Uncapping the Capped SWIX - Naspers to list international assets in Europe

Due to the increasing weight of South African media group Naspers within domestic equity indices over the past several years, many South African pension funds and investors have moved their domestic equity benchmarks from the FTSE/JSE SWIX All-Share Index (“SWIX”) to the FTSE/JSE Capped SWIX All-Share Index (“Capped SWIX”). Recent announcements by Naspers regarding their internet holdings have implications for these investors, and while the exact details remain unknown, the following highlights some of the anticipated changes.

On 25 March, Naspers announced that it will list its non-South African assets on Euronext Amsterdam, as one of several steps to reduce the discount it trades to the value of its investment in Chinese listed Tencent Holdings. The new entity (NewCo) will hold 100% of its global internet companies including its 31% stake in Tencent, as well as its stakes in Indian online food-delivery business Swiggy, Indian online travel site MakeMyTrip, Russian online classifieds Avito, and Russia’s biggest internet company Mail.Ru. Likely to be Europe’s largest global consumer internet company, its primary listing will be in Amsterdam, with a secondary listing on the JSE.

Naspers is attempting to unlock some of the discount that exists between its JSE listing and the listed value of Tencent. As Naspers trades at approximately 30% to 40% discount to its global internet companies, the listing attempts to force a truer valuation on the Russian and Indian companies. The JSE-listed Naspers will continue to hold 100% of Media24 and online retailer Takealot, and 75% of Newco. The remaining 25% of NewCo will be distributed to shareholders through a capitalisation issue, splitting Naspers into two businesses on the JSE. This follows Naspers’ recent unbundling of South African MultiChoice to shareholders.

The impact on indices is expected to vary. The MSCI South Africa Index (the preferred benchmark for foreign investors into South Africa) will see its Naspers weight shrink by a quarter from 32% to 24%. NewCo will be excluded from the index as it only considers companies with a primary listing in South Africa. However, South African indices such as the SWIX and CAPPED SWIX will include the secondary listing, but adjusted for the weight of local share registry in the instrument.

The JSE introduced the FTSE/JSE SWIX All-Share Index suite in 2004. The SWIX is unlikely to see any change in weight. Instead of one company at 24% of the index, there will be two; Naspers at around 18% and Newco at around 6%. The 6% NewCo index weight may be smaller if a substantial portion of the shareholders move from the JSE registry, Strate, to the Amsterdam register, but this may also be balanced higher if the discount closes.

The FTSE/JSE Capped SWIX All-Share Index was introduced in 2016. Most emerging market indices are not capped, but the Turkish (10%), Russian (15%) and Australian (15%) indices are all capped. The Capped SWIX is the more interesting of the indices, as it was created to reduce the weight of Naspers and to avoid excessive concentration. With the split of Naspers into two instruments, the 18% Naspers weight will stay capped at 10%. However, the 6% NewCo weight in the index means that the Capped SWIX will effectively hold up to 16% combined exposure to Naspers.

The JSE is considering the addition of a new index and an amendment to the SWIX methodology which does not currently treat all companies consistently. Older stocks that were grandfathered into the index like Anglo American have not been downweighted as stocks like British American Tobacco have. A possible solution is to disregard the share register, which only downweights dual-listed stocks and instead only look at South African holders, resulting in equal treatment of all companies and the exclusion of foreign shareholders from the index. This would potentially bring Naspers’ combined weight to 15%. Another solution is to treat foreign companies at their full global free float with no nationality downweighting, bringing Naspers down to 13% based on JSE estimates.

The listing on Euronext Amsterdam is expected to take place in the second half of 2019. Naspers is the most valuable listed company in Africa on the JSE by market capitalisation and is set to continue to invest in South Africa. Details will become clearer as the listing approaches. Many South African retirement funds have the Capped SWIX as their benchmark and will need to be cognisant of the fact that they may be increasing their concentration to Naspers, rather than reducing it.

ENDS