PSG’s premium share price no real mystery, after all

FOR a listed share whose value is almost entirely made up of stakes in other listed entities, the propensity for PSG Group to trade at a premium to its net asset value is a conundrum for investors.

The group’s management uses a sum-of-the-parts model to value it: 80% of the group’s value can be calculated by working out the value of its stakes in companies it part-owns, such as Capitec, Curro and Zeder Investments.

If this were the sole determinant of value, with the group providing market-related pricing for its private equity and other investments, one would expect the group’s share price to hover around that mark. Yet, in the past year, the group has traded at a premium of as much as 10% to underlying components.

The answer lies in a potentially misleading concrete assessment of the value of PSG Group’s head office to the broader group.

Jean Pierre Verster, an analyst at 36ONE Asset Management, said this highlighted the struggles of the asset management division of financial services brand PSG Konsult, in which the group has a 62% stake.

The share price of PSG Konsult, which makes up about 13% of group NAV, has gone nowhere in the past year.

“When it listed and transitioned from the over-the-counter market, there was optimism about its prospects, but there were missteps in the performance of the unit trusts PSG Asset Management operated,” Verster said.

“They were overweight commodity companies right in the teeth of the commodity sell-off, particularly last year. That impacted asset management performance negatively. And because Konsult clients have a portion of their wealth in the asset management division, that had knock-on effects for the Konsult division, the biggest profit generator.”

The result was that it became tougher for Konsult to cross-sell asset management services if the group’s its unit trusts were performing poorly. “A performing asset management division creates a virtuous cycle of attracting more flows, generating more fees, having products to attract more clients. Citadel and Peregrine have done well in that respect lately, with Peregrine Capital generating returns for Citadel clients.”

The essentially short-term nature of chasing unit trust performance in the unit trust “quarterly beauty parade” contrasted with the attraction of the PSG Group’s leadership, which had a long-term record of picking, backing and building SHREWD MOVES: PSG CEO Piet Mouton is at the helm of a tight ship of ’astute capital allocators’ winning businesses, Verster said.

Its head office “has a businessbuilder mentality and they often get involved in running companies in their stable”.

Shrewd moves, such as underwriting the recent Curro rights offer and attracting an underwriting fee, as well as carefully managing the group share price — thanks to the shareholder register’s tight distribution among friends and family of the founding Moutons — also contributed to faith in management that registered as a price premium, Verster said.

“They are astute capital allocators. Just after PSG was added to the Top 40 index on the JSE and when the premium to NAV was at a record, they sold shares to raise equity. When they think it’s expensive, they sell and, when it’s cheap, they buy back shares. That can create value for shareholders. So shareholders believe they’ll keep increasing NAV at an above-average rate.”

Although the price premium above NAV has contracted, adding unrealised deferred tax lifted the group valuation to slightly above the share price, Verster said. “It speaks to expectation that they will continue to pick and grow winners that can become standalone listings in their own right.”

By metrics such as price to earnings, the group’s share looks pricey, but Verster suggested that, since Curro and the private equity business were still rooted in their growth phase J-curve, it made little sense to look at anything but the sum of the parts.

Capitec, which makes up 40% of the group’s value, continues to be the major contributor to headline earnings.

The group also owns around 59% of private education company Curro and 32% of agricultural investment company Zeder, which last year bought out minority shareholders in fresh-produce supplier Capespan.

The group will release its annual results on Friday.