OREANDA-NEWS. 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.

Naspers' profitability continues to be impacted by its high development spend, particularly in global e-commerce and the rollout of its digital terrestrial TV (DTT) service in sub-Saharan Africa, but visibility of future cash flow generation is improving. The sale and acquisition agreement between Naspers and Schibsted has significantly reduced competitive pressures and execution risk in ecommerce. We expect the joint ventures to result in lower development spend (marketing spend), and greater focus on product development will likely result in earlier monetisation. Fitch expects Naspers' operational and financial profile to become more compatible with that of an investment grade rating if development spend falls and if cash flow generation from e-commerce significantly improves over the next two to three years.

KEY RATING DRIVERS
E-commerce Risk Reduced
Naspers is in a multi-year development phase to expand the scale of its e-commerce platforms in approximately 40 countries. Early this year, Naspers concluded a number of agreements with Schibsted, Telenor and Singapore Press Holdings covering online classified operations in Latin America, Eastern Europe and South-east Asia, which improved its overall market position and reduced competitive intensity. In certain countries, operations were combined to achieve greater scale, which should shorten the time to when these businesses start producing significant positive cash flow.

Fitch views these transactions, as well as other disposals and a merger of online retailing operations in South Africa, as a demonstration of management's focus on improving cash flow generation from the e-commerce business, while reducing execution risk.

Pay TV growth
Naspers' South African pay-TV business (80%-owned) continues to grow profitably, generating cash that is being used to fund investment in other areas, including the expansion of pay-TV services in sub-Saharan Africa. The DTT network deployment is mainly complete as are new broadcasting facilities in Johannesburg and in west and east Africa. Naspers should be able to capture growing demand for digital TV services as analogue signals in various African countries are turned off over the next few years. DTT subscribers increased by 170% to 2.2m in FY2015 with strong growth set to continue in the medium term. The DTT network is mostly complete in 11 countries across Africa, and increased cash generation should follow as operational leverage improves.

Associates Underpin Investment Risks
Naspers' 33.6% equity stake in Tencent (valued at USD65.8bn at current market price) and its 29% stake in Mail.ru (valued at USD1.3bn) 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. Naspers share of Tencent's dividends in FY15 was ZAR1.0bn and Fitch expects this should grow at 15%-20% per annum over the next few years. 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 two years of weaker credit metrics due to high development spend. However, 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 the rating case for Naspers include the following:
-Strong revenue growth over the medium term driven mainly by global ecommerce and Pay-TV in sub-Sahara
-Improving EBITDA margin from 8.1% in FY2015 to mid-teens in FY2018 as development spend falls and revenue increases
-Capex to decline in FY2016 and FY2017 as the DTT roll out is completed
-Growing dividends to shareholders
- Net debt (excluding satellite leases) to EBITDA ratio to fall below 2x by end-FY2018 from 4.5x at end-FY2015

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- FFO-adjusted net leverage (excluding satellite finance leases) remaining below 2.0x on a sustained basis
- Strong and sustainable free cash flow (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 ecommerce businesses that Naspers is currently developing
- A tangible commitment to balance the long-term interests of bondholders with those of shareholders

Negative: Future developments that could lead to negative rating actions include:
- FFO-adjusted net leverage above 3.0x (excluding satellite finance leases) and with no clear deleveraging path
- Further deterioration in FCF generation or expectations that FCF generation would not significantly improve over the next two to 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 ecommerce revenue growth from fully consolidated operations, given the amount of development spent to scale up these businesses. Revenue weakness would be viewed in conjunction with margin developments and effects on overall group EBITDA

LIQUIDITY
Naspers has ample liquidity, ending FY2015 with ZAR13.9bn of readily available cash and cash equivalents. The company has various revolving credit facilities of ZAR27.3bn, of which ZAR17.6bn has been drawn. The bulk of Naspers' long-term debt is denominated in US dollars. The ZAR1.36bn RCF is due in 2017 and the USD bond of ZAR8.5bn is due in 2017. Naspers' shares in the listed companies, Tencent and Mail.ru are also a significant source of potential liquidity.

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: 'A-(zaf)'; Outlook Stable
National Short-term rating: 'F1(zaf)'

Myriad International Holdings BV
Senior unsecured bonds: affirmed at 'BB+'