R3 200. Naspers’s 33% holding of Tencent is worth more than R3 000 per share. Then you get all the other Naspers assets - valued at around R450 per share - for free," says Fourie.

"Tencent recently bought a 5% stake in Tesla. If Tesla is successful, China could be a major market for Tesla. Tencent stands to benefit from its investment. Smart move," says Fourie.

READ: Tencent rainmaker takes biggest gamble

Growth and value

Martin Harris, a trading specialist at EasyEquities, explains that an investment of R20 000 in Naspers five years ago would be worth R142 000 today - a 704% return, including the reinvestment of dividends.

At the beginning of January 2012 Naspers cost about R355 per share. At the prevailing exchange rate, the equivalent in dollars was $47 per share.
 
At that time Tencent, in which Naspers has a 33.51% interest, cost HK$31 per share. The Hong Kong dollar shadowed the US dollar at a rate of around HK$7.75 and so Tencent cost $4 per share.

Currently, a Naspers share will cost you around R2 800, translating to around $212 per share at a conservative exchange rate of R13.20 to the US dollar. So, in rand, a Naspers share over five years is up about 690% (excluding dividends) while in dollars it is up about 356%. Naspers does not, however, simply reflect the Tencent performance as Tencent is up over 783% in US dollars.

"The way I see it is that Naspers has essentially traded as a marked down Tencent proxy. Initially Naspers traded at a premium to the ‘see-through-value’ of the Tencent stake, suggesting that the market priced in value to Naspers over and above its investment in Tencent.

"This premium has subsequently degraded, and so the market capitalisation of Naspers has typically traded 15% to 20% below the market value of their stake in Tencent," says Harris.

"The discount is a telling metric of the market’s confidence in Naspers’ ability to generate its own growth outside of Tencent. The material discount in Tencent provides a cushion for possible negative surprises and some headroom for future upside if e-commerce is a positive surprise.

"The valuable pay-TV business, of which Multichoice is a flagship, is not being reflected, while e-commerce is value detracting as returns remain elusive after years of heavy spend."
 
He says Naspers companies spent $387m alone in the first six months of the 2017 financial year and will spend about $600m for the full year. In the six years to March 2016, about $3bn was spent and in the five years 2017 to 2021 some $1.5bn to $2bn is possible. That could result in up to $5bn in 11 years, or an average of $450m per annum.

Development spend is predominantly paid for by MultiChoice profits and the Tencent dividend.  

"While Naspers shareholders have done well from a capital appreciation perspective, shareholders have not done as well as they could have given the increasing value diminution relative to Tencent," says Mark N Ingham, an independent analyst.

Naspers and Tencent based to 100 over 5 years in US dollars at prevailing exchange rates for the ZAR and HK$s:
(Source: EasyEquities)

Strong run

Brett Birkenstock, director at OAM, says Naspers can be considered both cheap and expensive, depending on how one views the share and its holdings. It is most certainly a volatile holding, but the 'Blue-Sky' is vast and is most certainly a very attractive growth stock.

Abri du Plessis of Gryphon Asset Management also says Tencent released better-than-expected results last week, and that is what is driving Naspers.

"I do not think Naspers is overvalued yet, but would not try and call a level - it is a moving target. R10 000 invested on January 1 2001 would be worth about R2.4m today," says Du Plessis.

READ: Naspers pumps R960m into Takealot

* Fin24 is part of Media24, a subsidiary of Naspers.

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