GCR affirms PSG Financial Services' rating of A(ZA); Outlook Stable

03 September 2015 PSG

Global Credit Ratings (GCR) has affirmed the national scale ratings assigned to PSG Financial Services (PSGFS) of A(ZA) and A1(ZA) in the long term and short term respectively, with the outlook accorded as Stable.

Eyal Shevel, Head of Corporate Ratings at GCR, says PSG has demonstrated a track record of investing in and supporting companies to the point where they become leaders in their industries.

“This has helped drive a Compound Annual Growth Rate (CAGR) in recurring headline earnings of 26% from F10 to F15, with F15 recurring headline earnings rising by a review period high 39% to R1.1 billion,” says Shevel.

Most key businesses reported growth in excess of 15% in F15, with Capitec Bank Limited and PSG Konsult Limited in particular contributing strongly to earnings, despite a challenging operating environment. Reflecting the strong earnings and equity price performances by the listed investments, PSG’s Sum-of-the-Parts (SOTP) valuation had climbed to R33.4 billion at 6 May 2015, from R13.8 billion at FYE13.

Although on a consolidated basis PSG’s debt increased to R4.8 billion at FYE15 (FYE14: R3.3 billion), due to the expansion of the underlying businesses, debt at the underlying businesses have no recourse to PSG and all security is only over the assets of the company that has assumed the debt.

Shevel says that at the holding company level, PSG is lowly geared with interest bearing obligations (excluding non-redeemable preference shares) at 6 May, 2015 amounting to R1 037 million (increased from R679 million at FYE15) and primarily comprising of redeemable preference shares of R930 million. Non-redeemable preference shares have remained stable at R1.4 billion since FYE14. Thus, gearing relative to the SOTP value was just 2.6% at 6 May 2015 (FYE15: 2.4%), and including non-redeemable preference shares was 6% (FYE15: 5.7%), well below PSG’s comfort level of 40%.

“Cash flow forecasts remain a key management tool used to PSG, with forecast inflows and expected requirements prepared for a rolling 12 month period. Supported by strong dividend income from Capitec and Konsult, as well as management fees from Zeder Limited, projections indicated that PSG will have sufficient cash to meet investment and dividend requirements,” says Shevel.

“More balanced cash flow generation across group companies, reducing the reliance on Capitec, would be positively viewed. However, given the significant earnings and SOTP contribution, the PSG rating remains closely linked to the fortunes of Capitec. Thus, an uplift to the Capitec rating could lead to a similar uplift for the PSG rating. Conversely, anything that impacts Capitec’s financial position could have a negative impact on PSG. Underperformance from other core investments could also have negative impact, were it to curtail dividend flows or require large capital injections from the group,” Shevel concludes.


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