Global Credit Ratings (GCR) has maintained the financial rating outlook of PSG Group (PSG) at an A level.This is according to Eyal Shevel, Head of the Corporate Sector at GCR, who says strong growth in the value of underlying businesses has seen the sum-of-the-parts valuation increase more than three-fold over the five-year review period to R17.3bn at 1H F14.
“While value accretion has been, driven by the investment in Capitec Bank over the period, Capitec has reached a more mature phase and is unlikely to grow at the same pace. Thus, value enhancement is now anticipated from Curro and some of the agricultural interests.”
“PSG has demonstrated a strong track record in building up companies (through the investment of both financial and management resources) to the point where they can be listed and ultimately become leaders in their industries,” explains Shevel.
Shevel says PSG posted 33% growth in recurring headline earnings to R715m in F13 and by 14% year-on-year to R336m in 1H F14, almost double the F11 level. “While earnings growth has been driven by Capitec, the majority of the underlying business reported positive earnings growth. Added to this have been strong profits from the sale of non-strategic assets.”
He says Capitec’s strong earnings and dividend payments are expected to provide the cash flow underpin for the group to continue its investment strategy, although PSG Konsult and Zeder investments are also expected to provide strong dividend cash flows to PSGFS. “These funds will then be available to reinvest in Curro and some of the younger businesses such as Chayton Africa, the Zambian farming operation and distance learning company Impak Onderwysdiens,” says Shevel.
Shevel further explains that PSG’s use of perpetual preference share funding has helped maintain gearing at low levels, with a net ungeared balance sheet reported in most years. “While gross debt rose to R2.2bn at FYE13, this included R750m in redeemable preference shares, which entail less risk than ordinary debt and was matched a by similar increase in cash. Moreover, gearing ratios have remained low over the review period, well below managements comfort level of 40%.”
“Positive ratings action is dependent on continued strong cashflow growth for underlying subsidiaries. Particularly when Curro becomes cashflow positive, this would see cashflows improve, while at the same time reducing cashflow absorptions. A weakening in the performance of underlying investments, particularly Capitec, would be negatively viewed. In addition, an increased utilisation of debt at a group level as a preferred funding vehicle (a shift away from preference shares) would warrant a review of the rating,” concludes Shevel.