Are the Naspers and Prosus share prices a buy at current levels?
Prosus and Naspers shares are down more than 20% year to date, following regulatory pressure in China affecting the Tencent investment
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Are the Naspers and Prosus share prices a buy at current levels?
A lot has been happening in the Naspers and Prosus stable in 2021, with the net result being a year to date share price decline of 20% and 22% respectively. In this article we highlight key catalysts and take a look at how these shares are shaping up, in terms of a technical view and broker outlook.
Naspers and Prosus ‘value’ unlock and price divergence
The most recent attempt to unlock value between the companies has been the swop of Naspers shares for new issue Prosus shares. However this has not really helped the Naspers cause as index and index tracking rebalancing, has seen a near term underperformance of the share against Prosus. The short term price divergence has been furthered by news of a $5bn Prosus share buyback program.
Naspers and Prosus continue to trade at wide discounts to NAV, estimated at roughly 40% and 55% respectively. While it is natural for investment holding companies to trade at discounts to NAV, the current discounts do remain quite large (on a historical and comparative basis).
Tencent still the key driver of price action
Tencent remains the most relevant investment holding for Prosus and in turn Naspers. Prosus holds around 31% of Tencent, which accounts for the vast majority (more than 75%) of both the Naspers and Prosus assets. Naspers access to Tencent remains through its holding of Prosus, which does justify the deeper discount (than Prosus) to NAV, as an extra structural / cost layer exists.
The below chart highlights the high level of price correlation on a relative scale for Tencent, Naspers and Prosus.
Tencent a key driver of Naspers and Prosus’ performance this year, has been riddled with regulatory hurdles from Chinese authorities to negatively affect its share price.
Some of this year’s regulatory and Chinese State Media pressure directed at the internet giant is as follows:
- Tencent was barred from entering into exclusive music rights agreements estimated at a merger value of $5.3 billion
- Chinese State Media has added pressure to the regulator and in turn Tencent on the suggestion that online gaming is having a negative impact on children
- Financial and security concerns have resulted in a brief suspension of new Chinese users being onboarded to Tencent’s WeChat platform
Despite the regulatory headwinds, the group has recently posted a strong set of results for the second quarter and first half of the financial year. For a summary of the recent Tencent results click here.
This years correction in share price, while earnings for the group have remained robust, makes Tencent an attractive offering at current levels for investors. However, it seems a foregone conclusion that further regulatory pressure will continue to cause short to medium term (at least) volatility for the company.
Tencent, Naspers & Prosus broker ratings and price targets
The below long term (LT) broker ratings and price targets are aggregated from Refinitiv data as of the the 26th of August 2021.
| Company | LT Average Broker Rating | No. of Brokers | LT Target Price | Share Price | Currecncy | Discount/Premium to Target |
|---|---|---|---|---|---|---|
| Tencent Holdings | Buy | 53 | 654.92 | 471.8 | HDK | -27.96% |
| Napers | Buy | 9 | 4455.69 | 2406.48 | ZAR | -45.99% |
| Prosus (Euronext) | Buy | 19 | 115.14 | 70.94 | EUR | -38.39% |
| Prosus (JSE) | Buy | 3 | 2393.33 | 1244.42 | ZAR | -48.09% |
Technical Analysis view
Tencent
The share price of Tencent remains in the downtrend which commenced in May this year. In the near term however, we have seen a strong rebound from the 404.50 support level as well as oversold territory. The rebound sees 500 as the initial resistance target.
Traders who are looking for long entry might prefer to see the recent downtrend broken with a further confirmation through a close above the 500 level. In this scenario 562.45 becomes the next upside resistance target from the move.
However until such time as the 500 level is broken the downtrend is considered to remain prevalent for the share pricof Tencent.
Naspers
Echoing the price action of Tencent, the share price of Naspers also remains in in a downtrend which commenced in May this year. In the near term we are seeing a rebound from the 2365 support level as well as oversold territory. The rebound sees 2550 as the initial resistance target.
Traders who are looking for long entry might prefer to see the recent downtrend broken with further confirmation through a close above the 2850 level. While 2550 is a closer resistance target, we feel a break of this level (should it occur) is not enough to instill confidence that the longer term downtrend is broken.
Until such time as the 2850 resistance level is broken, a downward bias for Naspers remains prevalent.
Prosus (JSE listing)
The share price of Prosus also remains in the downtrend which commenced in May this year. In the near term we are seeing a soft rebound from the 1155 support level as well as oversold territory. The rebound sees 1400 as the initial resistance target.
Traders who are looking for long entry might prefer to see the recent downtrend broken with a further confirmation through a close above the 1400 level.
However until such time as the 1400 level is broken the downtrend is considered to remain prevalent for the share price of Prosus.
In summary
- Naspers is underperforming and may continue to underperform Prosus in the near term
- Naspers and Prosus continue to trade at a deeper than historic discounts to NAV
- Naspers discount to NAV is broader than that of Prosus
- Tencent the primary investment holding for Naspers and Prosus has been negatively affected by regulatory pressure
- Regulatory pressure is expected to remain for at least the short to medium term and continue to cause volatility in the share price
- Tencent earnings remain robust and valuations are looking more attractive at current levels
- The average broker ratings for Tencent, Naspers and Prosus remain ‘Buy’
- The share prices of Tencent, Naspers and Prosus remain in a longer term downtrend, although we are seeing a rebound from oversold territory in the short term
- A break of trend resistance is needed in all three shares before considering a change in the downward trend bias still in place.
This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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