Prosus N.V. (JSE: PRX) recently showcased robust confidence in its operational ability with the release of its latest interim report for the first half of the 2024 fiscal year. With notable growth in both top and bottom lines, the Naspers subsidiary surpassed expectations and accelerated its timeline for reaching profitability across its consolidated e-commerce portfolio. The initial target of achieving this milestone in H1 2025 has now been moved up to H2 2024, underscoring the company’s swift and substantial progress.
The losses within its e-commerce portfolio have rapidly diminished, marking a significant transformation for this business segment, now operating at full scale and firmly on course to achieve profitability. This strategic shift represents a pivotal moment for the company, signalling a positive trajectory for its future prospects after a period of enduring increasing losses.
Technical
On the 1D chart, a breakout emerged from the descending channel, with the bullish momentum receiving confirmation from the crossing of the 25-SMA (green line) above the 50-SMA (blue line) and 100-SMA (orange line). However, resistance at R632.56 halted the momentum, but with a 1.82% rise in the opening hours of the new week, this resistance could soon be at risk once more.
With support at the prior 61.8% Fibonacci golden ratio of R604.30, the share price could pivot back toward the resistance at R632.56. A breakout could open the door toward a supply zone at R648.33, posing a challenging barrier to a sustainable uptrend. However, the estimated fair value of R668.91 is not far away, and the price could converge with this level, presenting a 7.6% potential upside, should the supply zone fail to withstand the buying momentum.
If the resistance at R632.56 prevents further upside, a temporary retracement could occur toward R587.08, where the Fibonacci midpoint is backed by support from multiple SMAs. This level could provide strong support, making it a psychological level for sellers to cross to enforce a long-term downtrend.
Fundamental
The inherent volatility of Prosus’s share price is evident in the graph below, as its share price suffered significant contractions before swiftly recovering to realize a 10.61% price appreciation over the past three years. This performance does not live up to the 38.35% return of the JSE Top 40 index over the same period. However, its recent earnings report could signal a turning point. The first half of the 2024 fiscal year proved a successful one, with profit attributable to shareholders increasing from $2.54Bn to $3.38Bn. Core headline earnings advanced by 85% to $2Bn, reflecting an improved e-commerce consolidated business and increased profitability from Tencent. With projections of this business reaching profitability in the next six months, could this be a pivot point for the company’s future?
Revenue for the first six months of the year amounted to $2.56Bn, a 16% improvement from the $2.27Bn in the year-ago period. This growth was mainly attributed to growth in its Classifieds, Food & Delivery, and Payments and Fintech businesses. Classified revenue, which represents 13% of the company’s overall revenue, grew by 32% to $342M. Food & Delivery, which contributes 27% of total revenue, advanced by 17% to $679M, while Payments and Fintech saw a 32% improvement in its top line, coming in at $497M. Its largest revenue contributor, namely Etail, realized a 4% expansion to $930M, with its smaller Edtech segment growing by 11% to $71M, and saw its growth impacted by the adoption of generative AI, forcing its businesses in this segment to leverage the new technology and address its operational costs. Evidently, there was top-line growth across the board, but what does this mean for profitability?
The chart below highlights an optimistic trend, as the company’s trading losses from its e-commerce business have shown significant progress in its quest toward profitability. Trading losses for the half-year contracted from $338M to $110M, driven by a $220M contraction in trading losses from its main e-commerce business from $256M to $36M. Its Classified segment realized a 134% increase in trading profit from $38M to $94M, while its Payments & Fintech business managed to contract its trading losses by $62M to $22M. Due to this bottom line improvement, management was confident enough to move up the timeline of when it expects its e-commerce business to turn profitable from the first half of its 2025 fiscal year to the second half of the 2024 fiscal year.
The company has also actively engaged in an open-ended share repurchase program since June of last year by selling small numbers of Tencent shares. This program was designed to unlock value for its shareholders and increase the NAV per share over time. The program is expected to be active as long as the discount of the holding company to NAV remains high, and since its inception last year, the company has created $25Bn in value and delivered 7% NAV growth, reducing the holding company discount by 16 percentage points.
While funding this buyback program through selling Tencent shares, the company also holds flexibility in its sources of capital due to its improved cash flow over the recent half year. Net cash generated from operating activities increased from $42M in the year-ago period to $904M, resulting in free cash flow of $725M, a 6X improvement from the year-ago period, driven by improved profitability and an increased dividend from Tencent. These healthy cash flows could be vital in the company’s ability to take advantage of additional opportunities that present itself in the market while maintaining its ability to reward shareholders.
Summary
With optimism returning over Prosus’ ability to generate sufficient profits, the share price started the week on the front foot, accelerating close to 2%. As we advance, resistance at R632.56 could be a crucial level to watch, as it could prevent a sustainable uptrend. However, the estimated fair value at R668.91 remains within reach, presenting a 7.6% potential upside from current levels.
Sources: Koyfin, Tradingview, Reuters, Moneyweb, Prosus N.V.
Piece written by Tiaan van Aswegen, Trive Financial Market Analyst
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