Com­par­isons are dif­fi­cult…

…but Mou­ton may have a few tricks up his sleeve

Finweek English Edition - - Companies & markets - MICHAEL COUL­SON

PSG EX­EC­U­TIVE CHAIR­MAN Jan­nie Mou­ton has re­peat­edly shown since he took over the PAG shell and used it as the ve­hi­cle for build­ing up a ma­jor fi­nan­cial ser­vices group just how shrewd an op­er­a­tor he is. Though the most ob­vi­ous as­pect of the re­sults for the year to Fe­bru­ary may be con­fir­ma­tion of just how much PSG made out of its in­vest­ment in the JSE, more sig­nif­i­cant for in­vestors may be a cou­ple of his ac­com­pa­ny­ing re­marks to the me­dia.

Mou­ton said (a) that PSG may not ben­e­fit to the same ex­tent from mark-to-mar­ket gains this year; and (b) that it plans to list an­other three of its op­er­a­tions sep­a­rately. To­gether, those com­ments sug­gest that he sus­pects the mar­ket may be near a peak. Af­ter all, the log­i­cal thing to do is to list sub­sidiaries when you think the mar­ket is over­priced and buy them back when it’s cheap.

PSG listed its agri in­vest­ments through Zeder – of which it now owns 38,5% – in De­cem­ber 2006 and you can only spec­u­late what other parts of the busi­ness may be con­sid­ered ripe for flota­tion.

The big­gest con­trib­u­tor to the break­down of head­line earn­ings is lumped to­gether as “Them­beka Cap­i­tal, private eq­uity and Capitec” at R142,9m. That could hardly be listed as it stands, but Capitec ap­pears to rep­re­sent only about R20m of that.

Them­beka is PSG’s 49,9%-owned black em­pow­er­ment as­so­ci­ate (for­merly listed as Arch Eq­uity), run by the well-re­garded KK Combi. It’s held through 97,5%-owned newly formed private eq­uity in­vest­ment com­pany Pal­adin Cap­i­tal, of which it ap­pears to be a ma­jor com­po­nent.

It would cer­tainly make sense to list Pal­adin (as sug­gested pre­vi­ously in Fin­week), both to ex­pand its cap­i­tal base and give it a mar­ket value.

Stock­bro­ker and as­set man­ager PSG Kon­sult, now 74% owned, con­trib­uted R46,5m to head­line earn­ings last year. From a cycli­cal point of view, this may be a good time to list and would also en­able mi­nor­ity hold­ers to put a mar­ket value on their in­vest­ment. PSG Kon­sult’s pref shares are of course al­ready listed.

Well, we shall see. Mou­ton won’t tip his hand pre­ma­turely but his many ad­mir­ers will be watch­ing keenly how his strat­egy emerges.

Mean­while, back to the re­sults. Di­luted head­line earn­ings for the year, on the cap­i­tal as in­creased by a rights is­sue, are 507c/share (2006: 341c/share), from which div­i­dends of 90c/share will be paid (67,5c/share). In gross terms, head­line earn­ings were R651m (R358m), of which the hold­ing in the JSE con­trib­uted R425m (R118m).

Two ob­vi­ous con­clu­sions stand out from that: first, that the to­tal profit on the JSE stake was at least R543m, and prob­a­bly more, as 4% of the orig­i­nal 15% was sold only af­ter the year-end at what ought to have been higher prices than ruled on 28 Fe­bru­ary; sec­ond, that if you ex­clude that, earn­ings of the rest of the group ac­tu­ally fell.

But while the first of those con­clu­sions should be cor­rect, the sec­ond, though arith­meti­cally valid, is mis­lead­ing. Trou­ble is, the two years aren’t en­tirely an ap­pleswith-ap­ples com­par­i­son. For ex­am­ple, while 34,4%-owned as­so­ci­ate Chan­nel Life pushed up its com­pa­ra­ble earn­ings by 44% to R36m, for ar­cane ac­count­ing rea­sons its con­tri­bu­tion to head­line earn­ings fell from R16,6m to R7m. Sim­i­larly, the agri in­vest­ments earned only R50m, down from R98m. But be­cause of the list­ing of Zeder, I doubt if those fig­ures are com­pa­ra­ble, ei­ther.

Then there’s a R19m charge on the new 30% in­vest­ment in m Cubed (could that be used as a ve­hi­cle for a list­ing?) and an ex­tra R25,4m charge as div­i­dends on the pref shares had to be paid for a full year, against only part of fi­nan­cial year 2006.

Of course, re­ported prof­its aren’t al­ways the best yard­stick for a com­pany such as PSG. Net as­set value can be a bet­ter in­di­ca­tor – and that soared from 589c to 1 151c/ share.

In any event, the two main busi­nesses did su­perbly. The con­tri­bu­tion of Them­beka et al was 85% up on the pre­vi­ous year and PSG Kon­sult’s 96% up. Though the com­ple­tion of the JSE trans­ac­tion will de­press over­all earn­ings this year, all the op­er­at­ing units ex­pect real growth.

And with R1,3bn cash at year-end (up from R222m the year be­fore) PSG is well placed to ex­ploit what­ever new op­por­tu­ni­ties may of­fer them­selves. Even if it was a net seller of eq­ui­ties last year, it ob­vi­ously be­lieves there’s still value to be found: one new hold­ing, for ex­am­ple, is 4% of Dat­apro, bought in Fe­bru­ary at 112c/share (see Good, Bad & Ugly). Them­beka holds a fur­ther 2,5%. Cur­rently at 169c, that in­vest­ment is al­ready well in the money.

So just what PSG may earn this year is prob­lem­at­i­cal. But I’m sure any earn­ings de­cline won’t jeop­ar­dise dis­tri­bu­tion. Even if earn­ings halve – which I doubt – it would still be more than 2,5 times cov­ered.

In the first few hours af­ter the re­sults were pub­lished last Tues­day morn­ing, the share put on about 50c to R28/share, against a slightly lower over­all mar­ket. So it looks as if in­vestors are happy enough with Mou­ton and his team.

Sus­pects the mar­ket may be near a peak? Jan­nie Mou­ton

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