Naspers or Prosus: the detail is in the devil

Now that the dust has settled on the Prosus listing and trading in the shares has settled down, investors may be wondering whether they are better off holding Naspers or Prosus, or both?

Looking back at the share price movements around the corporate action, it is evident that investors who elected to take the Prosus shares as opposed to receiving additional Naspers shares are better off. This is unsurprising and was largely anticipated due to the expected narrowing of the discount to Tencent through the listing of Prosus. After all, this was the stated rationale behind listing the global internet businesses as a separate entity.

Historically, Naspers has traded at a large discount to the underlying value of its investments/businesses or the net asset value (NAV). At times, this discount moved above 40%, with the longer-term discount averaging at around 30%.

Prosus consists of all of Naspers’ historic global internet businesses, which includes the likes of Tencent, Mail.ru, Delivery Hero and more recently Ctrip (which was swapped for the shareholding in MakeMyTrip). Alongside these listed investments, Prosus also owns a number of non-listed classified, retail and other start-up venture businesses spanning various industries. The valuations of the listed entities are readily available, and the valuations of the non-listed entities are based on analysts’ calculations.

Naspers owns 74% of Prosus, as well as their local businesses including the likes of Takealot and Media24. Given that Prosus is listed, we are able to derive a market valuation for Naspers’ ownership of that business. We have applied a zero valuation to the local non-listed entities as their valuations are likely to be too small (at this stage) to have any meaningful impact on the overall net asset value. Attempting to calculate what the market may be willing to pay for them would therefore be a futile exercise.

After having removed the net cash position, Prosus trades at a 21% discount to its NAV, which is a significant improvement to the discount that Naspers traded at prior to the listing of Prosus. Investors have therefore benefited from this value unlock.

Spot the double discount
Using the market valuation of Prosus, it appears that Naspers’ discount has reduced by an equal amount, with Naspers trading at a 21% discount to its NAV. However, the devil lies in the detail, and it is important to note that there is a double discount embedded in Naspers’ share price. The true value of Naspers’ NAV is not 74% of the market value of Prosus, but rather 74% of Prosus’ NAV. Calculating the discount using Prosus’ NAV as opposed to its market value removes the double discount and provides the true look through discount of Naspers - currently 38%. This is more or less in line with the discount prior to Prosus’ listing.

So, which holding represents a stronger investment proposition? From a valuation perspective, Naspers is the preferred entry point. In addition to receiving Prosus assets at a much cheaper valuation (the 21% discount to Prosus market value that Naspers currently trades at), there is the potential upside from the South African assets which currently carry little to no value within Naspers but may potentially be worth much more at a later stage. Furthermore, management have been actively trying to reduce the significant discount that Naspers trades at, and if one believes that they will continue to do so, then given the discount, there could potentially be further unlock for Naspers shareholders. Herein lies the catch though. Investors opting for Naspers as opposed to Prosus have to believe that further value unlock will be forthcoming. As a result of the double discount, if the gap between Prosus’ NAV and Naspers’ NAV remains unchanged, from a relative perspective (i.e. the 38% discount remains) investors will not see the benefit from all the upside of Prosus.

A final consideration is the significant capital gains tax implications that may come from having owned Naspers shares for a long time. In this case, the thought of paying a significant tax bill to switch out of Naspers in favour of Prosus is likely to be enough to sway legacy Naspers shareholders to continue holding on to their Naspers shares. This argument will not apply for new investments though.