Prosus’s Financial Goals – Daily Star

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Regular listeners will recognize my excitement about the new direction Prosus is taking.

I’ve often praised CEO Fabricio Bloisi on this podcast, and the Prosus share price has responded very positively this year.

Last week, at the Capital Markets Day in London—which I enjoyed attending from my comfortable chair in Cape Town—the management team shared their vision with a global audience. The tech atmosphere was tangible, with the group CFO in a chic collared shirt while others embraced the casual look that has become characteristic of modern tech leaders.

And why not? Ultimately, that’s what Prosus stands for. To be clear, I will refer to Prosus instead of Naspers, as Prosus is the global brand they are promoting.

Read:

Prosus reports its first profit under CEO Bloisi’s new strategy

Prosus posts significant profits from its own operations

Instead of diving deep into Bloisi’s presentation or the AI showcases from other executives, I will concentrate on the sector the market has overlooked while central banks were flooding the economy with capital: the financial segment.

So, pivoting from golf shirts to collared shirts, let’s outline some key insights from CFO Nico Marais’s presentation.

From millions to billions

The PR team deserves credit here. Prosus’s presentation is filled with memorable slogans—like “millions to billions” and “not just value but velocity.” Growth stocks thrive on compelling narratives, and Prosus gets this.

The phrase “millions to billions” highlights the profitability embedded in the business.

While we’re accustomed to deal sizes in billions and market caps stretching into trillions, e-commerce profitability has been predominantly a story of millions—and only in recent years have those millions started to turn positive.

The goal is to quadruple e-commerce adjusted Ebit (earnings before interest and taxes) from FY25 to FY28. This ambition relies on successfully closing the Just Eat Takeaway.com deal in Europe, which I discussed in a previous episode of Supernatural Stocks.

Listen/read: Supernatural Stocks Podcast: Why Prosus is acquiring Just Eat Takeaway

How will they achieve this? What are their broader strategic focuses financially?

Let’s delve into the CFO’s priorities at Prosus.

First and foremost – profitable growth

Priority number one is to enable profitable growth.

What a transformation we’ve seen! It’s not just about growth anymore, but about profitable growth.

Of course, forecasting risks play a part, but Europe is expected to be their fastest-growing region in the next three years, with a projected revenue growth of 2.5 times from FY25 to FY28.

A similar forecast exists for Latin America, albeit from a smaller base.

In India, they predict only 1.3 times growth, indicating the maturity of the Indian app and services ecosystem. This maturity is a crucial factor, particularly as the Indian market has significantly outperformed China’s manufacturing-focused economy recently—a key consideration for investors in the Indian market, especially given its higher valuations. Caution is advised here.

Next, let’s assess the expectations for adjusted Ebitda (earnings before interest, tax, depreciation, and amortization) regionally.

Latin America presents the best opportunity for margin expansion; with a projected 2.5 times revenue growth, they expect adjusted Ebitda to triple by FY28.

In Europe, with a forecast of 2.5 times revenue growth, adjusted Ebitda is anticipated to grow threefold. Meanwhile, in India—which remains unprofitable—they aim for a 5% margin by FY28, posing a significant drag on overall group margins. This raises questions about whether the Indian market is currently overvalued and if investors may be overlooking other promising regions.

Lastly, regarding profitability, the presentation indicates that the adjusted Ebitda margin in the e-commerce segment lags significantly behind its peers by about 700 basis points.

This gap would be concerning if Prosus were a mature company, as closing it would be challenging. However, given the potential for margin expansion in scaling platforms, they are likely to narrow this gap.

This reflects the infamous ‘hockey stick’ trend, where losses initially worsen before profits surge significantly.

This trend is common in tech and platform businesses, requiring substantial fixed infrastructure investment before real profits can materialize. Once those profits begin to flow in, low variable costs translate to a significant portion going directly to the bottom line, pleasing shareholders eager for returns.

Of course, the bearish counterargument is that peers are also scaling, making the current profitability landscape a moving target. Notably, while margins in the peer group expanded by six percentage points from FY22 to FY25, Prosus improved by 15 percentage points—transitioning from losses to profitability. This will be a key focus for market watchers.

I should also mention that Prosus adjusts for stock-based compensation to align with the practices of its peers. This aspect has always been a concern for me, as tech firms often mask the fact that paying bonuses in shares still impacts shareholders. Yet, for comparability, it’s appropriate for Prosus to present adjusted figures in line with its peers.

The main takeaway is that Prosus has finally reached a juncture where the business, excluding Tencent, is generating positive free cash flow.

As Bloisi highlighted in his presentation, they’ve shifted from being a “Tencent-minus” company to a “Tencent-plus” entity. Annual free cash flow from the ex-Tencent business has surged by $1 billion since FY22—an impressive improvement.

Disciplined capital allocation

Priority number two is to optimize the balance sheet and capital structure.

Post the Just Eat Takeaway.com deal, Prosus is operating with net debt of $3.9 billion on a pro forma basis. With the ex-Tencent business no longer consuming cash, the overall balance sheet remains strong. The debt maturity profile extends until 2052, with minimal near-term maturities creating little concern for investors.

Priority number three involves actively managing the Prosus portfolio, which contrasts starkly with simply allocating capital.

Active management includes decisions to invest as well as retracting or divesting underperforming assets.

The presentation included a slide stating, “we are disciplined and will make trade-offs”—a reminder that capital is a finite resource.

This may seem obvious, yet it sharply contrasts with the zero-cost money environment of a few years ago when the previous management team invested recklessly at the cycle’s peak.

As evidence of their trade-offs, they’ve unlocked $2.6 billion in disposals over the past year. While they also allocated $7.8 billion in major mergers and acquisitions during the same period—including the planned expenditure for Just Eat Takeaway—it’s expected that Prosus will maintain a net investment stance rather than merely recycling capital.

Returns for shareholders

In terms of investment, they will continue to buy back their shares.

This leads us to priority four and priority five, which are closely intertwined, with the former aimed at realizing their true valuation and the latter focused on closing the gap on their share price discount.

Essentially, they’re indicating that as long as they aren’t trading at fair value, they perceive buybacks as a rational allocation of capital, alongside investing in their existing portfolio and pursuing new ventures.

However, I question the dividend policy. Given the potential for buybacks and capital deployment, one must seriously consider if it’s prudent to double the dividend at this time.

Ultimately, it comes down to signaling around capital discipline and attracting significant investors who prioritize dividends. Dividend theory is an intriguing area of finance and investing.

As I’ve stated, I’m optimistic about Prosus. In hindsight, it would have been ideal to invest when the market lost faith in the hockey stick effect—that’s when the risk/reward ratio is most attractive.

The second-best scenario is to invest while growth momentum is strong, just prior to any decline.

I would argue we are at that critical juncture, with a sufficiently ambitious growth path that stakeholders should see ample benefits, even if Prosus doesn’t fully meet its lofty aspirations.

They just need to get close.

The Capital Markets Day raised no red flags for me. On the contrary, I continue to appreciate the new narrative coming from this group.

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