Attracting R7.7bn to manage on behalf of clients is no small feat. Generating a return on earnings of 22.5% in a market stymied by lacklustre economic growth, elevated interest rates and a local stock market that can’t get itself firing on all fours again is the cherry on top.
“We’d rather be good than big,” Francois Gouws, CEO of PSG Financial Services (formerly PSG Konsult), told IM last month after the release of the company’s financial results for the six months to end-August.
Headline earnings per share were up 21%, core income advanced 15% and the company spoilt shareholders with a 23% increase in payouts to 13.5c a share.
The company, which reports the results of its business in three underlying units, benefited from the uncertainty gripping local investors.
“When things get tough, people place a premium on advice,” Gouws said.
At PSG Wealth, the division responsible for advice and the biggest profit-spinner, headline earnings increased by 18% in the six months to R312.9m.
The wealth division attracted the R7.7bn in net flows — a lekker jump from the immediate previous six months’ R5bn inflows. The flows are underpinned by an expansion in PSG Wealth’s advisory network with a net 13 new advisers added to bring its total to 603.
“It isn’t unusual for us to attract these flows,” said Gouws. “Our market share is still less than 5% and we’re growing.”
On the funds side, PSG Asset Management’s single-managed and money-market funds had R1.7bn in net flows even as market movements shaved R46m off the value of assets under management (AUM), which increased 3% to R50.3bn. Including the large multi-management portfolio, AUM rose 6% to R209.3bn at end-August.
The increase in AUM in its single-managed portfolios compares with competitor Coronation Fund Managers’ R25bn increase in the first six months of the calendar year.
The model of organic growth may not be the most exciting, but we deliver growing dividends to our shareholders
— Francois Gouws
Also in the mix is PSG Konsult’s third division, the fledgling insurance company Western National Insurance, with its roots in neighbouring Namibia. Though small, and mainly focused on commercial insurance lines, the company is punching above its weight.
In the six months to end-August, Western generated headline earnings of R68.7m — 12% higher than the corresponding period a year earlier — despite increased claims due to the June flooding in the Western Cape and Boksburg earthquake.
Gouws is positive about the outlook for Western, due to “its small market share, geographic diversification and diversified market” it serves.
“We are very pleased with the insurance business’s performance,” he said. “It is still small, giving it a lot of opportunities to grow in future.”
But the crux of PSG’s performance lies in the management’s approach to growth. Or as Gouws explained: the old PSG (of Jannie Mouton’s) philosophy of generating high levels of return on equity (ROE) to shareholders. In other words, a shareholder’s capital needs to work for them.
This is also still evident in the approach followed by PSG’s former sister company Capitec, where CEO Gerrie Fourie’s focus on ROE is one of the reasons investors are willing to pay up for the share.
It’s the case with PSG too: the stock is trading at a healthy p:e of 18 and price-to-book ratio (p:b) of 4.2. Capitec trades at a p:e of 21.3 and p:b of 5.2 — more than double that of the next dearest bank, FirstRand, which has a p:b of 1.9. Capitec delivered ROE of 24% in the six months to end-August despite a 62% jump in nonperforming loans.
Over the long term, PSG, in its current form, delivered an annual return of 14.8% over seven years — with dividends reinvested — compared with annualised CPI inflation of 4.9%. Over five years the stock returned 10.5% annually against inflation of 4.9%, and over one year it returned 34% with inflation at 4.8%.
But what lies ahead for the company? Will it branch away from advice, asset management and short-term insurance?
Gouws likened PSG to an engine that is dependably firing along, delivering steady ROE and dividends to shareholders.
“Our focus is on ROE,” he said. “Our focus is on organic growth. The model of organic growth may not be the most exciting, but we deliver growing dividends to our shareholders.”
Previously, Gouws has said that it is seldom that acquisitions add value to shareholders. And the company has been shy in buying out rivals — even the smaller ones, rather focusing on growing its “own wood” through upskilling people and advisers and building its technological abilities.
“It isn’t much different from what the old PSG sister companies do,” he said. Indeed.
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