Media
Tencent 700:HK
Share price: HK$147
Shares in issue: 9,4 billion
Market cap: HK$1,38 billion
Year end: December
Fair value sum-of-the-parts: HK$180
Fair value discounted cash flow: HK174
Naspers
Share price: R2002
Shares in issue: 437,9 million
Market cap: R876,7 billion
Year end: March
Fair value : R2200/share
Target price: R2500/share
Trading Buy and Portfolio Buy
Since my last note on 15 February, both Tencent and Naspers have run well with Tencent up from HK$133 to KH$147 and with Naspers up from R1705 to R2002 – 10% up for the former and 17% for the latter.
I mentioned that with the Naspers price down by 20% from its highs in November 2015 this was a good new entry point for new money to get a chance once again.
We’re now about 10% off those November highs.
The relative price divergence in favour of Naspers is welcome but we’ve some way to go before the Tencent proportion of market value falls from 100% or more of Naspers market cap to at least 85%.
There is considerable scope for value to be realised from MultiChoice and other developmental assets. Ecommerce alone subtracted R3 769 million from trading profit in H1.
Tencent reports Q4 and F2015 annual results on Thursday 17 March. There will be an analyst conference call that evening in Hong Kong.
For the year ended December 2015, I am forecasting EPS for Tencent of CN¥3,48, up 35%, with a dividend of CN¥0,38.
Q3 F2015 on Q3 F2014, Tencent has grown adjusted EBITDA by 32.7% with no let-up in growth momentum and with new initiatives flying thick and fast, as I’ve analysed in previous notes.
As Naspers owns 33,8% of Tencent it’ll share in the dividend to that extent. If I assume a total dividend of CN¥3,5 billion then that will translate to approximately R2,8 billion for Naspers.
For Naspers, my forecast for the year ended March 2016 remains at earnings per share of 4694 cents with rand earnings of R19 677 million. By F2018, I have Naspers EPS up to 9065 cents.
My sum of the parts value on Tencent is CN¥1,425 trillion ($219 billion) which translates to HK$180 per share. The Naspers portion of this is R1,136 trillion or R2595 per share.
My DCF value on Tencent based on free cash flows is CN¥1,375 trillion ($211 billion) which translates to HK$174 per share. The Naspers portion of this is R1,097 trillion or R2504 per share.
My value on Naspers, which takes the above into account and adds my derived values on MultiChoice, Novus and other print, and Ecommerce together with the market cap of mail.ru and then subtracts debt at centre, is R1,305 trillion. Deducting a 20% fair value discount, to provide a cushion for error, takes this to R1,044 trillion or R2385 per share.
The above assumes latest exchange rates with respect to yuan, Hong Kong dollar, US dollar and rand and so the value figures will vary according to movements in FX rates.
So for example, if the rand had to go back to R14/$ then the fair value drops from R2385 per share to R2200 per share.
Therefore, to allow for an extra buffer I am keeping fair value at R2200 per share. A target of R2500 is the midpoint between R2200 and the value without the 20% discount applied.
Household Goods
Steinhoff
Share price: 8850 cents
Shares in issue: 3,713 billion
Market cap: R328,6 billion
Fair value: 7500 cents
Target price: 8500 cents
Trading Sell and Portfolio Buy
Steinhoff has exceeded my target price of R85 following interest sparked by two approaches to London listed companies, Home Retail Group and Darty.
There’s an old saying in markets about buying rumour, selling fact. This may be an opportunity to heed that.
Some caution remains necessary.
Firstly, the German tax investigation is ongoing, the outcome of which is unknowable at this time but it could have potential negative valuation consequences. Even if Steinhoff gets a clean slate, you’d rather be on the right side of that and miss some upside. I’ve cautioned about this since 2014.
Secondly, there are also valuation consequences should the approaches be realised, as further debt will need to be taken on. I am satisfied this represents more opportunity than hard risk and arguably positive for the investment case.
Let’s deal with HRG and Darty first.
By no later than 17H00 on 18 March 2016, Steinhoff must either announce a firm intention to make an offer for HRG or not. In respect of Darty, a further announcement will be made in due course regarding the timing.
There is strategic motive that goes beyond thwarting J Sainsbury (HRG) and Groupe FNAC SA (Darty). The cash offers are compelling and the synergies and savings arguably greater but difficult to quantify and present value.
The possible acquisitions total £2,1 billion, which is €2,7 billion.
With effect from 7 December 2015, Steinhoff N.V. has had a primary listing on Frankfurt Stock Exchange and so the group’s presentation and functional currencies changed from the South African rand to euro.
Steinhoff as at 31 December 2015 had gross borrowings of €5 256 million of which €4 445 million was longer than a year. Net of cash in the amount of €3 068 million that gives us net borrowings of €2 188 million. Unutilised borrowings came to €2 428 million.
With EBITDA interest cover exceeding 10x and with borrowing powers unlimited, subject to certain servicing covenants, there is funding headroom to pay cash for HRG and Darty.
In addition, on 2 October 2015, special purpose entities of Steinhoff International Holdings Limited purchased 150 million Steinhoff ordinary shares for €758 million or €5,05 each. These shares are accounted for as treasury shares but treasury shares are also currency.
Turning to the tax issue, during the half-year results analyst’s conference call on 29 February the question of the effective tax rate got kicked into touch – remaining low for the short to medium term at around 15%.
The effective group tax rate was 9.4% for F2014.
In the notes to the Frankfurt listing prospectus, the company cites the “effect of different statutory taxation rates of subsidiaries in other jurisdictions”. That represented on average an annual 17% saving between 2012 and 2014 whilst the group tax rate has been between 7% and 14% since 2002.
Three quarters of profits come predominantly from EU countries. Not a single jurisdiction I am aware of has a 9% tax rate.
The tax investigation was first made public on 4 December 2015. Thereafter, the stock sold down from around R85 and was just below R70 in the third week of January.
On 26 November 2015, German authorities searched the Westerstede offices of Steinhoff Europe Group Services GmbH.
The authorities are reviewing the balance sheet treatment of certain transactions involving transfers of participations and intangible assets among SEGS, additional subsidiaries and third parties. The investigation focuses on adherence to an arms’ length valuation and proper accounting in regards to German generally accepted accounting practice.
Steinhoff has got legal and audit advice and the conclusion is that no evidence exists of contravention of any provisions of German commercial law. This opinion doesn’t conclude the investigation but Steinhoff avers that it “is confident that the matter will be resolved amicably with the German regulators”.
By way of background, Steinhoff owns and manages its brands via Switzerland, where taxation on intellectual property holding companies is 8% to 12%. Brand management revenue derives from royalties received from customers and group entities.
My note dated 30 July 2014 analysed this structure. I advised to build in a taxation aspect when assessing Steinhoff as a whole and modelled what EPS would have been in a more normalised situation.
On average, since 2002 EPS would have been 18% lower than reported. The effect on the price earnings ratio would be to increase the arithmetic mean by 23%.
The differential over the years amounts to quite a large sum. In F2015 the difference between the SA corporate tax rate and the actual effective rate was a difference of €183 million or R2,5 billion. For the first half of F2016 the difference was €91 million or R1,4 billion.
A reiterate continued caution until there is clarity.
Pepkor has contributed since 1 April 2015 and reflected for the full six months of the latest results. Turnover in euro increased 19.2% to €1 845 million and profit increased by 25.5% to €197 million.
Kika-Leiner was consolidated wef 1 December 2015.
Pepkor in particular assisted with the 47% increase in revenue to €6 700 million and the 65% increase in operating profit to €802 million. Headline earnings increased by 46.5% and headline EPS from continuing operations decreased by 2% to 16,9 cents.
Largely due to Pepkor, weighted average shares in issue increased by 50%.
The first half is seasonally slightly stronger but given the trend in operating margin – up to 12.0% in H1 – we should see a strong finish to the year.
I’d anticipate F2016 headline earnings from continuing operations of at least €1 300 million or around R21 billion if the rand stays at current levels to the euro. That would translate to 35 cents in euro or 561 SA cents. On a 3x dividend cover that means a dividend of about 12 euro cents or 192 SA cents.
At 8850 cents, the stock is on a 15,8x forward price earnings ratio and a gross yield of 2.2%. This is at an historic premium. The stock register is predominantly in South Africa and the price largely made on the JSE.
I have had a Trading Sell and a Portfolio Buy recommendation and I am content to leave fair value at 7500 cents and the target price at 8500 cents.
Mark N Ingham
Ingham Analytics Ltd
07 March