It is only fitting that PSG Group reported a very good set of results – the figures for the year to end February 2022 are the last before the group distributes all of its underlying investments to shareholders and then delists from the JSE.
Management reported that the net asset value (NAV) of the group increased by nearly 36% over the last 12 months, admittedly partly due to the continued recovery in share prices.
The NAV increased from around R19.77 billion at the end of February 2021 to R26.77 billion at the end of the 2022 financial year. In terms of value per PSG Group share, it increased from around R94 to nearly R128.
However, it was management’s decision to unbundle the underlying investments that will unlock the full value of decades-long growth for shareholders.
The price of PSG Group shares increased by nearly 44% since the end of February 2021.
The share price increased sharply when the group announced its intentions to restructure. In February, when it told shareholders about its plans, the share price immediately jumped from below R82 to just below R100 to effectively close the gap between the share price and the net asset value.
In the customary webcast, PSG Group CEO Piet Mouton presented a table to shareholders to illustrate how shareholders are set to benefit.
Just before the announcement of the proposed unbundling, PSG Group was trading at a discount of nearly 42% to the value of its underlying investments.
On Monday (April 25) the discount was less than 10%, with the share price at R95 and the total value of the distribution of shares in PSG Konsult, Curro, Stadio, Kaap Agri and CA&S Group, as well as the offer by PSG Group to buy its own shares from shareholders who wish to sell the soon-to-be-unlisted shares.
The remaining small discount can be attributed to the cost of capital for a few months, a small risk premium, and whatever transaction costs may be needed to buy PSG Group shares now and sell all the distributions later.
Management notes in its commentary to the results that the calculation of PSG Group’s net asset value requires limited subjectivity as approximately 91% of the investment value is calculated using JSE prices. While the other investments are included at internal valuations, this too requires little guesswork as PSG Group is offering a firm R23 per share to acquire these interests from minority shareholders.
Mouton mentioned that the restructuring remains subject to existing shareholders approving the proposals, as well as regulatory approvals and some other conditions normally required in transactions of this nature.
Holding companies’ fading allure
He listed the normal reasons why the shares of holding companies trade at a discount to their underlying investments. While pointing out that a lot of these might not necessarily apply to PSG Group, investors seem to make little distinction between one holding company and the next.
The most prominent and quantifiable is the effect of tax on the ‘real’ value of underlying investments if a holding company was to sell all its investments to realise the true value.
Capital gains tax will apply to decades’ worth of growth in the value of the assets, some of which are fast-growing companies where shares were acquired at a fraction of the present market value. Distribution of the proceeds to shareholders will attract tax on dividends.
In addition, the sale of underlying investments will be subject to transaction costs, and large volumes from a known seller will impact share prices.
Mouton noted that investors also punish investment holding companies for perceived bad investments and excessive head office costs. That PSG Group achieved average returns of 38% per annum since inception and that its internal costs are way less than those charged by unit trusts is ignored by investors.
There is no glory if management is good at selecting investments – the growth of Capitec Bank is an undisputed example.
PSG Group started Capitec from nothing in 1999, and under its wing it grew to one of the most popular banks in SA.
Capitec shares were trading at R2 200 on Monday.
PSG Group said in a separate Sens announcement on Monday that it has received overall positive feedback regarding the proposed restructuring.
“As a JSE-listed investment holding company, the main objective of PSG Group remains to create wealth for PSG Group shareholders on a per share basis,” it says.
“However, the share price of PSG Group has unfortunately been trading at a significant discount of approximately 30% to the value of its underlying investments (or the so-called sum-of-the-parts value) in recent years, despite significant value unlock initiatives undertaken, such as the unbundling of nearly its entire shareholding in Capitec during the financial year ended 28 February 2021, in terms of which approximately R21 billion was unlocked for PSG Group shareholders, based on Capitec’s closing share price on 21 April 2022.”
It also alludes to the fact that the underlying companies are doing well and that PSG Group has completed its role as mentor. “The PSG Group investments forming part of the PSG Group unbundling are mainly established businesses with strong balance sheets and no immediate requirements for additional capital and which no longer require an anchor shareholder.
“Furthermore, they have exceptional management teams and experienced boards,” according to PSG Group.
What happens next
The next hurdle is that shareholders need to approve the proposed restructuring, which should not be much of a hurdle at all given the sudden windfall to shareholders.
As management remarked, the proposal has been welcomed this far.
A small sticking point is the cash offer to acquire the leftovers of PSG Group from shareholders. PSG Group warns shareholders that the offer of R23 to acquire a handful of small young enterprises might be cut a bit, depending on final tax liabilities.
“The final tax liability will only be determinable on or about the applicable last date to trade prior to implementation of the PSG Group unbundling,” according to the announcement outlining the process to date.
If the corporate advisors got their sums with regards to tax right, “the cash consideration for the PSG Group scheme will remain unchanged” at R23 per share. But they warn that PSG Group has no control over the matter and the cash offer might, at worst, be R2 lower than anticipated.
It probably won’t make a difference to PSG Group shareholders.
As investors, they will be more concerned with the JSE falling 3.5% on Monday, a move that wiped out half their gains since the start of the year.