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PSG prunes its roses

It has nipped, clipped and encouraged while focusing on its less mature companies.

Like a rose farmer who quietly prunes, fertilises and waters in the off-season with the promise of blooming rewards in the warmer months, so investment holding company PSG has quietly tended to its portfolio of investments in the cold of SA’s low growth economy.

It has nipped, clipped and encouraged, but made no major changes to its investment portfolio over the last 18 months or so. Instead, says CEO Piet Mouton, the focus is on growing the current portfolio, with particular emphasis on the less mature companies. “All of our companies continue to invest through the cycle. Curro will invest between R1.3 billion and R1.8 billion, Evergreen [which builds retirement villages] plans to build another 500 units at a cost of R1.5 billion, while Konsult continues to invest in people and technology.”

In particular, PSG’s management team is spending a lot of time with its emerging businesses within PSG Alpha (including Energy Partners, CA Sales, Stadio, FutureLearn and Evergreen).

Time and effort

All of these businesses could “move the needle” over the next five to 10 years, says Mouton. “We are happy with this portfolio and believe that with effort and time several of these businesses can be big.” By this, he means R5 million to R10 billion-plus businesses.

“I’ve said it before, but no one waves a flag when the economy is ready to turn. You need to be ready.” 

That said, the underlying investments had a mixed year, with Capitec and Curro positively blossoming (Capitec delivered growth of 19%), while PSG Konsult performed marginally better (earnings growth of 4%), Zeder was flat and PSG Alpha’s earnings per share declined by 7%.

PSG’s recurring earnings per share increased by 9% to R10.86 in the year to February.

The group’s sum-of-the-parts (SOTP) value, of which more than 90% is calculated using JSE-listed share prices while other investments are included at market-related valuations, amounted to R311.45 per share as at February 28, 2019, representing a 22% increase from the R255.17 valuation at the same time last year. At April 18, 2019, it was R329.73 per share.

Capitec

While the emphasis is placed on PSG Alpha, much of the group’s strategy – and balance sheet strength – hinges on Capitec. Capitec accounts for 67% of the group’s value and roughly 85% of its market capitalisation, at current prices. “This means that the market is not placing much value on the other businesses – PSG has become a proxy for Capitec,” says Anthony Clark, independent small and mid-cap analyst.

Given the fact that the Capitec share price surged from R840 last April to R1 383 currently, and the stock is now richly priced, should PSG not be considering unbundling this asset to shareholders, Clark asks. In this scenario, PSG’s market cap would reduce substantially, but at the same time, smaller assets could blossom and be more fairly valued.

“My concern,” he says, “is that while PSG has created fantastic value over the years, growth has stalled. The market will not see any reason to rerate the stock until something changes.” 

Like any careful farmer, Mouton is not in a rush. And he is not concerned about the share price rise or the dominance of Capitec in the portfolio. Nor is he overly concerned about the fact that PSG is currently trading at a 17% discount to its SOTP, which is historically a wide margin.

‘No’ to unbundling

Capitec, he says, is integral to PSG’s current strategy. “If we unbundled Capitec we would be highly geared and would find it more difficult to support our alpha companies,” he says.

He adds that at different times the SOTP value has swung from a discount to a surplus. “One should not overreact during a time when there is a big discount. There are more sellers than buyers in the market, it’s how it is.”

PSG’s investment strategy is different, he adds, and the advantage that this has over private equity or unit trusts is that it is not governed by prudential limits which govern the size of individual investments in a portfolio. “It means we can hold onto our winners and reap the benefits for our shareholders. And right now you get to buy Capitec at a 17% discount.”

A final dividend of 304 cents (2018: 277 cents) per share was declared for a total of 456 cents (2018: 415 cents) per share, representing an increase of 10% for the financial year under review.

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Is SA fairly unique in having so many public companies whose main asset is shares in other public companies? Berkshire obviously has a huge portfolio of shares in a variety of public companies (about $200b worth or say half market cap) and then huge debt and huge cash. But not dominated by one or two holdings

In part a legacy issue I think. Under isolation SA companies could not do much with its surplus cash so they build up these conglomerates, most of which has been dismantled. BEE shareholdings led to the second round of conglomerate building – think ARM.

These types of companies are quite prevalent in emerging markets. India with the Reliance and Tata empires, South Korea and Thailand also have a few if memory serves. Japan is infamous for its convuluted cross holdings as well.

Or, we have this thing where if you can control enough of A which controls enough of B so that with an effective 25% you control B. Illegal in the US, where you would also have to file to SEC if you, your cousin, their brothers and grandpa have agreements to vote in concert.

“This means that the market is not placing much value on the other businesses – PSG has become a proxy for Capitec,” says Anthony Clark, independent small and mid-cap analyst.

So the other listed businesses are worth less than their market value? Why is the market only placing a value equal to its market value on Capitec and not on the other listed businesses. The reason for a holding comapny trading at a discount to its SOTP is either that there is a cash leakage – managent fees or tax issues or it is structurual, investors will rather go into the market and buy the listed assets that they want themselves than buying the basket that PSG represents. It has absolutely nothing to do with investors placing a higher value on Capitec listed share price compared to for arguments sake Curro’s listed value.

Come on Anthony stop tweeting and do some proper analysis for a change

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