PSG in­flu­ence should not be un­der­es­ti­mated here

Financial Mail - Investors Monthly - - Analysis - Marc Hasen­fuss

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”.

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