February 27, 2017 / 3:38 PM / 9 months ago

Fitch Affirms Naspers at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, February 27 (Fitch) Fitch Ratings has affirmed Naspers Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB+' and Short-Term Foreign-Currency IDR at 'B'. The Outlook is Stable. A full list of rating actions is at the end of this commentary. The ratings affirmation is supported by the improvement in credit metrics following the sale of Allegro for USD3.25bn which should reduce net debt to negative USD152m by FYE17 (financial year ending March 2017). We expect funds from operations (FFO) adjusted net leverage to be about 2x at FYE18. The use of the Allegro disposal proceeds, the pace of investments in ecommerce and sustained improvements in the pay-TV businesses in South Africa and sub-Saharan Africa are key to Naspers' leverage and operating profile over the next few years. The Tencent equity stake provides a potential liquidity source, which has allowed Fitch for a few years to tolerate higher leverage than normal for a 'BB+' rating profile. KEY RATING DRIVERS Limited Free Cash Flow: Naspers' profitability continues to be affected by high development spend (funds used for growth initiatives), particularly on global e-commerce. The visibility of future cash-flow generation is limited, and we only expect free cash flow (FCF) for the consolidated group to turn positive in FY19. We believe that Naspers' management is prepared to follow a more aggressive investment strategy especially in developing its e-commerce portfolio of assets. This strategy could see additional acquisitions and increased development spend which could weigh on the group's credit metrics. The value of the Tencent equity stake provides the group with the flexibility to pursue this aggressive investment strategy, but Fitch balances this view with the operating performance of its fully consolidated assets in e-commerce, video entertainment and print segments. E-commerce Risks: Naspers has been implementing its strategy of "optimising returns" in its ecommerce segment. We believe there are signs of rationalisation in its portfolio of assets through the divestment of low-margin businesses. E-commerce investments have been offset by the recent sale of Allegro and funding the acquisition of Avito through equity. Visibility of the impact of the e-commerce business on Naspers' overall leverage remains limited as management has indicated that the proceeds from the sale of Allegro will be applied to pay down debt as well as fund operations and future investments. E-commerce EBITDA Negative: Fitch expects the e-commerce segment will remain EBITDA negative in FY18 and FY19. The sale of Allegro, which contributed a trading profit of about USD130 million in FY16, has delayed the point the consolidated e-commerce businesses turn EBITDA positive, according to our estimates. A significant proportion of Naspers' e-commerce assets are generating revenue and profits, while other assets require further development spend to build scale and reach a position of monetisation. E-commerce EBITDA should increase as monetisation improves. Margin Pressure in Video Entertainment: Video entertainment in South Africa and sub-Saharan Africa (SSA) has faced head winds from a weak macroeconomic environment, lower consumer confidence, and a change in subscriber mix. A delay in the switch-off of analogue TV switch broadcasts in SSA has meant that the demand for digital TV has not materialised as quickly as we initially expected. We anticipate profitability in this segment to remain pressured, partly mitigated by management's cost control initiatives. However, we expect the SSA video entertainment segment to be EBITDA negative in FY17 and FY18. This is after an increase in subscriber growth and a change in pricing and content strategy. South African pay-TV remains Naspers' main cash generating segment. However, profitability and cash flow remain under pressure. The decline in premium subscribers numbers has been offset by growth in middle and lower subscriber base, but the change in the mix has limited revenue growth in South Africa. Associates Underpin Investment Risks: Naspers' 33.6% equity stake in Tencent (valued at USD82bn at the current market price) and its 29% stake in Mail.ru (valued at USD1.2bn) are significant assets. However, in line with our rating methodology, the value of these two unencumbered minority stakes is not explicitly reflected in Fitch's credit metrics, only the dividends received. Partial stakes in these listed companies can be sold down fairly swiftly, allowing Naspers to repay all of its gross debt. Because of this potential liquidity source, the 'BB+' rating can tolerate weaker credit metrics until FYE18 due to high development spend. DERIVATION SUMMARY Naspers 'BB+' rating is weaker than its peers', with volatile FCF generation and exposure to macroeconomic and FX risks. The dependence on the value of equity stakes to reduce leverage is not commensurate with Fitch's view of an investment-grade profile. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - underlying revenue growth over the medium term driven mainly by global e-commerce and pay-TV in sub-Sahara; - Improving EBITDA margin to about 10% in FY19 as development spend falls and revenue increases; - mergers and acquisitions spending of USD1.7bn between FY17 and FY20; - the USD700m debt maturing in July 2017 to be repaid from existing cash; - operating lease multiple of 6.5x used, representing a blended average of the lease multiples applicable across the various geographies Naspers operates in. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - FFO-adjusted net leverage remaining below 2.5x (including satellite finance leases) on a sustained basis - Strong and sustainable FCF generation within 12-18 months, including improved cash-flow contribution from the e-commerce division - Solid operating performance from Naspers' core operations, as well as from the new pay-TV and e-commerce businesses that Naspers is currently developing - A tangible commitment to balance the long-term interests of bondholders with those of shareholders Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - FFO-adjusted net leverage above 3.5x (including satellite finance leases) and with no clear deleveraging path - Further deterioration in FCF generation or expectations that FCF generation will not significantly improve over the next three years - Unexpected regulatory pressures relating to competition in the domestic pay-TV market or changes in government regulations affecting the ability to service foreign debt - Significant reduction in e-commerce revenue growth from fully consolidated operations, given the amount of development spend to scale up these businesses - Revenue weakness would be viewed in conjunction with margin developments and effects on overall group EBITDA LIQUIDITY Healthy Liquidity: Naspers has ample liquidity. The company ended 1HFY17 (end-September 2017) with USD1.5bn of readily available cash and cash equivalents with its next bond maturity of USD700m due July 2017. The unutilised revolving credit facility for USD2.5bn which expires November 2020 provides an additional liquidity cushion. Naspers has also received USD3.2bn in February 2017 from the sale of Allegro. FULL LIST OF RATING ACTIONS Naspers Limited Long-Term Foreign-Currency IDR: affirmed at 'BB+'; Outlook Stable Short-Term Foreign-Currency IDR: affirmed at 'B' National Long-Term Rating: affirmed at 'A+(zaf)'; Outlook Stable National Short-Term Rating: affirmed at 'F1(zaf)' Myriad International Holdings BV Senior unsecured bonds: affirmed at 'BB+' Contact: Principal Analyst Damien Chew, CFA Senior Director +44 20 3530 1424 Supervisory Analyst Yeshvir Singh Associate Director Fitch Ratings Limited 30 North Colonnade London E14 5GN +44 20 3530 1810 Committee Chairperson Raymond Hill Senior Director +44 20 3530 1079 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. 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