A bland cautionary announcement released following its annual results on Thursday all but indicates that PSG Group is finally tackling a problem that has weighed on the investment holding company for the past two years.
Its shares are trading at an ever-widening discount to the underlying parts.
In recent months, this has reached extremes of as much as 35%, while the average over the past year has been 23%.
With the stake in Capitec material to any sum-of-the-parts (SOTP) calculation, the dislocation has seen a situation where PSG shares have been trading to its value of its shareholding in the bank. Never mind its stakes in PSG Konsult, Curro, Zeder, and Stadio, as well as a sizeable portfolio of unlisted investments.
Investors have, understandably, been very critical of this.
Piet Mouton, CEO of PSG Group, says the “large discount does trouble us”.
He says one of the resulting problems is that the group is “unable to access the equity markets if we need to, [which is] one of the primary reasons why companies would want to be listed”.
The major reasons management offered on Thursday for the discount include:
- The “significant success of Capitec”;
- Investment holding companies have generally fallen out of favour (globally); and
- There are too many listed entry points into the group (95% of its assets are).
It is the last of these where Mouton didn’t mince his words. “Historically, we believed that being listed was important.” This provided a direct incentive to management, he explained.
But, with increasing “red tape” he says it’s obvious why “many more companies would opt to operate in an unlisted environment”.
This could point to a reduction in the number of investee companies that are separately listed. Mouton also confirmed that the group would not pay a special dividend with the special dividend received from Zeder next week as a consequence of the Pioneer sale to PepsiCo. The R1.7 billion will be “retained as a liquidity buffer” as some of its companies “might need capital in the short term”.
Some have speculated that in the absence of cautionaries from any of its investee companies, that an unbundling or offer to minorities at one of these would be off the table and that PSG may be looking at a separate transaction. Mouton seemed to pour cold water on this on Thursday morning, saying that while management has “looked a various opportunities outside the group in recent months”, at this stage, “like most firms” it is “going to look slightly more internally at this stage to see if there are opportunities and pursue them accordingly”.
Anthony Clark of Small Talk Daily Research agrees, questioning what logic there would be buying offshore when the rand has blown out to the extent it has. With much of the JSE having been “decimated in the recent Covid-19 bloodbath, why would you not buy stocks that you know well?”
A cautionary is generally required when a transaction equates to at least 10% of a listed company’s market cap. In PSG Group’s case, this would be around R3 billion. That none of the investee companies have issued a cautionary yet could be a technicality. PSG may not have started formal discussions with the target’s board
Capitec ‘very interlinked’ with PSG
For much of Thursday, the market seemed to believe that PSG would look to unbundle Capitec, or a portion of its holding. The holding company ended the day up 12%, while Capitec traded as much as 8% lower intra-day. Clark says while a Capitec unbundling is certainly possible, it is very interlinked with PSG and its dividend flow is paramount to the group (PSG’s final dividend is down 75% as Capitec did not declare a dividend due to a Guidance Note from the Reserve Bank in light of the Covid-19 crisis).
A separate factor is whether the SA Reserve Bank would even allow an unbundling, given the current economic environment. Any unbundling will improve liquidity but also likely increase volatility.
Neither Curro nor Stadio were whispered in the market on Thursday, which suggests the other two listed entities, PSG Konsult or Zeder, could be possible delisting targets.
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These are both trading at significant discounts to what management believe these assets are worth, more so given recent market turbulence. This provides a unique opportunity to take larger stakes in either of these or to delist them completely.
PSG Konsult is in radically better shape than the business that listed on the JSE in 2014.
But it is Zeder that to Clark’s mind is ripe for a delisting.
Post the special dividend payout, the discount to the sum of its parts will be roughly 50%. Clark says Zeder is a complex business with “highly cyclical agricultural assets” that the market likely doesn’t even understand all that well. Add to this the fact that any sector recovery is probably at least 12 months away. It might be “better managed hidden from view”.
With a reasonable cash offer, PSG may find strong support from minorities, given the dynamics sketched above.
A final intriguing, but far-fetched possibility is that PSG Group may be looking to delist itself.
This would allow it to restructure its portfolio in private. But raising the funding necessary, especially in current markets, might be a leap too far.