Analysis of the Naspers structure

Naspers is a leading multinational media group, incorporated in 1915 as a public limited liability

company and listed on the Johannesburg Stock Exchange (JSE) in September 1994. The

company also has a listing on the London Stock Exchange (LSE). The Company’s segments

include Internet, pay television, print media and related technology in emerging markets. Its

principal operations are in Internet platforms (focusing on commerce, communities, content,

communication and games), pay-television and the provision of related technologies and print

media, including publishing, distribution and printing of magazines, newspapers and

books(Naspers.,2012 :1).

The Naspers Internet subsidiary consists of investments in internet platforms in Central and

Eastern Europe, China, Russia, Brazil, Africa, India and Thailand. The services provided are

primarily delivered to computers and mobile phones (Naspers., 2012;1).

The Pay Television subsidiary provides subscriber platforms and channels in sub-Saharan Africa,

as well as investments in mobile television in sub-Saharan Africa (Naspers., 2012:1).

In the Technology operation, Naspers deals with the development of underlying technologies

for internet, pay-television and mobile platforms (Naspers., 2012:1).

The Print Media operation is responsible for the groups’ magazines, newspapers, printing,

distribution and book publishing businesses in South Africa and sub-Saharan Africa, as well as

print media investments in Brazil and China (Naspers., 2012:1)

Segments to be valued separately.

Ten Cents in the Internet operations should be valued separately because it has unstable and

unpredictable revenue generation therefore cannot be easily valued using discounted cash

flows, therefore should be valued separately. More growth in the use of the internet on the

coming years due to the emergence of new forms of social media communications such as

blogs also makes the revenues to be made difficult to forecast.

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Key drivers to Naspers’s Value

Generic factors such as liquidity, Control premium ,Growth into Africa and other emerging

markets and other Macroeconomic considerations such as the exchange rate since the

company operates on a global scale are important key success factors for Naspers.

Key assumptions to consider when valuing Naspers

The main assumptions to be considered should be those that directly influence the use of

discounted cash flow valuations, which are growth, interest rates, exchange rates, tax rates,

and depreciation and amortization rates.

Historical Analysis of Naspers

The appendix indicates that Naspers revenues have been fluctuating year on year from 2007

where there were no net sales. The highest sales recorded were in 2009; while in 2010

revenues increased but at a decreasing rate. This declining increase could be attributed to the

fact that the print business globally, including Naspers, suffered during the recession, due to

advertisers spending less on print advertising to cut back on costs and because of the stronger

Rand. Irdeto, the company’s technology operations was also heavily affected by the recession

because drastic cut backs on research and development due to the crises (Naspers, 2010:17).

The fact that there was still growth during the recession is attributed to the fact that most

emerging markets in which Naspers operates survived the global economic meltdown relatively

well. On average, the company experienced revenue growth of 15% over the past 5 years.

Naspers earnings per share have increased by 61% from 2010, decreased by -44% from 2009,

from 2008,a 59% increase and from 2007 by 44%.The decrease in earning per share from 2009

to 2010 can be attributed to the global financial crises and can be tied with the declining

increase in revenue shown above.

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Current ratio of 1.1 in 2007, dropped to 1.09 in 2008, which could be attributed to the financial

crises as globally liquidity of many companies was jeopardized. The ratio then grew to a

consistent 1.2 in 2009 and 2010, from which it increased to 1.24 in 2011.The increase in

liquidity could be because the company has put in place mechanisms to absorb threats to

liquidity, by reducing short-term debt financing. Furthermore, the company’s liquidity

remaining strong through the recession could be attributed to the diversified nature of its

operations since those did not suffer equally during the economic meltdown. Industry current

ratio is 0.85 which means that Naspers has had a relatively strong financial position in terms of

its liquidity.

The groups’ net operating profit less amortization and tax has been increasing at a sharply

declining rate from 2007 until 2011, from a 17.3% increase from 2007 to a 4.4% increase from

2010.This could be due to the fact that the company has made more acquisitions in intangible

assets since 2007 and hence have to deduct larger sums for amortization. This could also be

that because the company has made acquisitions in multiple countries, they have had to pay

more for operating cash taxes due to tax adjustments for foreign taxes, and global increases in

interest rates.

The fluctuating cost of sales experienced by the group could be, attributed to the unstable

nature of its internet business operations.

Naspers’ return on equity was at its highest in 2009 and has showed continued increase to

date. This means that return earned on the common stockholders’ investment has been

increasing. Relative to the industry five year average of 8.90%, Naspers has had a five year ROE

average of 27% (Reuters., 2012:1). This indicates that compared to their competitors, Naspers

look after their shareholders and this sends out a clear message to future investors.

Naspers experienced a return on invested capital (ROIC) of 6.8% in 2011, 7.9% in 2010, 8.03 in

2009, 6.3% in 2008 and the highest ROIC recorded in its 5 year analysis of 10.5% in 2007.These

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variations in ROIC are attributed to the differences in the profitability of the acquisitions that

the group has made.

Forecast of Naspers performance

Sales growth (g)

Scenario growth probability Weighted average

Worst case 3% 50% 1.5%

Base case 18% 30% 5.4%

Best case 20% 20% 4%

total 10.9%

The World Bank, in its Global Economic Prospects report has stated that the global economy

has entered a dangerous period. It elaborates that some of the financial turmoil in Europe has

spread to developing and other high-income countries, which until earlier had been unaffected,

hence, growth in several major developing countries (Brazil, India, Russia, South Africa and

Turkey) is significantly slower than it was earlier in the recovery(World Bank., 2012:1).Seeing as

Naspers has major holdings in the countries mentioned, the worst case scenario, of a 3%

revenue growth rate has been assumed to have the highest probability of happening. Seeing as

from the historical analysis, the revenue growth for the past five years averaged to 18%, even

though there was a recession, this will be used as the base case. With all the economic

challenges stated, and considering that Naspers has not had such a revenue growth rate, 20%

was chosen as the best case that the company could find itself in. However this is highly unlikely

because the global economy is expected to contract.

Cost of sales growth (g)

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Scenario Growth% of sales Probability% Weighted average

Worst case 60 25 15%

Base case 50 60 30%

Best case 40 15 6%

total 51%

From the historical analysis, the cost of providing services averaged around 50% of net sales for

the past five years; hence this has been used as the base case scenario. Because financial

theory states that cost of sales increase with sales, it is highly likely that the base case will

continue being the status quo, hence the high probability assumption.

Selling, general and administrative expenses growth (g)

Scenario Growth% of sales Probability% Weighted average

Worst case 50 20 10%

Base case 30 60 18%

Best case 20 20 4%

total 32%

The past five years have shown selling, general and administrative expenses averaging around

30% of sales, therefore this was chosen as the base case scenario.

Amortization

As it is evident from the ROIC historical analysis that acquisitions have not brought significant

returns for the group, it will be assumed that amortization will stay constant for the next five

years. This assumption emanates from the assumption that the group will not make more

acquisitions of intangible assets.

Operating cash taxes

These will be assumed to be 28% since this has been the taxation at statutory rate.

Furthermore, the World Bank forecasts a double dip recession; it can be assumed that

governments will not be changing tax rates due to the volatility that may caused due to

protesting civilians and companies feeling pressure from increased taxes during hard financial

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times. This is also supported by the fact that Naspers has invested more into emerging sub

Saharan markets, and the World Bank has stated that developing countries will have much less

fiscal space available to respond to a new crisis (World Bank., 2012:3).

Changes in working capital

Changes in working capital were forecasted to be 5% for consistency

Capital expenditure

In forecasting for the capital expenditure, it was estimated, looking at the property, plant and

Equipment expenditure from 2010 and 2011 that there was an increase of 5% .Therefore, for

consistency of the results, the rate of 5% was used for subsequent years.

Naspers cost of capital

The McGregor valuation tool was used to calculate the weighted average working capital of

Naspers, using 153 as the risk free rate. The WACC of the company was found to be 10.98% and

in calculating the terminal value, was rounded to 11%.A growth rate of 7% was used as

discussed in class.

The 2017 free cash flow or terminal value of R 1,132.98 million was found. This is a much lower

free cash flow from the other cash flows forecasted ,starting 2012.This then indicates that in

the long-term, using the same growth rates to forecast reduces the value of future cash flows.

The terminal value here is positive which shows that in perpertuity, Naspers will still have

positive cash flows.

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List of references

Naspers., 2012.About Naspers. Available [online]: http://www.naspers.com/about-naspers.php

Accessed: [23 February 2012]

Naspers.,2010.AnnualReport.Available[Online]:www. naspers .com/downloads/ar/ 2010 /

naspers _ar 2010 .pdf .Accessed: [20 April 2012]

Reuters., 2012.NaspersLtd(NPNJn.J).Available[Online]:

http://www.reuters.com/finance/stocks/overview?symbol=NPNJn.J. Accessed: [16 April 2012]

World Bank., 2012. Global Economic Prospects: Uncertainties and vulnerabilities. January 2012

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