News of a generous, albeit conditional, multi-million share option award for PSG’s top three executives did not go down well with shareholders dismayed that the share price is currently back at 2015 levels and that the same three execs appear to have no plan to address the problem.
It’s not just the latest award; the grim share price performance seems to have had little impact on the group’s long-standing remuneration policy and the substantial packages pumped out to the top three, namely CEO Piet Mouton, finance director Wynand Greeff and executive director Johan Holtzhausen.
In financial year 2019, the three were paid a combined R127.4 million, almost three quarters of it gains from the exercise of share options.
The group’s 2019 remuneration report suggests that anyone struggling with the generous rewards needs to take a longer-term perspective.
Each of the three executives, says the PSG remuneration committee, has served in their current roles for at least nine years. Over this period the share has gone from R22.05 (February 2010) to R259.78 (February 2019) and, says the committee, assuming the dividends were reinvested in PSG shares, this represented a return of 33% per annum over the period.
“Shareholders have accordingly benefitted significantly from the value created, while executive directors have been remunerated commensurately due to their interests being materially aligned with those of shareholders,” it states.
On the face of it, this perspective does look reasonable and it conveniently reminds investors of PSG’s glory days.
The group has an impressive track record, dating back to its establishment in the 1990s by Jannie Mouton (father of Piet). Its backing of Capitec – enabling it to grow from scratch to one of the largest banks in South Africa within just two decades – was particularly impressive. Many investors have bought into PSG to get access to Capitec in much the same way Naspers was used to get access to Tencent.
But the days became notably less glorious from early 2018, as economic growth remained a distant dream and investors appeared spooked by the reminder of then-Steinhoff CEO Markus Jooste’s close relationship with PSG when, in early 2018, cash-strapped Steinhoff offloaded its 25% in the group.
But at least one investor reckons it’s not just in the last few years that PSG’s performance has lost the sort of shine that justifies hefty remuneration packages.
Unpacking the share price
Albie Cilliers has gone back to the February 2010 date referenced by the remuneration committee and notes that back then R14.90 of the R22.50 PSG share price was attributable to the stake in Capitec. This left a ‘surplus’ value attributable to PSG of R7.15. Fast forward ten years to end-February 2020 and PSG’s share price is trading at an apparently impressive R187. But, says Cilliers, strip out the R211 attributable to its Capitec stake and you’re left with a negative R24 a share.
“In other words, over the past ten years the value attributed to the ‘skills’ of the three PSG executives reversed from a positive R7.15 per PSG share to a negative R24 per PSG share,” says Cilliers.
“That’s equivalent to R6.9 billion since 2010.”
Add in the R2.67 billion of Capitec dividends received by PSG during the period, and the long-term picture looks extremely grim.
Capitec in perspective
And while PSG can rightly take credit for getting Capitec onto its dramatic growth trajectory, after the 2003 unbundling of 55.3% of Capitec shares, it cannot claim any credit for the bank’s ongoing success. In the Sens announcement released at the time, PSG was clear: “Capitec is now totally independent, has its own business plan and culture, dedicated management and staff and adequate capital to stand alone.”
Unsurprisingly, things haven’t gotten any better during one of the JSE’s most turbulent trading periods since 2008. At the close of trade on Monday, PSG’s sum of the parts (SOTP) was R277.42, which towered over PSG’s own share price of R177.85 that day – an eye-watering 35.9% discount. It’s even at an 18% discount to the value of its Capitec stake.
So not only is the market attributing no value to PSG’s other investments – which include 60.6% in PSG Konsult, 55.4% in Curro, 44% in Zeder and around R5 billion worth of unlisted assets – it’s not even attributing full value to the Capitec jewel in the crown.
Is something going on?
Sasfin’s David Shapiro, who avoids companies like PSG, where the component parts can be bought directly in the market, says the sustained and steep discount makes it difficult not to suspect something is going on.
“Maybe there are concerns about Capitec,” suggests Shapiro, before noting that Capitec has just released an impressive trading update.
“Investors are spooked; it could be the turbulent times we’re in or something more specific to PSG.”
Shapiro says it’s difficult to know what Mouton can do about it. “If he sells any assets, what will he do with the cash? There’s nothing to buy here.” PSG itself has played down any prospect of a significant share buyback, saying it would have little impact on the discount.
Without any major investments on the horizon, there’s no pressure on PSG to sell assets. It rakes in about R600 million a year in dividends from Capitec and is set to pick up around R2 billion from PepsiCo’s just-confirmed acquisition of Pioneer, which represented a large portion of Zeder’s assets.
Anthony Clark, an independent analyst who has tracked PSG and its component parts for several years, says if the challenge is to unlock value for shareholders then it’s not about selling assets but about unbundling them. However Clark believes this is unlikely to happen as the Mouton family has a controlling stake and appears unwilling to pursue this course of action. “But something has to give.”
He describes the underlying assets as solid businesses with good management and notes that for a while they were market darlings.
“If the economy picks up these businesses will pick up.”
RECM’s Piet Viljoen agrees there’s little chance of an unbundling, particularly of Capitec, and believes PSG management should not react to market pressure. “Naspers undertook a complicated and expensive exercise to deal with its discount and achieved nothing.”
His only criticism is directed at their poor communication with investors, which rather remarkably for a listed company includes not taking questions at results presentations or AGMs. “They should communicate their strategy to the market and repeat it,” says Viljoen.
Capitec unbundling ‘unlikely’
Kokkie Kooyman, portfolio manager at Denker Capital, agrees that an unbundling of Capitec is unlikely and contends it would achieve little. He backs the PSG model and believes the top executives are totally committed to making it work, but agrees the remuneration issue looks a little insensitive.
“They should demonstrate their confidence in the future by taking no salary increases or bonuses and telling the market they are confident the share price appreciation will be sufficient reward.”
Meanwhile, during turbulent times it does help to have a big parent, notes one analyst. But the issue then returns to executive remuneration. Why, asks the analyst, if PSG and most of its underlying assets – excluding Capitec – can only perform when the economy is performing, are the top executives so generously remunerated? “That largesse is difficult to accept when shareholders are nursing hefty knocks.”
No doubt Mouton, who said he could not comment because of the closed period, will provide some insight at the upcoming results presentation.