Underappreciated!

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By Philipp Wörz

All of us have had moments of regret.

Thoughts like, “I should have bought that beachfront property in 2001”, “Why didn’t I buy that wine farm in Stellenbosch” or “Why did I marry that ogre?’ may have crossed your mind. The same goes for financial investments and, in that department – nodisrespect – I am sure there are a few PhDs in hindsight among us.

In order to prevent another repeat situation of this “perfect science”, investors need to take cognisance of opportunities as and when they arise. One such opportunity of late and currently is Naspers (NPN), which is an emerging markets-focused, South African-based, media company with investments across various media platforms on all continents. The share reached a record high of R216.50 on October 30, 2007 and subsequently fell as low as R126.02 on March 17, 2008, a share price drop of 42%, bouncing back to R160 this week.

In what follows I will portray some of the features of Naspers’ investment case and why we believe that it should be a component of your investment portfolio over time.

Pay TV

Naspers owns Pay-TV operations in South Africa, most of the African continent and in Greece. Even though competitors are entering the SA Pay-TV arena, Multichoice enjoys a monopoly-like situation and inroads by competitors are happening at a snails pace. Telkom’s recent reduction of its investment in Telkom Media simply goes to show that infiltrating a market with a dominant operator is not an easy task. South African subscriber numbers stood at 1.47 million in September 2007 and – if you believe in the long-term secular growth of the SA economy – even though we are experiencing short-term hiccups, numbers will grow further. Additionally, the emergence of consumers in other parts of Africa consumers will aid in growing the bottom line.

The challenge new operators will be facing is securing the necessary quality content for its subscribers at affordable prices. We think they will struggle. Valuing the Pay-TV operation by means of a discounted cash- flow methodology results in a value of R55bn, which comprises 85% of Naspers’ market value. Nevertheless, increased competition must result in some margin pressure in the short to medium term, stemming from increasing content costs or difficulties in increasing bouquet fees. We would argue that Naspers’ dominant position will outweigh these anticipated headwinds over the
long term.

Tencent and the like

At the current Naspers share price, the market clearly does not believe in Tencent’s and Naspers’ other internet investment valuations. Naspers owns 35.5% of Tencent. Tencent is a China-based instant-messenger (IM) service used by about 700 million subscribers. Most revenue comes from internet value-added services. Naspers has other internet-related businesses in South Africa, Asia and other countries in Europe. At the current price of HK$46.90, Tencent accounts for 47% of Naspers’ current market capitalisation. Tencent grew its revenue to HK$3.7bn in 2007 and made a profit of HK$1.57bn.

Of the 15 analysts polled by Bloomberg, fourteen rate Tencent’s stock as a buy-and-hold one, with an average price target of HK$58. At this price Tencent would account for 60% of Naspers’ current value. Even assuming a more conservative valuation of HK$30 the implied price earnings ratio of Naspers’ core operations is still well below 10, which is attractive by any measure.

Tradus

In December 2007, Naspers announced an acquisition of pan-European online auction and e-classified operator, Tradus for £946 million. The market got a little scared by the announcement of this acquisition as, at face value, the acquisition looks rather dear. However, if one trusts management’s ability to pick good investments and take advantage of growth and synergies in their East European online businesses (Mail.ru and Gadu Gadu), this purchase may not be too bad after all. Tradus will be accounted for in the 2008 financials, to be reported on in November, which the market will keenly be anticipating.

In addition Naspers operates media companies in South Africa, such as MWEB, Media 24, Paarl Print and numerous other companies overseas, most notably Abril, (the Brazilian publishing company), in which Naspers’ share can be valued at around R3.5bn. One can argue that the SA-based companies, especially those dependent on the advertising cycle, will be facing headwinds as the economy takes its foot off the accelerator, (Thanks, Tito!), but we would be of the opinion that this is more than reflected in the current share price.

Even though the counter has appreciated by 25% from its lows, current levels provide investors with a long-term view a good entry point to take part in the growth of this company’s attractive businesses. Buy it now and look back in ten years, you’ll be glad you did. Don’t become a victim of the perfect science, hindsight.

Source: Philipp Wörz, Alphen Asset Management, April 11, 2008.

 

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Read more on Naspers at Wikinvest
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