S&P warns over Naspers earnings in 2017

S&P Global Ratings has revised its outlook on South Africa-based media and e-commerce group Naspers to negative from stable.

The ratings agency has affirmed its ‘BBB-‘ long-term corporate credit rating on Naspers and our ‘BBB-‘ issue rating on its senior unsecured debt instruments.

“The outlook revision reflects our view that Naspers’ profitability will weaken in 2017 – fiscal year ending March 31 – following its lackluster reported revenues and profitability in 2016.

“Slower organic growth in its cash-generative video entertainment operations and its limited ability to quickly adjust its cost base, which bears significant exposure to the U.S. dollar, are the main reasons behind the expected weaker performance,” S&P said.

It said that the deteriorating economies in South Africa and Sub-Saharan Africa, coupled with the resulting devaluation of local currencies, have dragged down consumer confidence and demand for video entertainment, especially in Sub-Saharan
Africa.

Consequently, 288,000 of Naspers’ direct-to-home subscribers in the region cancelled their subscriptions in 2016.

“The increased foreign exchange volatility in the same period prompted lower dollar denominated profitability, due to lower dollar-denominated revenues and a substantial chunk of total costs incurred in dollars,” S&P said.

The ratings agency noted that Naspers has taken measures to defend its subscriber base in
the region and to reduce its cost base by changing its offering of pay-TV packages and shifting toward more local content.

“In our view, these steps, teamed with gradually declining development spending, will mitigate the slowing organic growth in the video entertainment business. Therefore, we expect the EBITDA margin will narrow to 8%-10% in 2017, versus the more than 10% margin we previously anticipated.”

It further pointed out that Naspers’ e-commerce division is still loss-making despite some profitable e-commerce assets, including Allegro, Avito, and OLX. S&P said it believes this division is unlikely to turn profitable in the next 24 months.

“In addition, the company’s profitability is constrained by the weaker contribution from video entertainment. Therefore, we continue to assess the company’s profitability,
measured by the EBITDA margin, as below average for the media industry,” it added.

S&P said that despite the current cyclical challenges in video entertainment, that part of the Naspers business is solid.

“Long-term underlying trends, such as low penetration of pay TV in Africa and positive growth prospects over the long run in the region, will in our view support the division’s development.”

The ratings agency said that it would view negatively Naspers’ disposal of its stake in Tencent or of other assets, and then not using the proceeds for debt reduction.

Shares in Naspers declined 1.73% in midday trade on the JSE, to R2,360.

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S&P warns over Naspers earnings in 2017