PSG is more than Curro and Capitec

Investors should want to know what’s coming next.
PSG CEO Piet Mouton. Picture: Supplied

When most investors think of the PSG Group they will think of the company’s massively successful investments in Capitec and Curro. They may also consider the substantial interests it holds in two other listed companies, PSG Konsult and Zeder Investments.

Certainly almost all of the current value in PSG Group is held in these four companies. However, as CEO Piet Mouton reminded attendees at the group’s AGM in Stellenbosch on Friday, PSG is not a typical investment holding company.

“There is a fundamental difference between PSG and most investment companies,” he said. “We have been very good historically at early stage investments. We were there from the beginning with PSG Konsult when there were only five brokers, and with Curro when it only had three schools. We use PSG Alpha to find these kinds of investments, and hopefully they can have similar success to the big companies in the group.”

For investors, therefore, the opportunities within the PSG Group should be as much about what is already established in its portfolio as what is coming next.

The criteria

PSG Alpha’s mandate is to identify and invest in companies with “exceptional growth potential that could become significant assets in the broader PSG Group”. As Mouton noted, there are particular things it is looking for.

“We have learnt a lot of lessons throughout the years,” he said. “One thing that’s very important is that it’s as easy or difficult to build a big company as a small company. So if you do get it right, the industry must be big.”

Banking and education are obvious examples. Capitec has nearly 10 million customers, but it is still only the fourth largest bank in the country by market capitalisation. Curro has over 52 000 learners in its schools, but estimates that the potential market of learners who can afford its offerings is three million.

“If we do get it right, then we should be able to reap big benefits,” Mouton said. “The market dynamics must also make it attractive.”

This means either that there should be large, inefficient, incumbents, as was the case when Capitec started 20 years ago, or it should be highly fragmented, as is the case in the financial advice industry where PSG Konsult began.

“You also can’t just do the same as the industry has done,” he continued. “You have to approach it differently, think differently about the same problem, such as bringing a retail thinking to banking.”

The next big thing?

Investors can therefore have justifiably high expectations for three of PSG Group’s more recent investments – Energy Partners, Evergreen and Stadio.

Energy Partners provides cost efficient and sustainable energy solutions through applications such as solar and steam. What makes it different is that its model is primarily to own and manage these assets at clients’ premises and then sell the electricity that is produced.

At its most recent year end, it had R112 million in assets. PSG Group believes this is a tiny fraction of the opportunity.

The company estimates that the entire electricity market in South Africa represents R2 trillion in assets. Just 1% of that would be R20 billion, which illustrates just how much room there is for the company to grow.

Evergreen, on the other hand, operates in a market that is highly fragmented, with largely undesirable offerings. It builds and manages high-end retirement villages.

PSG Group took a 50% interest in Evergreen in April this year, when the company had 501 units. That number has already grown to 547, and it has a target of 1 047 by year end. In just five years, it plans to have built 4 928.

Finally, Stadio was unbundled from Curro late last year. It offers tertiary education through a number of different brands.

The opportunity in this space, said Mouton, is very obvious when you look at enrolment numbers in South African tertiary institutions.

In 2009, 334 718 children passed matric with a university exemption. Only 164 518 could be accommodated. By 2016, the number of exemptions had grown to 442 672, yet the number of admissions was only marginally higher at 171 930.

“There is not a lot of new capacity being created. Stadio already has 13 campuses across South Africa and ambitions to expand the footprint way beyond this.”

When it listed in October, the company had 13 000 students. Its target for the end of the current financial year is 35 000.

The future

What is also telling about these investments is that they are all based in South Africa. PSG’s founder and chairman, Jannie Mouton, has said repeatedly that the group has no interest in looking internationally, because he believes that the best opportunities are in the local market.

“Don’t waste your brain becoming an expert on what’s wrong in South Africa,” he told the AGM. “Rather look at the opportunities. Focus on how you can make a difference, employ people, and make South Africa a better place. That’s what we stand for.”

Apart from the positive sentiment this expresses about the country, it also means that investors don’t need to worry about the company destroying value by making ill-advised offshore acquisitions. This has been an issue for a number of other local firms.

For Jannie Mouton, however, the opportunities for doing business in this country remain positive.

“I have never sold a PSG share, and I recently bought more,” he said. “This should tell you what I think about PSG’s future.”

Patrick Cairns owns shares in PSG Group.

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I just can’t get excited about a company whose share price has only grown 8,37% in 3 years. Watching paint dry is more exciting than listening to Piet Mouton on the radio, maybe he’s not that excited either?

But wouldn’t you agree that the actual underlying businesses in PSG have grown more than 8.37% in 3 years?

Don’t let the historic returns (price growth) distract you from the reality of the underlying business value. Price is what you pay, value is what you get. Paying R21.27 for a business worth R25.13 is a discount in my eyes – the shares are on special, or ‘cheap’ relative to their instinct value (assuming you trust their calculations of some-of-the-parts value of each business).

Consider the possibility that PSG share price could have been unfairly dragged down (along with every other SA-focused company) by the negative sentiment+outlook of South Africa during the Zuma years. SA may still have challenges ahead but we’re better off post-Zuma and share prices are coming off a low bottom i.e. they have already priced in a lot of negative news, this makes the risk/reward potential much better.

“(assuming you trust their calculations of some-of-the-parts value of each business).”

99% of its assets are listed, value therefore market value, not directors valuation

Post-Zuma? That smiley lap dancer hasn’t started yet. Shaka never too anything lying down. KZN is a powder keg and that will only be the start. Be? Actually Well on the mihe way.

@notwarren good point. but remember actual value can differ from ‘market’ value which you see in the share price (steinhoff is an extreme example). I do trust PSG financials, I’m just recognising the potential risk of financials being inaccurate.

@vulpes48 agreed Zuma legacy will spill over into future years, but increasingly Ramaphosa’s decisions will become more important (whether that’s good or bad is another debate).

What is instinct value ? I do know what intrinsic value is.

PSG is another Steinhof in the making. He can throw us all the numbers of how big the market is still for banking and scholling blah blah blah and so can that tomatoe vendor on the street corner tell us how big the tomatoe market is. The big question to ask is whether the tomatoe vendor PSG can make profits trading in those markets and is it a sustainable model.

Steinhof gave some very interesting presentations to us as to why it made sense to buy all those foreign business which we later came to discovered were useless.

We know from Viceroy that Capitec is of real serious concern, contrary to what Capitec would want us to believe.

I would suggest that you stay far from PSG.

@Anonymous. In what way is it similar to Steihoff?

Management with integrity. Not involved with any of the Steinhoff mess.

Limited to no foreign footprint.

Businesses that were all invested in early and guided by management, instead of old businesses paid for with a premium.

I can see you’re pushing an agenda. But for GS’s, make it a bit less predictable.

@Anonymous to add to @tripleleveretf.

Strong cashflows in underlying businesses.

Limited gearing and gearing that is there are perpetual prefs – no need to roll debt in other words.

“The big question to ask is whether the tomatoe vendor PSG can make profits trading in those markets and is it a sustainable model.” Really? Have a look at Capitec, PSG Konsult and Curro numbers and tell me they are not making profits. Please also state why you do not believe the businesses are sustainable.

Viceroy report on Capitec has been proven to be rubbish.

You naturually have the right to your opinion but please provide better analysis than a rant about tomatoes.

Yes the window used does not look good. The market as a whole is only 9% up over the same period. Add 6 months to 3.5 years and the investment without the say 2% income paid each year and you get a return of 72%. That seems pretty good to me!

Curro, like Advtech has had its run. The education market is finite so sooner rather than later it will mature. Stadio faces the same problem. Using the SOTP approach will lead to the wrong valuation.

“John Maynard Keynes once wrote that evaluating shares is like judging a beauty pageant. It is not your view of beauty that counts. The judges determine the winner. In this case the judges are the market and as long as Mr Market believes in the SOTPs method of valuing a share, PSG / Naspers / et al, will hold their price. But, surely, someday, another little boy (I have had my say) will yell “but mommy, the emperor has no clothes on!”

How is an SOTP that is almost exclusively based on market values wrong?

What is the no clothes that you refer to? There are no inflated directors values in PSG’s SOTP/NAV it is all listed assets…

It is better to buy the performing companies in the PSG group rather than buying PSG. The valuation of PSG shows it to be lower than the “sum of the parts”.

Why invest in PSG then?

Naspers is the naked emperor, but then again you don’t have to agree with me.

“It is better to buy the performing companies in the PSG group rather than buying PSG. The valuation of PSG shows it to be lower than the “sum of the parts”.

Are you really serious? So if you go to the supermarket and they have an offer where you can buy an apple + banana for R2 you would rather buy an indivdual apple at R1.50 and an individual banana for R1.50.

Why invest in PSG then? – See above – because it is cheaper

“Naspers is the naked emperor, but then again you don’t have to agree with me.” your earlier comment said : “Mr Market believes in the SOTPs method of valuing a share, PSG / Naspers / et al, will hold their price. But, surely, someday, another little boy (I have had my say) will yell “but mommy, the emperor has no clothes on!” I am confused how does this only refer to Naspers

I wish there were more investors like you out there would make generating alpha much easier

But when the time comes to selling PSG it will still be sold @ a discount just like when you bought it. By investing in the performing listed subsidiaries rather than the holding company you will do better, like me.

The performance over the last 5 years (to 9 August 2018) is as follows

PSG 266.27% the holding company – not bad considering
CPI 389.72% the bank – exceptional – even after Viceroy’s report – carries the group
ZED 29.92% very pedestrian – not be in my portfolio
KST 25.32% from June 2014 – not be in my portfolio either
COH 57.25% peaked in Dec 2015 and sliding ever since – I sold out in Jan 2015
SDO -29.69% since listing – disaster.
So, you carry on holding PSG, I will stick to CPI, thank you.

End of comments.

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