When analysing an investment holding company, the most useful metric is the discount or premium of share price to net asset value (NAV). Usually, the numbers come in at a discount, but in rare cases they trade at a slight premium.
PSG uses the sum-of-the-parts methodology in calculating NAV, which is elegant in its simplicity and clarity, with most of its underlying investments being listed. It requires adding up the value of the component parts, deducting group expenses, resulting in a net valuation.
Currently, its discount to NAV is 32%, which is much higher than the normal discount for investment-holding vehicles of about 20%. It is, however, significantly better than others, for example, the 75% discount that African Rainbow Capital (ARC) is currently exhibiting.
Investors will challenge why an investment group continues in its current form if its discount to NAV remains sustainably large. And this is fair criticism. If value cannot be added by the central holding company then there seems little point in the structure’s ongoing existence. We then hear a loud, persistent clamour to unbundle component parts to existing shareholders, thereby unlocking value.
PSG Group CEO Piet Mouton is having none of that type of negative sentiment. The son of its founder Jannie Mouton, he is determined to significantly reduce the gap, which has been growing consistently over the past year or so, with it averaging 23% in the past year.
Some of the reasons put forward by PSG management for this steep discount are that there are too many other listed entry points into PSG, thereby allowing investors to construct and emulate their own PSG-lookalikes; that PSG has struggled to get meaningful traction with the unlisted PSG Alpha, which is a portfolio of early-stage investments in select growth sectors; and, of course, the general market dislike for investment holding companies.
Mouton is determined to reduce this discount, but does not put forward his strategy, except to say that share buybacks are unlikely to be used, as that strains liquidity. There is currently a cautionary on PSG and conventional wisdom assumes that it will be focused on this issue.
Market talk suggests an unbundling of Capitec in whole or in part, but this makes little sense considering its overwhelming importance in the life of PSG. The bank has been an outstanding performer over the past 20 years, for both direct and PSG shareholders. Many investors see Capitec as a proxy for PSG itself and this is reasonable, considering that 30.7%-owned Capitec has by far been the best segmental performer in the group.
Other listed investments, such as PSG Konsult, Curro and Zeder, are dwarfed by Capitec in terms of NAV and earnings contribution. Asset manager PSG Konsult is a solid business, largely predicated on its extensive financial advisor base; private school group Curro has been threatening to make large profits for a long time, though it is still very much in the investment phase of its lifecycle; and agricultural sector Zeder has been a volatile and incongruous performer.
And unlike ARC, PSG’s unlisted investments are tiny in comparison with the listed base and therefore unlikely tools in the discount-narrowing exercise.
If PSG is, indeed, considering unbundling any of its listed investments, its own cautionary would have to be matched by cautionaries in any of the listed potential unbundling targets. However, this is not the case. So something else must be going on, with the group being especially tight-lipped.
These are difficult times and Mouton must no doubt have something up his sleeve that the rest of us haven’t even thought about. Never forget, his father bought an obscure recruitment firm called PAG and transformed it into the powerful investment vehicle that PSG is today. Could Piet be trying to emulate Jannie in terms of establishing his own big, hairy, audacious goal?
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.