Not another Bidvest, but still promising
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.