PROSF - Alphyn Capital - Naspers / Prosus: Value Hiding In Plain Sight

• Prosus will start an open-ended program to sell Tencent shares and use the proceeds to buy back shares.
• Prosus is selling Tencent shares at full market value and buying PROSY stock at deeply discounted prices.
• Prosus will continue to benefit from a strategic connection to Tencent and attractive dividends to fund operations.

The following segment was excerpted from this fund letter .

Prosus ( PROSY )

On June 27, Prosus announced a significant change to its capital allocation strategy. The company will start an open-ended program to sell Tencent ( TCEHY ) shares and use the proceeds to buy back Prosus shares, for as long as the NAV discount remains at “elevated levels.”

The board and management have recognized that the ROI from buying back deeply discounted Prosus shares far exceeds that of investing in its portfolio of fast-growing yet loss-making tech companies, especially in the current environment. With approximately 50% of the CEO and CFO's remuneration now coming from Short Term Incentive options directly tied to the discount, it is clear where their focus now lies.

On the earnings call, management hinted further actions would follow to simplify the company structure and improve NAV per share.

Importantly, because Prosus is selling Tencent shares at full market value and buying Prosus shares at deeply discounted prices, the value of Tencent per remaining Prosus share increases, and so Prosus will continue to benefit from a strategic connection to Tencent and attractive dividends to fund operations.

There has not been much change in the fundamentals of the business. Most of the private businesses continue their strong revenue growth (ranging from 45% to 93% per annum), and several divisions have a clear line of sight to profitability in a few years. Moreover, in a more difficult funding environment, they should benefit more than many of their competitors from having the cash and resources of parent company Prosus.

With management sharpening its focus on capital allocation, the perception from investors has changed, which has begun to unlock value that has been hiding in plain sight (the discount).

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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