Spreading its reach
Naspers’ drive to become the leading provider of Internet-based services in emerging markets has not only been characterised by guts, ambition and deep pockets, but also a vision that has not been fully embraced by the market. Local investors may not yet fully understand the markets in which this multimedia conglomerate is investing.
The group now makes about 75% of revenue from its SA operations — still high as a proportion, but substantially down from 100% in just under a decade. Since 1999 Naspers has been on a multibillion-rand shopping spree, acquiring stakes in several Internet companies in China, Russia, Poland and Thailand, while also setting up similar operations in Africa and India.
According to a report by Jupiter Research — “Worldwide Online Population Forecast 2006-2011” — the biggest growth in online use in the next few years will happen in Brazil, Russia, India and China, all countries where Naspers has a presence.
However, Naspers’ strategy has at times been greeted with caution by investors. The most recent example is the subdued reaction to the group’s purchase of leading UK-based online auction site Tradus for R13,2bn in December. The Naspers share price fell 10,2% to R162,50.
Analysts questioned the group’s logic and willingness to spend so much on foreign companies. And certainly the strategy is not yet paying off in contribution to the bottom line — especially when compared with pay-TV.
Pay-TV contributed R6,3bn to overall revenue of R10,5bn for the six months to end-September. The SA division accounted for the biggest chunk at R3,62bn, while pay-TV operations in sub-Saharan Africa and the Mediterranean brought in R1,4bn and R910m, up by 24% and 12% respectively.
Naspers’ Internet businesses — including M-Web SA, M-Web Africa and M Web Thailand, MXit and the Internet start-up in India — contributed R654m to total revenue, up 22% from R538m in the previous corresponding period.
Steve Meintjes, head of research at Imara SP Reid, says though income from Naspers’ foreign-based Internet investments has increased by 35% to R93m because of the improved contribution of Tencent and Mail.ru, “their contribution equated to a still minor 5,6% of an operating profit of R2,3bn”.
Tencent is a popular Chinese instant messenger service in which Naspers has a 46,5% stake. Listed on the Hong Kong Stock Exchange, Tencent contributed R218m to core headline earnings during the six months to September 30. The company reported a revenue increase of 21,8% to US141m for the year ended September 30 and gross profit growth of 26,7% to $101,5m. Its operating profit went up by 29,8% to $62,6m.
Leading Russian portal Mail.ru, on the other hand, in which Naspers acquired a 33% shareholding for $191m, is one of that country’s three biggest Internet portals, with more than 30m users at November 2005. The company was founded in October 2001.
Naspers group investment officer Mark Sorour says the low contribution of the group’s Internet business is due to Internet penetration only now picking up in developing markets. Citing SA as an example, he says though Internet penetration remains relatively low, it is growing, as is online advertising.
Sorour says it may be easy to dismiss contributions from these companies. However, he points out that even though the revenue from them is still low, the growth is and will be impressive.
He says that unlike other companies, the business model of Internet companies is different. For one, their balance sheets are not as asset-heavy. With Internet-based companies, people are the main assets. The success of an Internet company depends on the number of people who use its service.
Naspers’ purchase of Tradus, though in keeping with the group’s strategy, signals a significant shift for the company from advertising revenue-dependent media assets to transaction income.
The former are susceptible to economic cycles, where in cases of a slowdown — as seen recently with its print division — the revenue growth rate takes a knock. Tradus, however, makes its money from charging a fee for the platforms it gives a seller and buyer to conclude a deal.
Whether investors will buy into Naspers’ vision is unclear. Since the Tradus announcement, the group’s share price has traded between R159 and R171. Analysts continue giving the company the thumbs-up based on its consistent performance in the past. In January 1999, Naspers’ share price was R23,95. In November last year it reached a record high of R209. The lowest close was in March 2002 at R12,30.
Sorour says the focus right now is on long-term investments. The group started consolidating media assets locally, acquiring the remaining 38% stake in M-Net/SuperSport from Avusa and stripping itself of nonmedia assets.
Says Meintjes: “Investors may recall that Naspers paid big school fees in failed technology and Internet-related acquisitions in the late 1990s, and we are inclined to think that the lessons have been taken to heart, especially because since then there have been notable successes such as Tencent. As such we have no quarrel with the strategy and believe investors can accumulate at these levels.”
Meintjes says the Tradus deal is the culmination of a strategy which no doubt reflects the input of CEO Koos Bekker while on his “sabbatical year”.
Loading ...