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“Tencent likely to report strong Q2 results” What does this mean for Naspers?

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What does this mean for Naspers?

On Wednesday 17 August, Tencent reports second quarter earnings. Naspers owns 31,5% of Tencent, which is a material component of the valuation.

I expect a strong result again with revenue growth of 44% year-on-year to CN¥33,5 billion.

Advertising, with year-on-year growth of at least 65%, and mobile games, up by at least 26%, are a big driver. However, social networking remains an important contributor at 23% of total revenue and could grow by 41% year-on-year.

I also estimate earnings growth of 30% year-on-year to CN¥10,35 billion with EPS up from CN¥0,85 to CN¥1,11 for Q2.

For the year to December 2016, I maintain my estimate of adjusted EPS of CN¥4,57 for growth of 31%. Three compound growth remains at 28%.  

I estimate Tencent earnings to be the equivalent of $6,5 billion in 2016 of which Naspers shares in $2,18 billion – equivalent to R29 billion at R13,40/$. Assuming a total dividend for 2016 of $700 million Naspers would share in that to extent of R3,16 billion.  

The Tencent share price has been very firm of late and has moved from under HK$140 at the start of 2016 to HK$191 currently.

However, given the run-rate on earnings the price earnings ratio is not overly stretched for a company growing earnings at 30% plus. The forward 2016 PE ratio is 35,8x whilst the forward PE ratio to December 2017 is 28,2x.

The rand has strengthened from over R15/$ in June to R13,40/$ at the time of writing. However, I have valued Naspers using R14/$ for the past few months to allow for a margin of safety. With the Tencent share price having moved from around HK$170 to over HK$190 there is almost no impact of consequence on my fair value in rand.

I am therefore keeping fair value at R2200 per share with the target price maintained at R2500.

Trading Buy and Portfolio Buy maintained.

Kind regards,

Mark N Ingham