Investment house PSG Group has, over the decades, undergone numerous transformation exercises that founder Jannie Mouton would clearly define as "Project Growth". "Project Internal Focus" and "Project Unlock Value".
Older readers may remember that 2002’s "Project Unlock Value" (in)famously involved unbundling PSG’s stake in Capitec Bank — a decision almost instantly rued by Mouton and his brains trust.
The Stellenbosch-based investment company wasted little time in strenuously reacquiring and rebuilding an influential Capitec stake – a development that has been both a blessing and a curse, especially over the past few years.
No new project is being bandied about now, at least officially. But PSG is, significantly, trading under cautionary, which means something is afoot.
With numerous references to the large discount (25% at the time of going to press) that the PSG share price offers to the sum-of-the-parts (SOTP) value and the portfolio’s heavy value bias towards the stake in Capitec, investors can safely assume "Project Unlock Value, Part Two" is under way.
There is some conjecture that a sure way to unlock value is for PSG to consider unbundling, or partially unbundling, its stake in Capitec.
CEO Piet Mouton is obviously not giving much away.
He tells the FM: "What can I tell you … there are myriad opportunities [for] unlocking value." But he does stress that the value-unlock considerations have been in the works for a while: "I have this year so far written about five executive strategy proposals to the board."
He says the first followed the successful conclusion of agribusiness subsidiary Zeder’s sale of its stake in Pioneer Foods to PepsiCo. This deal, via a special dividend from Zeder, will pump R1.7bn into PSG.
Another proposal was drafted in February, when the economy started to creak rather ominously, and there have been other proposals triggered by the Covid-19 pandemic.
Opportune Investments CEO Chris Logan thinks PSG might be too concerned about the various discounts which have opened up dramatically at the group (and Zeder).
"They missed the point that discounts will open up dramatically when a country is downgraded to junk, capital and talent leave and growth is negative," he says. He suggests PSG should rather buy back shares at Zeder, where there is both a 50% discount and cash, and, more importantly, that it should follow fellow investment company Remgro’s recent lead in aligning executive incentives with shareholder value.
But after canvassing some investors after PSG’s results presentation, the FM concludes that first prize would be some form of unbundling effort with Capitec.
Significantly, one slide in the presentation pack asked: "Is PSG Group just a Capitec proxy?"
Capitec, valued at R32bn, accounts for a whopping 67% of PSG’s SOTP. This holding has fairly recently been as high as almost 80% of the SOTP. The proxy point is clearly valid.
But Mouton argues that a 10-year performance to the end of February 2020 gives a better contextualisation of Capitec’s contribution to its parent.
Sure, a 10-year compound annual growth rate on a PSG per-share basis, excluding dividends, puts Capitec comfortably in the lead, with a dashing 34%. But PSG’s other assets returned a decent 16% — well ahead of the 7% returned by the JSE all share index.
Mouton’s conclusion is: "Capitec has contributed significantly to our success. However, our other assets have also materially outperformed the JSE over the last 10 years."
The FM maintains that PSG would be better served by at least unbundling a portion of its Capitec holding — perhaps reducing the stake to a portfolio holding of 10%.
That would give the portfolio better balance, and allow PSG to bring promising smaller investments like retirement village developer Evergreen, power management specialist Energy Partners, Southern African fast-moving consumer goods distributor CA Sales and distance learning business Optimi (the old FutureLearn) to the fore.
In addition, R1.7bn of cash from Zeder could potentially make a "needle-moving" investment if PSG’s portfolio, after a Capitec unbundling, carried a value of between R15bn and R25bn (rather than a figure of closer to R50bn).
The one serious drawback of a Capitec unbundling, complete or partial, would be a serious reduction of dividends, despite the bank skipping the latest payout after following Reserve Bank guidance to cope with possible lingering Covid-19 fallout.
Dividends from Capitec, which have underpinned PSG’s generous discount policy, have just about tripled since 2015, to R621m in 2019.
Aside from the Capitec triumph (which Mouton reckons is the most successful business started in SA over the past 20 years) there are several other reasons for PSG’s discount to SOTP.
Mouton argues that investment holding companies have generally fallen out of favour and that there are too many listed entry points into PSG (which really means investors can construct – or customise — their own portfolio).
Another factor, Mouton concedes, is that PSG has struggled to get meaningful traction with its early-stage investments nursery, PSG Alpha (though this did initially house the highly successful private education venture Curro).
Mouton stresses that it is PSG’s intention to "unlock the discount as far as reasonably possible when opportune".
Share buybacks, however, are unlikely to form part of this strategy.
It would probably be a bridge too far for PSG to pitch a buyout offer to minority shareholders in 60.6%-owned financial services subsidiary PSG Konsult, which holds a market value of over R10bn. PSG Konsult would also seem an unlikely candidate for unbundling.
But PSG’s private education interests Curro (schools) and Stadio (tertiary institutions), both 55% owned, could make for some intriguing speculation.
There is definitely an advantage to keeping both companies listed, with capital raising via rights issues not exactly a remote possibility considering the long-term expansion plans for these businesses.
But Curro’s market capitalisation of R4bn and Stadio’s of less than R1bn might tempt PSG to pitch buyout offers.
This would assume a longer-term plan to consolidate all PSG’s private education interests, including unlisted Optimi, under one structure.
Ultimately, though, any real resurgence in value in any of PSG’s companies depends on factors entirely outside of the company’s control. Which is presumably why Mouton spent much of last week’s results presentation arguing for an "urgent" return to economic activity.
"No-one wants to make unpopular statements and become targets on social media by those who will also later be the first to claim what should have been done. This is not our style," said Mouton.
But, he said, "we believe SA should act much faster in lifting restrictions to rejuvenate the economy".
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