Fitch Ratings has dropped local media group Naspers's long- and short-term ratings to what is commonly known as junk status because of a deterioration in its profitability as it continues to invest in future offerings.
Naspers, the largest media group outside of the US and China, with a market capitalisation of R602 billion, has been continuing its expansion into e-commerce and digital television, a move that led to development spend accelerating 79%, to R7.7 billion during the past year. "Our Internet activities are rapidly transforming themselves into mobile-focused operations," it said in its results.
However, its continued investment - which it has warned would affect future profitability - has spooked Fitch, which dropped its long-term rating to BB+, and its long-term rating to B, although the agency noted its outlook is "stable".
In a statement, Fitch said "the downgrade reflects the deterioration in the group's profitability mainly due to its high development spend as Naspers continues to invest in growth opportunities". While existing operations are performing well, higher-than-expected investments in global ecommerce and sub-Saharan pay-TV opportunities led it to reduce its expectations of operating profit and cash flow.
Fitch explains Naspers is in a multi-year development phase to expand the scale of its e-commerce platforms in about 40 countries. Its e-commerce unit widened its loss during the year, from R2.3 billion to R5.3 billion.
"Visibility of future cash flow generation is limited and the resulting increase in leverage means that Naspers' credit metrics are no longer compatible with an investment-grade rating." Naspers ended the year to March with cash and cash equivalents of R18.8 billion.
However, Fitch concedes that Naspers' international stakes in Mail.ru and Tencent represent "a considerable liquidity source," which means the lower ratings can handle two years of weaker credit metrics. This will be reassessed should the value of these stakes change, it adds.
Naspers holds 34% of Tencent - valued at $54 billion - and 29% in Mail.ru, which is worth $1.6 billion. Fitch notes dividends earned from its holding in Tencent this year came to R973 million.
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