By Ryk de Klerk
FOR the first time in many years I have turned very bullish on Naspers and Prosus. Prominent commentators and fund managers have accused Prosus and Naspers’s management of destroying value and although there might be merit in their criticism, another major factor has been overlooked.
Naspers and Prosus combined was by far the single largest equity holding and asset in the Government Employees Pension Fund’s (GEPF’s) fold, and exposed the fund to extreme market risk.
According to the GEPF’s financial statements for the year ended March 31, 2021 the fund held 76 million Naspers shares or 17 percent of the Naspers shares in issue valued at R268.7 billion.
The GEPF’s exposure to Prosus was 14 million shares valued at R22.9bn. The fund’s combined exposure to Naspers and Prosus amounted to 26.5 percent of the fund’s exposure to listed equities, and 14percent of the fund’s total investments including cash.
That was despite a reduction from the previous year’s 31.1 percent of total listed equity exposure, after which the GEPF’s holdings in Prosus were slashed by 28.8 million shares. Sales by the GEPF therefore accounted for more than 16 percent of the total number of the 176 million Prosus shares traded on the JSE during the fund’s 2021 financial year.
Yes, the Prosus sales amounted to more than 2 months’ average trade on the JSE.
Notes to the GEPF financial statements also revealed that the total fair value of the Naspers and Prosus holdings and open interest are in fact the real exposure after taking into account exposures to derivative instruments.
I bet my bottom dollar that the Market was acutely aware of the dire position of the GEPF due to the fund’s massive exposure to Naspers and Prosus, especially with Beijing’s clampdown on tech companies such as Tencent.
The GEPF had to address the risks either through selling Naspers and Prosus shares outright in the market or through derivative instruments which in any case would have led to the selling of the underlying stocks by counterparties.
Yes, the GEPF is or was most probably a forced seller.
Let’s assume that the PIC (Public Investment Corporation) as manager of the GEPF did nothing since the end of the GEPF’s 2021 financial year, and held on to the original Naspers and Prosus shareholdings.
By now, the value of the holdings would have been down by about R151bn or 51 percent since the end of March, last year. If the values of the fund’s other assets remained unchanged the total value of the fund would be down by 7.2 percent by now.
The fund’s exposure to Naspers and Prosus would be down to 15 percent of total listed equities and 7.4 percent of the fund’s total investments plus bank balances.
The exposure to Naspers and Prosus would still be outsized compared to the funds’ other listed equity holdings, though.
At the end of the GEPF’s 2021 financial year, the GEPF’s financial exposure to Naspers and Prosus was six times that of its second largest listed share, Anglo American.
The huge drawdown in Naspers and Prosus share prices and the surge in Anglo American’s share price would have slashed the ratio to 2.2 times.
Yes, still more than double the second largest holding.
Over the years, Naspers’s massive outperformance of the market kept the fund solvent and allowed for a build-up of contingency reserves.
Furthermore, the GEPF was not a drain on government’s finances as any shortfall would have required the South African government to chip in.
Now the GEPF’s members and perhaps the SA government have to face the music as the affordable level of contingency reserves amounting to R137bn as at March 31, 2018 is threatened by the more than R151bn drawdown in the GEPF’s Naspers and Prosus holdings.
That is, unless the managers of the fund’s assets were proactive in the management of the Naspers/Prosus holdings.
The extent thereof will only be known when the GEPF’s financials are published in the fourth quarter of the current calendar year.
Prudent asset management on a risk-adjusted basis in prior years would have resulted in the GEPF’s exposure to Naspers/Prosus to be much lower than that at the end of the 2020 and 2021 financial years.
Perhaps the GEPF and the PIC, as its asset manager, thought that they could significantly reduce the fund’s exposure to Naspers and Prosus in the GEPF’s current financial year, with a minimal impact on the prices of the two said entities.
The massive drawdown in Tencent’s share price in August last year no doubt could have caught the GEPF and its managers with their pants down.
In addition, the possible introduction of new pension fund regulation to help fund new investment in infrastructure by the private sector through the amendment of Regulation 28 of the Pensions Fund Act created an immediate extra burden for the GEPF.
Funds will need to come from somewhere, and most probably through the sale of listed equities. Due to the lack of diversification as a result of its massively outsized exposure to Naspers and Prosus, the axe would have fallen on the two shares.
I will not be surprised that what we are seeing in the market place is a fire sale – most of it to be completed before the end of the GEPF’s current financial year on March 31, this year – to have the liquidity to start financing infrastructure projects.
The GEPF’s shareholding in Naspers at the end of March last year amounted to nearly three months of the average number of Naspers shares traded monthly on the JSE from January last year to July, before the Naspers-Prosus share swap in August.
Why I am so bullish.
At Friday’s close, Naspers was trading at a discount of about 54 percent to its indirect holding in Tencent solely through Prosus, and the latter at a discount of more than 20 percent to its direct holdings in Tencent.
That excludes Prosus’s other assets.
Tencent will distribute 14.7 percent of issued shares in JD.com. The market capitalisation of JD.com was 821 billion Hong Kong dollars (R1.6 billion) of which Tencent will distribute R121bn of stocks to its shareholders.
Prosus holds 28 percent of Tencent, therefore Prosus will get JD.com shares valued at 33.8bn Hong Kong dollars or R66.6bn at prevailing exchange rates.
Naspers’s stake is about 73 percent in Prosus and the JD.com distribution will indirectly amount to about R48bn through Naspers’s stake in Prosus. It therefore makes sense for Prosus to use the proceeds to repurchase its shares in the market and thereby add significant value by buying the shares at a huge discount to its underlying value.
Naspers and Prosus management and their advisers can do what they want to try to narrow the discount to the underlying value of which the shares are trading. An overhang of stock should not force their hands to do stupid things
I will not be surprised to learn that by the end of December, 2022 the GEPF has cut its exposure to the group by at least half by the end of the GEPF’s financial year on March 31, this year.
So, yes, the consistent supply of Naspers and Prosus shares at giveaway prices may dry up sooner than later.
However, I do not know how low Naspers and Prosus can go given the mayhem in stock markets as a result of the Ukraine war.
Do not criticise your manager for holding on to Naspers/Prosus. There is method in the madness.
I am not buying the dip but the trough, though.
Buying Tencent through Naspers at a discount of more than 50 percent means that if the discount narrows to 30 percent – which is normal for a holding company – the upside is about 40 percent.
In addition, I get Prosus’s other assets for free. I am in for the long-run – that’s why I am prepared to take the pain in the short term.
Ryk de Klerk is an analyst at large. Contact rdek@iafrica.com. He is not a registered financial adviser and his views expressed above are his own. He has a direct interest in Prosus. You should consult your broker and/or investment adviser for advice. Past performance is no guarantee of future results.
Ryk de Klerk is analyst-at-large. Contact rdek@iafrica.com. He is not a registered financial adviser and his views expressed above are his own. He has a direct interest in Prosus. You should consult your broker and/or investment adviser for advice.
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