How will PSG repair its ‘Capitec’ drawback?


A bland cautionary announcement launched following its annual outcomes on Thursday all however signifies that PSG Group is lastly tackling an issue that has weighed on the funding holding firm for the previous two years.

Its shares are buying and selling at an ever-widening low cost to the underlying components.

In latest months, this has reached extremes of as a lot as 35%, whereas the typical over the previous yr has been 23%.

With the stake in Capitec materials to any sum-of-the-parts (SOTP) calculation, the dislocation has seen a state of affairs the place PSG shares have been buying and selling to its worth of its shareholding within the financial institution. By no means thoughts its stakes in PSG Konsult, Curro, Zeder, and Stadio, in addition to a sizeable portfolio of unlisted investments.

Buyers have, understandably, been very crucial of this.

Piet Mouton, CEO of PSG Group, says the “massive low cost does bother us”.

He says one of many ensuing issues is that the group is “unable to entry the fairness markets if we have to, [which is] one of many major explanation why firms would need to be listed”.

The foremost causes administration supplied on Thursday for the low cost embody:

  • The “vital success of Capitec”;
  • Funding holding firms have usually fallen out of favour (globally); and
  • There are too many listed entry factors into the group (95% of its property are).

It’s the final of those the place Mouton didn’t mince his phrases. “Traditionally, we believed that being listed was essential.” This supplied a direct incentive to administration, he defined.

However, with rising “pink tape” he says it’s apparent why “many extra firms would decide to function in an unlisted surroundings”.

This might level to a discount within the variety of investee firms which are individually listed. Mouton additionally confirmed that the group wouldn’t pay a particular dividend with the particular dividend acquired from Zeder subsequent week as a consequence of the Pioneer sale to PepsiCo. The R1.7 billion will probably be “retained as a liquidity buffer” as a few of its firms “would possibly want capital within the brief time period”.

Hypothesis

Some have speculated that within the absence of cautionaries from any of its investee firms, that an unbundling or supply to minorities at one in all these could be off the desk and that PSG could also be taking a look at a separate transaction. Mouton appeared to pour chilly water on this on Thursday morning, saying that whereas administration has “seemed a varied alternatives outdoors the group in latest months”, at this stage, “like most corporations” it’s “going to look barely extra internally at this stage to see if there are alternatives and pursue them accordingly”.

Anthony Clark of Small Speak Every day Analysis agrees, questioning what logic there could be shopping for offshore when the rand has blown out to the extent it has. With a lot of the JSE having been “decimated within the latest Covid-19 massacre, why would you not purchase shares that effectively?”

A cautionary is mostly required when a transaction equates to at the least 10% of a listed firm’s market cap. In PSG Group’s case, this may be round R3 billion.

Capitec ‘very interlinked’ with PSG

For a lot of Thursday, the market appeared to imagine that PSG would look to unbundle Capitec. The holding firm ended the day up 12%, whereas Capitec traded as a lot as eight% decrease intra-day. Clark says whereas a Capitec unbundling is definitely doable, it is extremely interlinked with PSG and its dividend circulate is paramount to the group (PSG’s last dividend is down 75% as Capitec didn’t declare a dividend on account of a Steering Be aware from the Reserve Financial institution in mild of the Covid-19 disaster).

A separate issue is whether or not the SA Reserve Financial institution would even enable an unbundling, given the present financial surroundings. Any unbundling will enhance liquidity but in addition probably enhance volatility.

Neither Curro nor Stadio had been whispered out there on Thursday, which suggests the opposite two listed entities, PSG Konsult or Zeder, might be doable delisting targets.

 

Wednesday’s shut YTD transfer to Wednesday’s shut 30-day transfer to Wednesday’s shut
Capitec R943.03 -35% zero
Curro R9.90 -46% 104%
PSG Group R140.47 -40% 16%
PSG Konsult R7.50 -23% 39%
Stadio R1.17 -44% 46%
Zeder R1.75 -64% -57%

These are each buying and selling at vital reductions to what administration imagine these property are price, extra so given latest market turbulence. This gives a singular alternative to take bigger stakes in both of those or to delist them fully.

PSG Konsult is in radically higher form than the enterprise that listed on the JSE in 2014.

However it’s Zeder that to Clark’s thoughts is ripe for a delisting.

Put up the particular dividend payout, the low cost to the sum of its components will probably be roughly 50%. Clark says Zeder is a fancy enterprise with “extremely cyclical agricultural property” that the market probably doesn’t even perceive all that effectively. Add to this the truth that any sector restoration might be at the least 12 months away. It is perhaps “higher managed hidden from view”.

With an affordable money supply, PSG could discover robust help from minorities, given the dynamics sketched above.

A last intriguing, however far-fetched chance is that PSG Group could also be trying to delist itself.

This may enable it to restructure its portfolio in personal. However elevating the funding essential, particularly in present markets, is perhaps a leap too far.