Summary
- I've reviewed Prosus a few times now. I consider my stance on the company as a very successful analyst stance with a good history. I've remained neutral on the stock.
- I'm still Neutral, despite some growth since my last article - and a drop again since the bounce.
- This business has a stellar track record, in that they invested in Tencent back in 2001. The return on this investment on a 21-year period is ~500,000%.
- However, the company's future prospects are different. Let me enlighten you as to my current price target.
Dear readers/followers,
In this article, we're going to take another look at the company Prosus ( PROSY ). I've been neutral on the company for a long time, and since my first article on the business, the company has performed in the following way.
Prosus Article (Seeking Alpha Article)
This article is an elaboration of that conclusion and the beginning of my following Prosus N.V.
Revisiting Prosus N.V. and the Thesis
Prosus is a tech investment company. A software disrupter that makes its money by investing in businesses in the relatively early stages of funding, and targets returns in the thousands of percentages. On a high level, the company has a lot of similarities with a venture capital firm. And we all know, if we've been investing for a while, that these sorts of businesses come at significant levels of risk.
Now, the market is pretty good at disregarding or calculating these risks somewhat differently than I do. If you view my articles on this company, you'll note that my price targets are incredibly low overall - compared to analyst targets at least.
Analysts tend to put Prosus at around €90-€130/share - I've never given the company this sort of premium, but analysts have said for about two years that this company is between 40-90% undervalued. So far, that hasn't materialized.
Prosus essentially tries to invest in a lot of companies. Most of them never really go anywhere and stay small investments/holdings until they are divested or picked up by others. But some of their other investments end up being very good holdings. And a few, very few , end up getting really profitable. The company made a bet on Tencent ( TCEHY ), and this turned out to be really good - and the thing that made the company one of the businesses to count on.
The risk/reward for a company like Prosus is absolutely core to its operations. Back in 2001, the company invested in relatively early funding in Tencent, buying nearly 45% (under 30% today) of the company for less than $35 million. That stake is now worth over €100B. That's Bitcoin levels of returns - and the comparison is valid on several levels.
I am focusing on this investment a great deal because this is really quite significant for the company. Despite other investments, Prosus' net asset value, or assets overall, is primarily still made up of Tencent. Take a look at some of these numbers.
So, this company remains mostly a bet on Tencent. In addition to this, there are very complex shareholding specifics at work, which I've gone through before, and which are worth understanding. What it essentially means is that the South African company Naspers cannot ever lose control of Prosus due to complex clauses in its statutes, because they own unlisted A-shares of which there are around 1M, and which automatically convert into votes at a multiple of 1000x each. Even if you controlled all of the outstanding N shares of the company, which are listed, you'd still not be close to a controlling stake in the company.
While this doesn't necessarily make the company uninvestable, it certainly raises a few eyebrows, as such a thing is very rarely done. This is also part of the reason I've never made an investment in Prosus.
The company's business strategy is turning its investments into essentially "the next Tencent". Do any of their current stakes or holdings have this potential in them?
Hard to say. We can clearly state that the company has plenty of assets that they're working with. Given that they own a massive Tencent stake, they also have no issues with money. If they need cash, they'll simply sell some Tencent.
Tencent hasn't exactly been a great performer over the past year. The company is down as much as Prosus (incidentally enough), at around 41%. So selling the shares isn't a superb idea at this valuation.
Revenue is up for FY22 - but HEPS, profit, and FCF are massively down. It's the same story as with many businesses today. But the things that drove earnings when the market was up are the same things that are dragging them down now. Tencent's drops are causing significant instability in the company's numbers.
Prosus IR (Prosus IR)
I'm not worried about Prosus and its cash situation. It's investment-graded and has plenty of resources on hand. What I am worried about is its potential to drive earnings and NAV, which is what Prosus would give you in actual income due to the near-zero dividend the company offers.
The company would have you believe that most of its core is declining due to Tencent. While there's truth in that statement, most of the impact between FY21 and FY22 does not come from Tencent.
It's a mix of increased investing in associates, consolidated businesses, and net interest cost increases due to the current rate situation.
The fact is, a company like Prosus will not deliver significant value and massive returns until we see a repeat of the company either buying or creating/supporting a massively growing business. Now, this is just my non-tech expertise opinion, but none of the company's current holdings seen above has the potential to be that sort of potential for the company.
Stackoverflow? It's pretty good, but hardly a 100,000% growth potential. GoodHabitz? Hasn't been profitable since 2020, and it's an online training platform. I don't see the moat here. Classifieds? The company has Russia exposure, which is dragging things down. Payments? I don't see a moat for PayU either. The company has interesting stakes, but none of which has the potential of Tencent, as I see it.
The other option for the company to reverse is Tencent reversing. While this is possible, inflation and lower sales are hurting the prospects of this business - and at 15-16x P/E, the company is actually fairly valued or close to it for the time being. I don't see a good potential for it reversing or rising back again.
Prosus targets a total 2025 NAV of $100B from its e-commerce segment, which would at that point start to rival Tencent - something that's desperately needed, looking at the current asset/NAV split. While half-year revenue during 1H22 was up nearly 31%, FCF was down to almost zero on a YoY basis. Food delivery isn't growing as fast as it once was, and Edtech's growth is flat. Results and margins show poor trends here. These trends have continued into FY22.
Prosus speaks a lot of doubling revenue and margin growth - but what quickly becomes apparent is that these margins, despite almost double revenues, are still negative, and justified by further investments toward an integrated ecosystem.
The fact is that the company has almost no recent investment successes on the order that would justify what you're paying here. A year ago, the company was firmly believing in Tencent's growth trajectory.
And how did that turn out?
I want to reiterate that I have no issue with the company spending its money as it does - it's essentially nothing more than a large VC company - and investing in, and failing with (some) companies is part of what a VC does. It's how it made Tencent a success - by suffering through years of poor performance, betting on seeing that superb profitability at the end of the tunnel.
If you like these things, Prosus could be for you - and more now than before.
Let's look at the most recent valuation.
Prosus Valuation
Evaluating Prosus is, on the surface, fairly easy. I invest in a lot of investment companies, even if I don't invest with anything with the same risk/reward tolerance as Prosus does. Because Prosus is an investment company, its share price will have some sort of variance to its net asset value ((NAV)). When I invest in investment conglomerates (and I do, over 10% of my portfolio is allocated to several of them), I do so on the basis of NAV taking center stage here.
Usually, I like a 1:1 NAV/share to Share price ratio as a guidance mark - but this mark is far less risky for businesses and plays, such as Investor AB ( IVSXF ). Less risk because most of their listed portfolio are quality companies going back over a century. Those companies pay a nice yield, and Investor AB pays a yield as well. That makes things very different.
Prosus does not do this. The majority of the company's investments are a 75%+ Tencent stake, but the company also relies on shifting in and out of markets, pushing capital into loss-making ventures to pick out those that may make it over time. It's not a bad way to go - if you have the money - but it brings about a lot of risk, a lot of volatility.
It's all about discount to NAV - and how much we should impair that NAV. Since my first article, I've been a proponent of discounting it by half. At least half - and preferably around 75%.
I view this as justified because Prosus, even including the tech frenzy, is now down almost 20% on a 3-year basis. Whatever gains it eked out with the latest few years are now completely gone.
Prosus price (TIKR.com/S&P Global)
If you sold Prosus at its highs, congratulations. Unfortunately, I know from personal experience that few investors have the foresight or feel to sell at highs.
The current forecasts are for Tencent to reverse - therefore for Prosus to reverse. If this happens, then the company at its 5-year average has the potential to generate returns in the triple digits.
Prosus Forecast (F.A.S.T. Graphs)
Still, remember the risk here. Remember that the company has 0% 2-year forecast accuracy, even with a 20% margin of error.
Remember that analysts have been calling for the company to trade 40-90% higher for years now, and this has not happened. Remember the inflation, interest rate headwinds and macro, with the company having actual exposure to eastern Europe.
Remember these things, and I believe you will see Prosus in a more risky light. For myself, I would not even look at Prosus unless it was discounted 60-70% to NAV - the same discount rate I apply to most Chinese or high-risk businesses to reflect what I view as outsized political risk.
I set my target in my previous article, and that target has not changed. I want Prosus to be trading at €40/share or below before I even start considering the company. That's even lower than the lowest target by 19 analysts from S&P Global. 14 analysts are currently at a "BUY" rating for the company or an "outperform" rating.
To me, however, that does not make the business a "BUY".
It continues to be a "HOLD" for me here.
Thesis
My thesis on Prosus is as follows:
- Prosus is an investment that's inherently different from buys I would consider due to its almost Venture Capital-like approach to investments and targets.
- The shareholder structure is unappealing and inherently disadvantageous to Prosus investors. While the company is fundamentally sound and has a great track record, there are too many fundamental question marks to really make this an option for me.
- I would be interested in Prosus if the market decided to discount it more than 70% to its current NAV. That currently comes to below €40/share but would change depending on the impact of Tencent. If Tencent drops, the company's NAV drops with it - and quickly. A 50% drop in Tencent NAV would drop the company's NAV by around 38%, showcasing just how tightly the company is tied to Tencent. We've seen this over the past half-year.
- I consider it a "HOLD" here.
Remember, I'm all about : 1. Buying undervalued companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime. Even if that undervaluation is slight and not mind-numbingly massive.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized).
This company is overall qualitative. This company is fundamentally safe/conservative and well-run. This company pays a well-covered dividend. This company is currently cheap. This company has a realistic upside based on earnings growth or multiple expansion/reversion.
For further details see:
Prosus: The Upside Was There, It's Now A 'Hold'