At face value there was much to be disappointed about in the Prosus-Naspers interim results.
However, these negatives were somewhat tempered by the main positive points for us, which were revealed in the management presentation to investors, where:
1. Management isolated the performance of the core operations from the new initiatives in the respective verticals, which demonstrated the improved profitability of the unlisted e-commerce businesses.
a. iFood Brazil’s trading profit margin increased to 7% in FI23 from -1% in FI22. The $45m profit was, however, negated by the $95m trading loss from the new initiative in grocery and convenience delivery initiative.
b. Olx’s core trading profit margin improved to 27% from 18%. The core’s $59m profit (excl. $7m Ukraine) was, however, offset by the $206m trading loss from the build-out of the Olx Auto delivery infrastructure.
c. The Payments operation’s core trading margin improved if one excludes the once-off provision related to the potential loss from a particular merchant. The $55m loss of new initiatives also offset this profit.
2. Management stated that they would allocate further capital only to existing verticals and their recent initiatives at this point, in an attempt to clarify the path and timing to profitability, and
3. Active cost management at corporate and operating levels and exiting of underperforming businesses to support this road to profitability. As a result of these measures, management guided to a meaningful improvement in profits in all the core operations and reduced losses in new initiatives in the second half of the 2023 financial year to March 2023.
The culmination of the abovementioned demonstration and measures is the statement that management expects the e-commerce operations to break even by the first half of 2025, at an aggregate level.
While the relative quantum of profit from the e-commerce operations are not yet at the at the level of Tencent’s contribution for some time, this goes some way to addressing one of my key concerns expressed in an internal ‘investment case’, namely “None of Prosus’ operating e-commerce platforms (Classifieds, Payments & Fintech, Food Delivery, Etail and Other) are profitable and still require funding from group reserves. The key question is then: When will the e-commence cluster become profitable, particularly in the context of the regulatory impacts on Tencent? We warn that there is a chance that losses may persist for some time, as has been witnessed with many tech companies in the past, such as Amazon.”
Management’s statements bring the break-even visibility closer than previously feared.
On the day of this result, our estimated net asset value per share (NAV) for Naspers increased by R184 and R170 for Prosus to R2890 and R1726, respectively.
Although, we believe that it is important to be aware that the NAV is calculated on a peer Enterprise Value to Revenue multiple basis, and was thus boosted by the:
Over 35% increase in the revenue earned by the e-commerce assets and
The lower number of shares in issue, following the share buybacks.
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