Tencent has been so important in the life of Naspers and Prosus for more than a decade that being able to do something without the Chinese technology beast is now a momentous occasion.
This week Prosus reported, for the first time, that it was free cash flow positive without that juicy annual dividend from Shenzhen. Historic stuff.
Then again, Prosus is only six years old – its birth dates back to 2019 when it listed on Amsterdam’s Euronext bourse with the promise of attracting a whole continent’s lazy capital – so its history doesn’t exactly stretch the memory banks.
Still, you can’t help but think of a six-year-old walking those final steps to junior primary for a first day of school. They grow up so fast. But growth, of course, has always been the point. And the group’s sprawling portfolio of online businesses has not always behaved quite the way a parent would want.
That, at least, was until today. In its latest financial statements to the end of March, released this week, the profitability of Prosus’s e-commerce business suddenly leapt from $38m to $443m. That is a 12-fold increase and more than even Prosus expected. (The company uses adjusted earnings before interest and tax as its main measure.)
It was little wonder that the share prices of both Prosus and its almost identical older sibling, Naspers, gained more than 3% on the JSE on Monday.
Experienced stock watchers will know how rare it is to see Naspers shares advancing and Tencent stock going the other way, but that was indeed the case, as Tencent dipped 0.3% on Monday.
In this context, CEO Fabricio Bloisi, who took the reins exactly a year ago, looks like a magician.
But the Brazilian, who founded and headed iFood before becoming Prosus boss, is quick to point out that he was more concerned with getting the culture in the organisation right than simply chasing numbers. “This is a good signal that we are moving in the right direction,” says Bloisi.
Bullish about the future, he likes to think this is the first step in his plan to create $100bn in value. This is a pivotal number in Prosus’s boardroom, as it represents exactly what Tencent meant for Naspers – a windfall of more than $100bn for a bet of only $32m back in 2001.
Naturally the giddying success of Tencent over many years tended to make everything else that Naspers’s management tried look rather bleh. To mitigate this, over the past decade, many billions were deployed to build “verticals” that, most notably in the case of education technology, shrank to nearly nothing.
Bloisi has made it his mission to break down silos between units and to let businesses in the Prosus ecosystem learn from each other. Based on this week’s results, at least, this cross-pollination seems to be delivering something tangible.
The business that he knows best, iFood, was the star performer, more than doubling profits. Critically, however, he managed to get the other businesses to generate more cash too.
Classifieds get classy
Last year, when Bloisi was tapped to become CEO, analysts were pleased that the board had picked “an operator” – someone who had built an impressive business inside the Prosus stable and who would hopefully get others to perform too.
The results this week vindicate that view. The group’s food delivery businesses are solidly profitable, and more so than a year ago. The same is true for classifieds (you remember how badly OLX was hurt by the arrival of Facebook Marketplace half a decade or so ago). Even the online payments and fintech business has narrowed its losses to only $11m. And e-tail – the likes of Europe’s eMag and our very own Takealot – turned a profit of $10m.
The lessening dependence on Tencent’s dividend, as well as the newfound ability to generate cash, is a vital shift, says Aeon Investment Management portfolio manager Muneer Ahmed. “This strategic pivot is essential for narrowing the group’s significant discount to net asset value,” he adds.
It’s a big deal. You have to page all the way back to 2013 in Naspers’s results if you want to see it being cash flow positive without the injection from China. Those, of course, were still the years of pay-TV as a reliable cash cow, and it then made sense to have MultiChoice in the stable. But streaming has since killed the TV-star and MultiChoice has long been spun out.
But if Bloisi’s tenure has passed the first test, many in the investment community hope that Prosus will now aim to get rid of non-performing assets.
Even though it is still early days, Bloisi’s commitment to selling non-core assets and his willingness to go deeper into the really lucrative opportunities are encouraging signs, says Ahmed.
The Brazilian invested $6bn in the past six months alone. First there was the acquisition of Latin America’s largest travel agency, Despegar, which Bloisi says has already started showing results in how it pairs with iFood. Second, Prosus has also offered $4.7bn for Just Eat Takeaway, a move to build scale in food delivery. Bloisi is waiting for that deal to close.
“We are buying them, because we think we can run them better,” he says.
After the Just Eat deal has gone through, Prosus will still have $11bn in cash that Bloisi says he will keep ploughing into new opportunities. With the Tencent dividend in the bank, and profits now streaming in from the other businesses, Bloisi will need to find something to do with all that money. But it’s a nice problem to have.
Top image: Rawpixel / Currency collage.
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