Above: Some calculations (for illustrative purposes only).
All of PSG Group’s investee companies are adequately capitalised to weather the trying economic conditions.
Given current uncertainties, it is difficult to ascertain the real state of the economy, how weak it truly is and how resilient the country is to bounce back. A clearer picture will only emerge in the next year or two.
This was said today by PSG Group CEO, Piet Mouton, with the release of the group’s interim results to August 2020.
The group is an investment holding company consisting of underlying investments that operate across a diverse range of industries, which include ﬁnancial services, banking, education, food and related business, as well as early-stage investments in select growth sectors.
Reporting for the first time after significant corporate action was undertaken during the reporting period under review, which included the unbundling of an effective 26.4% of PSG Group’s 30.7% interest held in Capitec and disposing of 1.9 million Capitec shares for R1.7 billion cash, Mouton said it necessitated the reassessment of the group’s Investment Entity status for International Financial Reporting Standards (lFRS) purposes, resulting in a change in accounting policy whereby subsidiary investments are carried at fair value since 1 March 2020.
Piet Mouton, PSG CEO: “Trading at a discount is an issue for investment companies.”
The performance of its remaining investment portfolio is accordingly measured with reference to the fair value of each investment (i.e. Sum-Of-The-Parts or SOTP value) rather than the consolidated profitability of PSG Group (i.e. recurring earnings). The group retains a 2.6% interest in Capitec for liquidity purposes and to bolster its balance sheet.
The calculation of the group’s SOTP value requires limited subjectivity as more than 75% of the value is calculated using exchange-listed share prices, while other investments are included at internal valuations.
The group’s SOTP value per PSG Group share amounted to R75.86 as at 31 August 2020, representing a decrease of 20% compared to the R94.44 per share as at 29 February 2020 if the aforementioned unbundled Capitec shares are excluded from the group’s SOTP value for comparative purposes.
The decrease is indicative of depressed equity markets and the challenging trading conditions brought about by the COVID-19 pandemic and associated national lockdown. On 9 October 2020, the SOTP value per PSG Group share was R82.80.
Following the aforementioned unbundling of Capitec, PSG Group’s policy is to pay ad hoc dividends as and when circumstances allow. As part of PSG Group’s objective of continued wealth creation, the directors have resolved to declare an ad hoc interim gross dividend of 164 cents per share.
Mouton made specific mention of the exceptional performance of PSG Konsult relative to the rest of the financial sector after reporting a 7% increase in recurring earnings per share, mainly driven by its Wealth and Insure divisions. PSG Konsult is now PSG Group’s largest investment, representing 34% of its SOTP value.
Mouton said that the significant discount at which PSG Group’s shares are trading to its SOTP value per share remains of concern to the group. “We will continue with PSG Group’s objective to create wealth for shareholders on a per share basis by growing the underlying investments, including unlocking value through reducing the discount to the extent possible over time.”
“Trading at a discount is an issue for investment companies globally and it seems that the ‘investment company model’ has fallen out of favour.”
“Amongst the reasons for the discount is investment companies having permanent capital. Investors seem to favour the ‘unit trust investment model’, where entering and exiting at net asset value is a given. The recent sale of Pioneer Foods and the unbundling of Capitec should, however, prove to the market that we are not here to build an empire for management, but rather to create shareholder wealth on a per share basis.”
“Another issue related to a discount is the holding company cost structure and the charging of fees by certain players. In the case of PSG Group, no fees are charged, and the holding company cost structure represents approximately 0.5% of our market capitalisation post the Capitec unbundling, being low relative to the rest of the investment industry.”
“Poor investment decisions also played a role in the industry. PSG Group, however, has a proven track record of success in this regard.”
“A further issue is there being too many listed entry points, allowing shareholders to construct their own portfolio. This is not easy to resolve, as our major investee companies are large relative to PSG Group.”
“We will continue to pursue value-creation initiatives in the long-term,” Mouton concluded.