PSG influence should not be underestimated here

After initial excitement the market appears to have curbed its enthusiasm for services specialist CSG Holdings.

The company, which listed on the JSE as Top-Fix, has undergone several changes. Top-Fix became M&S Holdings when the prime mover bought out the core scaffolding-service assets and left the workforce management operations behind.

M&S became CSG after a merger with services specialist BDM in February last year, a development that caused a buzz among retail investors when the hand of adventurous investment house PSG was revealed.

But the share (at the time of writing) was drifting close to its 12-month low of 150c, a level that discounts not only the company’s underlying fundamentals but also its potential for snagging earnings-accretive deal flow. Investors should get more clarity on the operating performance within a few weeks, when CSG’s interim results for the six months to June are due.

The main concern would be a slowdown in commodity-linked African economies where CSG offers its specialised services in facility management as well as mining, plant and construction support services.

But at the financial year-end to June. CSG looked anything but

flustered, with revenue increasing 21% to R1, 3bn and profit after tax up a sprightly 45% to R84m.

With additional shares in issue after significant corporate activity, headline earnings crept up 11% to around 18c/share. Directors were confident enough to hike the dividend 12% to 4,5c/share — albeit covered more than four times by earnings and with cash on hand of some R54m.

CSG’s earnings are of sound quality, with cash flow generated by operations topping R127m — equivalent to about 30c/share. So at a share price of 160c, CSG is trading on a modest earnings multiple of just nine times.

Of course, the intriguing aspect to CSG is the potential for corporate manoeuvring — remembering that PSG is the de facto “directional” shareholder.

CSG has, to date, has made mainly smallish bolt-on acquisitions, the latest being the takeover of cleaning services Afriboom for a maximum potential price tag of R35m (depending on profit warranties being met).

Though small, the Afriboom acquisition shows CSG’s dealmaking acumen, having been struck on an average price-toearnings multiple of five times. With Afriboom generating revenue of R109m in the year to February, the long-term potential of the transaction should not be underestimated.

CSG is under a cautionary, with the smart money betting on a deal to bolster either the support services or facility management hub. There is a push to shift operational focus away from the old workforce management core (which still generates the bulk of revenues), and onto the higher margin services and facility management offerings.

The cautionary has not exactly induced much frothy speculation in the market, which might suggest CSG is finalising another bolt-on deal rather than a gamechanging thrust.

In the longer term the role of serial dealmaker PSG cannot be underestimated.

One theory is that PSG’s private equity arm may look to reverse its controlling stake in power-saving specialist Energy Partners into CSG.

Energy Partners can broadly be defined as a specialist services company and could slot comfortably into the CSG structure, effectively adding a fourth operational pillar.

Such a deal would probably be settled by the issuing of new CSG scrip, which would allow PSG to shift from an influential shareholder to the controlling shareholder of an enlarged services conglomerate that might well come to be regarded as a “Bidvest Lite”.