Naspers and Prosus share prices aggressively narrow discount to Tencent Holdings

The Naspers and Prosus share prices have rebounded sharply following the release of results and news that the companies’ would be selling off part of their stake in Chinese technology giant, Tencent Holdings.

Prosus FY22 results

Salient features from the Prosus full year results are as follows

• Revenue of $35.6bn, up 24%

• Trading profit of $5bn, down 6%

• Core headline earnings $3.7bn, down 20%

Naspers FY22 results

Salient features from the Naspers full year results are as follows

• Revenue of $36.7bn, up 24%

• Trading profit of $5bn, down 6%

• Core headline earnings of $2.1bn, down 16%

Naspers and Prosus selling Tencent shares to fund share buyback programme

In an attempt to reduce the Naspers and Prosus discount to net asset value (NAV), Tencent shares will be sold at a measured pace, using the proceeds to bankroll a share buyback scheme.

The share repurchase programme is a long-dated initiative and will run for as long as the ‘elevated’ discount to NAV remains.

The sale of Tencent shares will be done on-market in a way as not to materially overwhelm the daily trading volume of the counter.

Prosus had previously indicated when it sold Tencent shares last year, that it would not be selling Tencent shares for a period of three years. However, this self-imposed voluntary restriction will now be abandoned, a move which is supported by Tencent Holdings.

Comments on results and share buyback news

Naspers results have shown a sharp rise in revenue across all its operational segments. However, the group’s classifieds business saw trading profit decline, while trading losses in its E-commerce portfolio, Food delivery business, Fintech Payments and Educational technology divisions all increase by significant margins.

Pressure on the group’s profitability has followed investment into ‘adjacent opportunities’ across all segments as well as a challenging macro-economic climate.

The cost of capital pertaining to the group’s initiatives outside of Tencent remain high and perhaps warrant the company maintaining some semblance of larger than normal (for an investment holding company) discount to NAV.

Ironically the share buyback news has overshadowed the decline in profitability from the stable. Prosus and Naspers share prices have now already gained roughly 20% each on the day of the news release. This presents an aggressive narrowing of the discount gap between the companies and Tencent.

When looking at trying to arbitrage the discount between Naspers / Prosus and Tencent, we think that much of this opportunity has now already been realized.