PSG: A legacy of outperformance | Fin24
 
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PSG: A legacy of outperformance

Jun 30 2016 14:51
Jana Marais

If you ask Piet Mouton, PSG CEO and second-oldest son of PSG founder Jannie Mouton, what the biggest challenges are facing the group, finding the next Capitec or Curro – two major drivers of PSG’s phenomenal growth story – is not on the list.

Speaking with Mouton at the group’s head office in Stellenbosch shortly after the group’s annual general meeting (AGM) on 24 June, when global markets were reverberating from the unexpected impact of the UK’s Brexit vote, it’s the state of the economy that first comes to Mouton’s mind.

“One would like economic growth at 3%-plus, and some more political stability,” Mouton says. “We like operating in a stable environment, but I don’t think we face a unique set of challenges.”

The drought and high soft commodity prices have negatively impacted Zeder, its agribusiness investment holding firm, and while the weak rand has boosted exports, Mouton would prefer the currency at stronger levels. “You can’t be dependent on a weak rand to grow exports,” he says.

Many have seen PSG’s major focus on South Africa – its two major investments, Curro and Capitec, are almost exclusively focused on SA – as a drawback, particularly given the tough economic climate. Mouton is unfazed, however. “Yes, SA has a very specific set of problems, but people don’t realise how tough it is in the rest of the world.”

SA Inc.’s obsession with building businesses overseas, despite many examples of failure, also opened up opportunities for PSG, he believes. “Many companies have taken their eye off the ball in SA, and that does create opportunities. It would have been very difficult, for example, to start a Capitec from scratch in the UK or Europe.”

The uncertainty around Brexit, for example, was unexpected, and markets were caught off-guard, Mouton says. (Weak market performance can weigh on the performance of its financial services firm PSG Konsult.) “One also doesn’t know if there will be additional fall-out in Europe. On the other hand, uncertainty also creates new opportunities,” Mouton says.

War chest

If there is something PSG is good at, it’s spotting – and exploiting – an opportunity. A recent example is its capital raising at the end of 2015, when it capitalised on a rally in its share price to raise R2.2bn in cash through a bookbuild at R245 a share. It also raised R267m in a private placement in May 2015 at R198 a share. The current share price of around R180 is substantially below its November peak of nearly R285, and the share again trades at a discount to its sum-of-the-parts (SOTP) valuation of R196.70 (as at 28 June).

Traditionally, investment holding companies trade at a slight discount to their SOTP valuation, unless the market expects significant corporate activity, such as an acquisition. In April, PSG said it had R2.9bn cash available to make new investments.

Some of this is likely earmarked for private education group Curro, which is expected to need more capital in future to implement its growth strategy. PSG already invested R669m in Curro in its May 2016 rights issue. The group is targeting 200 schools by 2020, up from 101 in 2015. PSG invested in Curro in 2009 when the company only had three schools. The investment now accounts for 19% of PSG’s SOTP total asset value.

Other investments in the past financial year included Zeder acquiring 25% of Capespan from minorities other than Zeder management through the issue of Zeder shares, and increasing its shareholding in Zeder to 34.6% for R231m after the stake was diluted to 32% following the aforementioned rights issue.

Private equity investments

Its private equity arm continues investing in early-stage businesses with high growth potential. The philosophy is attributed to Michiel le Roux, co-founder, former CEO and now non-executive director of Capitec, which was started by PSG: “We like early-stage investments, because they are either a small failure or a big success.”

A closer look at PSG’s portfolio shows that even if its private equity bets on firms like Energy Partners and education solutions provider Impak don’t pay off, its existing core portfolio still has substantial room to grow.

Curro, for example, may already serve about 42 000 learners, but that’s a drop in the bucket of the roughly half a million kids that get a private education in SA today. In addition, the private school market in SA constitutes only about 5% of the overall school market, while the worldwide average is around 15%, showing there is room to grow the private sector.

Curro has also made proposals to government to introduce a voucher system that would allow parents to “top up” payments for a private school education, which would alleviate the pressure on state schools, which battle to keep up with growing student numbers.

Capitec also still has room to grow its market share. While it already has a 22% market share in the primary banking client segment, its share of the consumer credit market is only around 2.5%.

Outlook

But why invest in PSG if you can choose to invest directly in its major underlying assets – Zeder, Curro, Capitec and PSG Konsult?

Firstly, you can only get exposure to its private equity portfolio, which include sizeable and scalable businesses, by investing at group level. It is also no mean feat that PSG’s head office, a cost centre for most listed companies, actually makes a positive contribution to the bottom line. This is partly thanks to management fees from Zeder, which are under review, but Mouton is confident that even without the Zeder fee income, head office, which includes PSG Capital, would be close to break even.

And given the group’s track record in terms of shareholder returns, it would be foolhardy to bet against PSG and the Moutons, who remain substantial shareholders in the company. (Steinhoff, with 26%, is the biggest shareholder in PSG.)

PSG’s returns since listing have been simply phenomenal (see table). The group has comfortably outperformed other much-loved JSE-listed stocks such as Richemont, Bidvest and SABMiller, and even Warren Buffett’s much-lauded Berkshire Hathaway.

“By our estimates, the group should be able to maintain at least high teens earnings growth over the medium term. While some of the core assets will start entering a more mature phase in the business cycle, we feel that even the largest asset, Capitec, should be able to sustain high teens earnings growth over the next three years,” says Liam Hechter, analyst at Anchor Capital.

While other JSE-listed family-controlled businesses haven’t exactly covered themselves in glory in recent years – the Ackermans’ Pick n Pay and the Venters’ Altron come to mind – PSG seems to be a steady ship.

A key difference between PSG and the likes of Altron is that PSG is an investment holding company, and doesn’t get involved in the day-to-day operations of the companies it invests in. It is rather a long-term strategic investor that “adds value by challenging management to innovate and grow their businesses, both organically and by means of acquisitions”, providing funding when needed, according to PSG.

A lack of liquidity has traditionally been one of the limitations of investing in PSG stock, a matter it expects to improve as international investors now hold a substantial portion (roughly 10%) of PSG shares. This is partly thanks to the inclusion of PSG in the MSCI Emerging Market Index, but PSG has also in recent years embarked on international investor roadshows.

At the 2015 AGM, Jannie Mouton predicted that PSG should be able to grow at a minimum of 20% a year for the next 10 years on a total returns invested (TRI) basis, predicting a share price of R1 115 by 2025. This year, he didn’t make any new predictions, but his view on PSG’s outlook is clear: “I turn 70 this year and have never been more excited about PSG’s future than now.”

The writer travelled to the PSG annual general meeting as a guest of PSG. 

This is a shortened version of an article that originally appeared in the 7 July edition of finweek. Buy and download the magazine here.

curro  |  zeder  |  psg group
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