Avior Capital Markets - PSG Group Limited (104T) PSG Group | Quality comes at a price

Report

Avior Capital Markets

David Talpert

PSG Group | Quality comes at a price

PSG Group has an impressive capital allocation record with a 43% (All Share Index: 14%) annualised total return since listing in 1995. We believe management has demonstrated an ability to identify early stage businesses that have a competitive advantage and that operate in a structural growth market. PSG then supports growth through active management and by providing permanent capital.

We believe PSG offers a discounted entry point into the listed portfolio that is growing aggregate earnings at over 20% a year over the next three years. The unlisted portfolio (6% of NAV) provides optionality for future listings. However, we believe Capitec is expensive at current levels, reducing our return expectations for PSG. We believe investors should switch from Capitec to PSG.

20/02/2019 33 EN

Underlying

PSG Group Limited

PSG Group is an investment holding company. Through its subsidiaries and associated companies, Co. is engaged in the provision of financial services as well as financial advice and fund management services, financing, banking, private equity and corporate finance services. Co. operates six reportable segments: Capitec, Zeder, Paladin, PSG Konsult, PSG Fund Management and PSG Corporate. Co. operates predominantly in South Africa.

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ZAE000013017 South Africa

Provider

Avior Capital Markets

Avior is a globally recognised capital markets research and trading firm, with the broadest research coverage within the region, with 100+ SA and 20+ SSA companies under coverage. Avior services clients from offices in London, Cape Town and Johannesburg.

Our research quality is consistently recognised in local and global surveys, with 18 analysts currently rated in their respective sectors (FM 2017). Value add through in-depth, innovative, high quality and consistent research with comprehensive underlying fundamental modelling supported by regular analyst and roadshow interactions.

Avior has proven that by working closely with our clients we can mutually develop dominant positions in certain sectors, going from strength to strength. Avior has a dedicated ESG team, having been ranked #1 in Corporate Governance research since 2008.

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Analysts

David Talpert

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PSG Group | More than a Capitec proxy?

PSG Group has experienced increased concentration risk in its portfolio as Capitec comprises 69% of Group NAV. The discount to NAV has widened to c.23%. We remain positive on Konsult and Curro. However, we are disappointed in returns from Zeder and PSG Alpha. We believe Capitec is expensive despite its growth prospects. In our view, PSG's track record supports a narrower discount (15%). However, we believe Capitec will continue to drive the valuation. Based on our UNDERPERFORM rating on Capitec, we believe PSG is fairly valued at current levels.

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PSG Group | Opportunity in the discount

PSG Group's discount to NAV has widened to 24%. In our view, PSG has an impressive record of allocating capital. Management has not made poor investments that justify a wider discount. We are concerned about Capitec's elevated rating and its 67% weighting in PSG's SOTP. However, we believe the current discount to NAV offers a sufficient margin of safety. Our short-term investment thesis is based on a narrowing of the discount. Longer-term, we believe PSG can outperform due to growth in the underlying businesses.

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PSG Group | Quality comes at a price

PSG Group | More than a Capitec proxy?

PSG Group | Opportunity in the discount

1 director bought

Tiger Brands | ESG | Pressed to execute

SA Investment Strategy | Review of January 2020 for SA investors: Coronavirus weighs on the ZAR

SA Banks | Low credit risk in commercial property | Time to buy SA banks

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