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A soft warning announcement released after its annual results on Thursday, but indicates that the PSG Group is finally addressing a problem that has plagued the investment holding company for the past two years.
Its shares are priced at an ever-increasing discount to the underlying parties.
In recent months, this has reached extremes of up to 35%, while the average for the past year has been 23%.
With the participation in the Capitec material for any sum of parts calculation (SOTP), the displacement has seen a situation in which the shares of PSG have been trading at their value of their participation in the Bank. It doesn’t matter your interests in PSG Konsult, Curro, Zeder and Stadio, as well as a significant portfolio of unlisted investments.
It is understandable that investors have been very critical of this.
Piet Mouton, CEO of the PSG Group, says that “the big discount concerns us.”
He says one of the resulting problems is that the group is “unable to access the stock markets if we need to, [which is] one of the main reasons companies want to go public. ”
The main reasons management offered Thursday for the discount include:
- The “significant success of Capitec”;
- Investment holding companies have generally fallen out of favor (globally); and
- There are too many entry points listed in the group (95% of its assets are).
It is the last of these in which Mouton did not bite the words. “Historically, we believed that being on the list was important.” This provided a direct incentive for management, he explained.
But, with the increase in “bureaucracy,” he says it is obvious why “many more companies would choose to operate in an unlisted environment.”
This could point to a reduction in the number of investees that are listed separately. Mouton also confirmed that the group would not pay a special dividend on the special dividend received from Zeder next week as a result of the sale of Pioneer to PepsiCo. The R1.7 billion will be “retained as a liquidity buffer,” as some of its companies “may need short-term capital.”
Speculation
Some have speculated that, in the absence of warnings from any of its investees, that a breakdown or offer to minorities in one of these would be off the table and that PSG might be considering a separate transaction. Mouton seemed to pour cold water on this Thursday morning, saying that while management “has seen several opportunities outside of the group in recent months,” at this stage, “like most companies” is going to “look at a little more internally this stage to see if there are opportunities and to pursue them accordingly “.
Small Talk Daily Research’s Anthony Clark agrees, questioning what logic should be purchased offshore when the rand has been consumed to the extent that it has. Since much of the JSE has been “decimated in Covid-19’s recent bloodbath, why wouldn’t you buy shares you know well?”
A warning is generally required when a transaction equals at least 10% of a listed company’s market capitalization. In the case of the PSG Group, this would be around R3 billion.
Capitec “very interconnected” with PSG
For much of Thursday, the market seemed to believe that PSG would seek to unbundle Capitec. The holding company ended 12% on the day, while Capitec traded up to 8% less during the day. Clark says that while a breakdown of Capitec is certainly possible, it is highly interconnected with PSG and its dividend flow is paramount to the group (PSG’s final dividend is down 75% as Capitec did not declare a dividend due to a Note. of Orientation of the Reserve Bank in light of the crisis of Covid-19).
A separate factor is whether the Banco de la Reserva de SA would even allow a disaggregation, given the current economic environment. Any disaggregation will improve liquidity but will also increase volatility.
Neither Curro nor Stadio were whispered in the market on Thursday, suggesting that the other two listed entities, PSG Konsult or Zeder, could be possible targets for listing exclusion.
| Wednesday close | YTD moves to close Wednesday | Transfer of 30 days to the closing of Wednesday | |
| Capitec | R943.03 | -35% | 0 0 |
| Curro | R9.90 | -46% | 104% |
| PSG Group | R140.47 | -40% | sixteen% |
| PSG Konsult | R7.50 | -2. 3% | 39% |
| Stadio | R1.17 | -44% | 46% |
| Zeder | R1.75 | -64% | -57% |
Both are traded at significant discounts to what management believes these assets are worth, even more so given the recent market turmoil. This provides a unique opportunity to take larger stakes in any of these or remove them from the list entirely.
PSG Konsult is in radically better shape than the company that was listed on the JSE in 2014.
But it’s Zeder who, for Clark’s mind, is ready for an exclusion from the list.
Post the special dividend payment, the discount on the sum of its parts will be approximately 50%. Clark says Zeder is a complex business with “highly cyclical agricultural assets” that the market probably doesn’t even understand as well. Add to this the fact that any recovery in the sector is likely to be at least 12 months away. Could be “better managed hidden from view”.
With a reasonable cash offer, PSG can find strong minority support, given the dynamics outlined above.
A final intriguing, but far-fetched, possibility is that PSG Group may be looking to withdraw from the list.
This would allow you to privately restructure your portfolio. But raising the necessary funding, especially in today’s markets, could be too big a jump.
