Portfolio Manager, Siboniso Nxumalo, talks Naspers’ poor performance on the JSE this week

Siboniso Nxumalo and The Money Show’s Bruce Whitfield unpack further plummeting performance from Naspers and Prosus this week, as well as good returns from Absa and Sun International.

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Transcript

Bruce Whitfield  00:01

Siboniso Nxumalo, this evening. He is a Portfolio Manager at the Old Mutual Investment Group. Please explain Naspers and Prosus to me this evening, Siboniso Nxumalo, they had an absolutely horrendous day.

Siboniso Nxumalo  00:21

Yes. Good evening, Bruce, and good evening to your listeners. So, as South African citizens, if you've got any money in the market, odds are you own a small piece of Naspers and Process, which then in turn, owns a Chinese company called Tencent, one of the biggest companies in China, and recently rather successful. But over the last 12 months, I think one of our analysts, who looks at Naspers and Prosus, noted that there's increasing regulatory pressure. And we've seen that come to bear on the Tencent share price. And today's massive decline in Naspers and Prosus, Naspers was down 13%, Prosus down 11 and a half percent, was driven by a continuation of that regulatory pressure. 

So, what happened, the Wall Street Journal released a story that Tencent is facing potential record fines for violations in some central bank regulation. Apparently, they have allowed people to flout some laws in China. And as we've seen over the last year, in terms of China, the Chinese regulator is very aggressive on these tech companies. And we actually saw all of them come off quite rapidly. So, the market is anticipating further bad news on the regulatory front. And they're saying, hey, we've also then got question marks, because if the regulator thought saying, hey, I want to regulate this FinTech part of it, which was one of the exciting growth engines for the future, for Tencent, the market then is looking and saying, maybe the earnings that are going to come from here aren't going to be as attractive. And so, the market said, well, you know what, we are going to sell this, and so therefore, the market wasn't too happy. And that's what happened.

Bruce Whitfield  02:01

And it dragged down the overall market but wasn't just Naspers and Prosus. I mean, underlying commodity prices across a whole swathe of commodities came under pressure today as well. And that contributed to that nearly 3% decline on the day.

Siboniso Nxumalo  02:14

Yes, Bruce. I mean, what is interesting, today, I mean, obviously, China, and now the actual country, and all the action actually is in China today, except for the results we're going to talk about a little bit later. But in terms of China, China's got a zero Covid philosophy. So, they've decided they don't want any Covid. And they are still in the business of locking down full cities. And so, one of their largest cities, Shenzhen, it came out that they want to lock Shenzhen down. 

And so therefore, this Covid policy is making the market nervous because they say, well, you know, China reported its lowest growth in a very long time, um recently, I think GDP growth was about five and a half percent, which is the lowest in a very, very long time. And so, therefore, the Chinese economy locking down, recording already slow growth, that worries the market because China is the biggest commodity consumer globally, and it's a key driver of high commodity prices. 

So, if China slows, there's less demand, there's less demand at the same level of supply, prices are going to come down. And that's exactly what's happened. And we saw it across the slew of companies. I mean, we look at the platinum companies, look at Northern, was down 6%. Impala was down 5.7%. Sibanye was down 5%. The gold held up fairly okay. But even the mining diversified. Anglo American was down almost 4%. And even the iron ore players were down. So, it was very rough, including Sasol, down 5% on low oil prices. But again, that fear, that hey, you know what, if China slows, that demand might go away. And these commodities are unsustainable at these levels.

Bruce Whitfield  03:50

That's a big concern. Two great sets of results out today, very nice recoveries in both Absa and Sun International. And they both tap in, I suppose, to the optimism of a salaried consumer market.

Siboniso Nxumalo  04:04

Yes, Bruce. I mean, if you think about it, Bruce, here we, a year ago, when you and I were having conversation, Naspers was the darling of the market, showing record numbers. A company like Absa, and a company like Sun International, were the ones that everybody was worried about. We were worried about South Africa, South African growth, etc. And here we are. I think in the bottom of 2020, you could have bought Absa for about R63 and now it's sitting at R177. Absa recording some really, really pleasing results. We are shareholders in Absa, so our clients should be pretty happy with this present result. I mean, we saw like Jason was talking earlier on pre provision profits, which is profits before bad debt. It grew pleasantly and actually management's done a fantastic job in managing their costs.

Obviously, the biggest driver which we saw, I think cost up 4%. But the biggest driver was the correction in bad debt. And so, we saw bad debt stabilizing. Which is a good thing because again, it shows the consumer is healthy. The consumer's got some money, they are borrowing, which again, we saw it in home loans and vehicles, and we see it in the vehicle sales and the house sales. And so, suddenly, actually, this economy is not as bad as we think. And the consumer is in actually, quite a healthy state. And they are borrowing. And so, we're seeing the banks report some really, really pleasing results. And that's exciting for the country. 

The second one, obviously, is Sun International groups. And Sun International, again, was in a lot of trouble last year. We saw their income up close to 30%, their adjusted EBITDA, which is close to cash flow, up 80%. Again, people are going out, people are out there spending. But the management of Sun International and both these companies has actually been really good at managing their balance sheet. Sun International, in terms of their debt, they focus really hard on focusing on costs, extracting quite a few savings, running the businesses judiciously. And actually, Sun International has a comment at the end that as their business continues to recover, that they're going to consider share buybacks and returning capital through dividends. And so, again, tough times. Management has proven their mettle and they've delivered and that's quite exciting. You could have had the shares for much, much lower prices than you have them now. But, ja, so those were very strong results.

Bruce Whitfield  06:18

Siboniso Nxumalo, thank you. He is Portfolio Manager at the Old Mutual Investment Group.