PSG Group, the investment holding company behind market darlings Capitec and Curro, still sees significant growth potential in South Africa despite trading conditions hampered by sub-par economic growth.
“The reality is that if you look at many of our core companies within the group, they still have fairly small market shares – and you can grow, even in a constrained or difficult environment, by taking market share,” says PSG Group CEO Piet Mouton. “You need to be better or slightly better than the competitors, and work smart.”
He adds that he would be the first to say that he would like to see GDP growth of over 5%, which would foster inclusive growth and likely accelerate the pace of growth for his company. Economists, however, say the country is unlikely to even register 1% growth this year.
Despite the weak domestic growth prospects, Mouton says the group is currently unlikely to invest abroad unless a ‘1+1=3’ type of opportunity arises. Its subsidiaries are free to explore opportunities outside of South Africa and take a “measured approach” to investing overseas.
The group’s sum-of-the-parts (SOTP) value increased by 7% to R272.94 per share in the six-month period from financial year-end to August 31, 2018. The SOTP value, based on market prices of its JSE-listed investments and market-related valuations for unlisted valuations, alongside recurring earnings per share, are the key financial metrics against which PSG measures its performance. Interim recurring earnings increased by 22% year-on-year to R5.03 per share.
The bulk of the group’s value was created by Capitec, which accounts for 59% of the PSG Group’s total SOTP assets. Per PSG’s calculations, Capitec’s sum-of-the-parts value increased from R29.54 million to R35.58 million over the interim period.
According to small cap analyst Keith McLachlan, the group SOTP value concentration risk in Capitec is a result of the retail bank’s success. If Capitec hadn’t grown to the extent that it had, then it wouldn’t form such a large part of PSG’s portfolio, he explains, noting that Capitec has outperformed PSG over the years. “There is nothing wrong with the bulk of the value creation being driven by Capitec as it is an exceptional business, which is well managed. There is also significant opportunity for more growth as it scales up and adds more products to its offering.”
As the risk is concentrated in a high quality company such as Capitec, PSG can leverage off it to invest in other business and even try to find the next Capitec, McLachlan suggests.
Mouton says Capitec’s business banking ambitions – to be realised either through the purchase of Mercantile Bank or by building its own business banking capabilities – may affect shareholder value in the short-term due to upfront costs, but would prove to be of benefit in the medium to long run.
Overall, McLachlan describes PSG Group’s performance as “quite decent” given the circumstances, adding that its underlying businesses delivered a mixed bag of results. He notes that shares in the group, which closed 0.61% higher at R212.74 per share, trade at a discount to its SOTP value partly due to a discount related to the group structure and differences in management and market valuations of its unlisted assets. “It is not an unfair discount,” he says. “In my opinion, PSG should trade at a discount to its sum-of-the-parts value … If it can build another Capitec, then there is significant value to be gained.”
Says Mouton: “I think Capitec is most probably the best company to come out of South Africa in the last 15 years. I’d love to find the next Capitec, but finding a business almost as good as Capitec would be good enough for me.”
He says PSG Alpha, its business incubation unit, comprises several exciting businesses which, if scaled, bode well for the group’s prospects. Through Alpha, it bought a 50% stake in retirement estate developer and operator Evergreen Lifestyle for R675 million, and plans to grow its 500-strong units to almost 5 000 units in the next five years. It also plans to turn Stadio, the tertiary education unit spun out of Curro, into a “proper university”, he says.
PSG lifted its interim dividend by 10% to R1.52 per share.