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CAPS Champion Contest: Idea #1

May 14, 2009 – Comments (6) | RELATED TICKERS: DIS , NYT

It's Thursday, which it means its time for the first stock idea from our Global Gains research team eligible to be rated in the CAPS Champion of the World Contest. (If you're not entered, you can do that here. Want to know the rules? They're here.)

Without further ado...

Idea #1: Short Naspers (NPSNY.PK)
Thesis: The stock is wildly overvalued since it’s mostly a no-growth traditional media company, but the market is valuing it as though it were a hyper-growth Internet company. The reason for this discrepancy is Naspers’ 35.5% ownership stake in Chinese instant messaging provider and Internet portal Tencent. Though Naspers’ Tencent stake is worth more than $6b today at current prices and Naspers’ market cap is just $8b, Hong Kong-listed Tencent simply cannot sustain a 16x sales multiple and 32x EBITDA multiple for long. When it drops, Naspers is going down with it since the true worth of Naspers is far less.

Company Description: What are you buying when South Africa’s Naspers ? I wouldn’t be surprised if you couldn’t tell me. The company is an amalgamation of full and partial ownership shares in print, television, and Internet media assets in a seemingly random allotment of countries, including South Africa, China, Poland, Brazil, and Russia. You can take a look at the company’s motley org chart on your own, but suffice it to say it’s all over the place. Though the management team seems adept and chairman Ton Vosloo has risen through the organization all the way up from lowly journalist (I kid), they seem inexperienced in the ways of new media -- the market niche where they’re making their big bets today. Further, there is enormous currency risk in all of these environments as well as few cost-saving operating synergies since there are language and platform differences. There’s just no logical way for the business to scale without further acquisitions.

Valuation: Naspers can be broken down into two segments: Old Media (TV, newspapers, and magazines) and New Media (Internet properties). The Old Media business has $2.2b in trailing sales and $541mm in trailing EBIT. Its growth is essentially flat. The New Media business has $362mm in trailing sales and -$60mm in trailing EBIT. It’s grown 20% yoy, though the losses have widened. What are the two parts worth? Not as much as the market seems to think, but to prove that, we have to dive deeper.

Based on a peer group analysis, Naspers’ Old Media assets should sell for about 2.0x sales and 7.0x EBITDA. That yields a fair value range of $3.8b to $4.4b.

A peer analysis of popular emerging markets Internet properties, on the other hand, indicates that they sell for an average of 4.5x sales and 18.0x EBIT. That would value Naspers’ New Media business between $1.6b and, well, something less than that since Naspers New Media business is posting losses. Further, the fact is that Tencent trades well above its peer group at 16x sales and 35x EBIT. That’s the second-highest valuation for this type of property in the world, second-only to Chinese search engine Baidu.com (BIDU), lending credence to my theory that Naspers’ stock price is being driven not by fundamentals or its underlying business, but by the momentum in the stock price of Hong Kong-listed Tencent.

To see that, just add up the high ends of our two valuation ranges. $4.4b plus $1.6b equals just $6.0b. Naspers today sells for more than $8b, so I suspect at least a 25% decline in the stock price from here. But it could go further. That’s because Naspers motley assortment of Internet properties are not all best-of-breed like Tencent and are subject to intense competitive pressures, and while I expect Tencent’s multiples to contract, I expect the multiple on Naspers’ portfolio to contract even more. Its traditional media properties also don’t have the brand cache of a New York Times (NYT) or a Disney (DIS) and thus probably don’t deserve similar multiples. Further, remember that Naspers is an enormous multiplatform bet on advertising, which may not be a bet you want to make in this depressed economic environment.

All of this is to say that I think fair value here is closer to $5b.

Agree/disagree?
Now get started on the CAPS Champion of the World Contest by rating this idea. And if you want to see a few additional notes, including how you might trade on this if you were a hedge fun, get more notes on Naspers on our Global Gains discussion boards (membership required. Don’t have one? Click here to join our international investing research service where we put out many more ideas every month.)