It’s difficult to argue against Naspers as an investment. The share price has sky-rocketed, with the pessimist investors calling the top at intervals starting around around R500 a share. The stock currently sits over R2000, and doesn’t seem to be slowing down. But when one investigates the fundamentals of the company, can one make sense of the rise? Ted Black is a cash ROAM specialist, he uses it as his lens to understand a companies value. Why? Because he says management’s purpose should be to make the firm more valuable. He takes a stab at Naspers, and asks if Koos Bekker and his team are still producing the goods. An interesting analysis. – Stuart Lowman
By Ted Black*
Naspers has had some bad press recently. Its credit rating may be heading for junk status and the firm has been accused of secrecy about the management share scheme. Meanwhile the share price and market value of the firm (VOF) keep climbing.
Instead of tracking the share price, let’s look at the business through a Cash ROAM (Return on Assets Managed) lens because management has only one purpose. It is to make the firm more valuable.
The VOF derives fundamentally from the cash productivity of the asset base. Managers who blindly accept the “common sense” of cost control and profit planning and watch the day to day share price, miss this point completely. The ROAM-focused manager does not make this elementary mistake. He/she fully understands that the true measure of management’s competence is asset productivity.
If management’s purpose is to make the firm more valuable, then as Peter Drucker put it, the purpose of the firm itself is to create and keep customers. That’s how you make it more valuable. The only results come from outside – from customers when you bank their cash. Inside, there are only costs. This means that the three most important measures for operating management are:
- ATO – this is Sales ÷ Assets. It is called “Asset Turnover” and measures the sales productivity of the asset base.
- Cash ROS% – this is Cash EBIT (Cash Profit generated by operating activity before interest and tax) ÷ Sales as a percent. It measures the profitability of sales. Multiply the two and you get,
- Cash ROAM% – the overall measure.
ROAM is more than financial. It measures marketing strategy. It asks in this order:
- For every $ of assets, how many $s of sales do we generate? (ATO)
- For every $ of sales, how many cents profit do we make? (Cash ROS%)
So how does Naspers stack up? Always judge a trend – not a number. Take ATO first.
As you can see, the sales productivity of the asset base has plunged since 2006.
Today, for every $ of assets, management generates a mere 36 cents of sales revenue.
As to cents profit per US$, it has fallen from 26.8 to 7.7 since 2008.
Management has steadily spent more in costs and expenses as a % of sales for the past nine years. Next is the combined effect of ATO and ROS on Cash ROAM.
It has fallen from 24% to less than 3%. The Cash Profit after Tax ROAM is only 0.5% and yet the VOF rockets up.
Today, market cap is 174 times the Cash Operating Profit and a 1000 times the cash profit after tax. Why?
Simple, Naspers is now an investment company. More than 100% of its profit before tax comes from its share of equity profit. Probably more than 90% of that is from Tencent.
Looking at Naspers annual report reminds me of the dotcom days … lots of gobbledygook, and very little information given on segments. You are left with a feeling that the only really profitable business is done where they dominate their markets. That’ll be South Africa and Tencent in China.
It is definitely a Rand hedge. Tencent’s Cash ROAM, although in decline from a heady 50%, coupled to massive growth, is still a very healthy 16%.
As the owner of a very successful chicken producer in the USA, Perdue, once said, “Put all your eggs in one basket and then watch that basket!”
Is that what Koos Bekker and team are getting to after his brilliant investment? They don’t seem to be managing the other eggs very well do they?
What do you think?
- Ted Black runs workshops, and coaches and mentors using the ROAM model to pinpoint opportunities for measurable, bottom-line, team-driven projects. He is also a freelance writer with several books published. Contact him at tblack@astrovoice.co.za.
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