Comparisons are difficult…
…but Mouton may have a few tricks up his sleeve
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