$NPSNY, $TCEHY & Holdcos | The Acquirer's Multiple®

In his recent interview with Tobias, Adrian Saville, Chief Executive at Cannon Asset Management discussed $NPSNY, $TCEHY & Holdcos. Here’s an excerpt from the interview:

Tobias: One of the unusual features of the South African market is that it is largely resource-based market. I’m familiar with markets like that, because I come from Australia, and Australia’s got a similar kind of market. You have this unusual feature in South Africa that you’ve got a very large tech stock in Tencent. What’s the update on Tencent?

Adrian: Well, if you’re an active manager, it’s an absolute curse because Tencent initially was held through a company called Naspers. Naspers acquired substantial stake in Tencent many years ago, and that has become a huge component of the broad Johannesburg Stock Exchange making up more than 25% of the index. When I give that example, I’m reminded of Nokia. In a way, Nokia became the single stock expanding 80% of the index. If you get it right, you look like a superstar, if you get it wrong, you look like an idiot. That makes a very strong case for actually indexing, just owning the index basket. To get to your question more exactly, Naspers has been under a lot of pressure to try and release the trapped value because Naspers trades at about 50% or 50 cents on the dollar of its Tencent valuation. There’s no good reason for this, why would have traded that type of discount?

The Naspers has done two things in recent times. The first was they separated out, part of the portfolio into a business called Prosus, which is also a holding company, but that allows them to separate or distinguish some of the e-commerce businesses in Naspers and Prosus. However, now both Naspers and Prosus are trading at 50 cents on the dollar, so go figure. What both of the businesses have done in the last year or so is they’ve gone into quite active share buyback programs and there’s a very vocal shareholder community that is trying to get this trapped value released, but it’s billions of dollars that are in there.

Tobias: I know that you wanted to discuss a holdco example. Is that the holdco example you’re thinking of?

Adrian: Well, no. It’s one of them. You’ve said South Africa has this large ticket basement. Perhaps, I should add to that, or alongside your observation comment that, although that that’s one of the very large tech investments, outside of that South Africa is relatively tech poor from a market perspective. However, we also have a very sophisticated and established financial services cluster. Over the years, that financial services cluster has translated into many holdcos being listed. African Rainbow Capital is an example, Brait, Brimstone, Ethos, Long4Life, Naspers and Prosus that we’ve just mentioned, PSG, Zeder, which is an agricultural sector holdco. I’ve gone over those alphabetically. [chuckles]

When I run through that list, and I look at the net asset value and their share prices, as a collective, they trade at about a 40% or 50% discount to net asset value. Some of them are huge market caps, with these very, very big discounts to nav. In the case of Naspers and Prosus, we’re talking about $100 billion market cap. So, you’ve got $100 billion market cap trading at, in the case of Naspers, a 55% discount to net asset value, and Prosus a 35% discount to net asset value. Not only do you have massive market cap, you’ve got huge discount. What’s really interesting, and this is where the clever financial engineering can come in is, the Naspers and Prosus portfolios actually look quite similar, so you could get your free lunch by going long Naspers and short Prosus with the 55% and 35% discount being your– that’s your straddle.

The other holdcos that I wanted to reference in passing and this was the one that I spoke to John about earlier in the year is a company called Sabvest Capital. Sabvest Capital has been listed on the Johannesburg Stock Exchange since the late 1980s. Over this 50-year listed investment history, it has produced a compound cumulative return on assets of 21% per annum, so you’ve got a business that’s compounding return on invested capital ROIC of 21% per annum. Its weighted cost of capital in a South African environment would be, given its market cap, given our risk-free rates, you would put a weighted average cost of capital of low double digit and for the sake of a number, a 12% weighted average cost of capital with a return on invested capital of 21%. This business is compounding away quite comfortably, also getting into the business of share buybacks. It’s got a beautifully diversified portfolio. About half of the assets is outside of South Africa. Then, it’s multi-industry. It owns a documented data storage business, it owns a textile, zipper and fastener business. It owns a taxi fleet financing business. It’s got some small industrial food and related industry investments. Here you’ve got this wonderfully diversified portfolio, by industry, by geography, by currency, compounding a 21% per annum, buying back and canceling its own shares, and it’s trading at 50 cents on the rand. Actually, it’s trading at 40 cents on the rand.

What the cynics will tell you is, when is that 60% discount going to close? Maybe the cheeky answer is, well, hopefully it never closes because, here, I can effectively get a good investment. I’m paying 40 cents for a rand of equity, and it’s the rand of equity that’s compounding at 21% per annum on my 40-cent exposure. This is, I think, an example of one of the really interesting ideas in the South African environment for international investors, global investors that might be just a little too small, it’s $100 million market cap. For us, it’s more than sufficient size for us to build quite a large position in our specialist equity portfolio. We own about 10% of our specialist equity portfolio allocated to Sabvest.