Not an­other Bid­vest, but still promising

Financial Mail - Investors Monthly - - Analysis - Nigel Dunn

The mis­sion of CSG Hold­ings is, ac­cord­ing to CEO Pi­eter Dry, to grow out­side its for­mer staffing solutions core into ser­vice de­liv­ery busi­nesses that are more tech­nol­ogy driven and have a higher bar­rier to en­try.

Re­cent years have in­deed shown that the CSG has suc­cess­fully tran­si­tioned. The group now has three di­vi­sions: fa­cil­i­ties man­age­ment (35% of rev­enue and 37% of op­er­at­ing profit), se­cu­rity and risk solutions (20%-23%) and staffing solutions (45%-40%).

Ini­tially some pun­ters thought new-look CSG might

have the mak­ings of an­other Bid­vest as the group moved rapidly by ac­qui­si­tion to­wards be­com­ing a mul­ti­di­men­sional ser­vice de­liv­ery en­tity— es­pe­cially af­ter PSG Group ac­quired an in­flu­en­tial stake.

But not quite; at least not yet. The share price peaked at 300c in 2015, but has sagged to 65c at time of writ­ing.

This raises the ques­tion: has CSG been the vic­tim of a mori­bund do­mes­tic econ­omy or strate­gic own goals — or a com­bi­na­tion of the two?

Per­haps the best place to start is a brief look at some op­er­a­tional met­rics over the

past five years. There has been a sig­nif­i­cant de­te­ri­o­ra­tion in both re­turn on in­vested cap­i­tal and re­turn on as­sets man­aged (ROAM) since 2015.

In the case of the lat­ter, the margin of earn­ings be­fore in­ter­est dropped to 7%, while as­set turn fell to two times. Some other note­wor­thy ra­tios are that CSG moved from a net cash po­si­tion in 2015 to gear­ing of about 28%. At the same time the shares in is­sue in­creased by 26%, rev­enue by 72%, at­trib­ut­able income by 38% and to­tal as­sets by 135%.

At this junc­ture, good­will and in­tan­gi­bles com­prise 43% of to­tal as­sets.

Look­ing at ROAM, it’s ob­vi­ous the depressed state of the do­mes­tic econ­omy will be a con­tribut­ing fac­tor in margin pres­sure and lower as­set turnover. But that ex­pla­na­tion alone does not sat­is­fac­to­rily ex­plain the near halv­ing in ROAM since 2015. Mean­while, the bur­geon­ing bal­ance sheet (par­tic­u­larly good­will) high­lights the pos­si­ble over­val­u­a­tion of cer­tain ac­qui­si­tions and the in­abil­ity to op­ti­mise re­turns from as­sets ac­quired.

CSG released a trad­ing up­date for the year ended March 31 re­cently in­di­cat­ing earn­ings and head­line earn­ings per share would be more than 20% lower. This was fol­lowed by a vol­un­tary op­er­a­tional up­date in which the most per­ti­nent point was that the in­te­gra­tion and con­sol­i­da­tion of se­cu­rity ac­qui­si­tions (made dur­ing fi­nan­cial 2018) took longer than fore­seen.

There is a con­cern that the large good­will and other in­tan­gi­bles fig­ure of R468m might ne­ces­si­tate im­pair­ment and fur­ther re­duce earn­ings.

On a best-case sce­nario the share is trad­ing on an earn­ings mul­ti­ple of four times prospec­tive earn­ings. If there are im­pair­ments and a greater than R5m bad debt charge, it may be higher.

Man­age­ment is con­fi­dent CSG now has the scale and na­tional foot­print nec­es­sary to lift the growth pro­file and im­prove mar­gins and as­set turn. On a prospec­tive earn­ings mul­ti­ple of five, IM be­lieves there is merit in ac­cu­mu­lat­ing the share at cur­rent lev­els.

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