ROFHIWA MADZENA: Now we’re getting into PSG’s interim results. Their investee companies came through with some resilient performances during the six months to end-August, 2021. The company has seen a 17% increase in what they call the sum-of-the-parts value per PSG share.
I’ve got the chief executive, Piet Mouton, on the line to talk more about these numbers and the outlook of the operating environment. Piet, thanks for your time this evening. There has been some solid growth in some of your interests. But what would you say were some of the most salient features?
PIET MOUTON: Good afternoon. The most impressive underlying performance I would say came from Konsult, which managed to push earnings up by 23%. You have to actually go back and remember that last year they also showed positive growth, where most of the financial stocks took huge hits. So you have to take that into consideration when you look at their results this year. They’ve been extremely resilient with all the issues we’ve had with Covid. That’s to me the outstanding thing.
Look, the sum of the parts is a valuation-based metric and 80% of it is based or listed share prices. So it’s fairly easy to calculate. You can go onto our website for updates; there is a 15 minute delay. So at any given time any shareholder can go and view what we believe is the latest sum-of-parts value.
ROFHIWA MADZENA: Let’s speak about some of your specific investments. One of the significant ones is Curro, which is the largest provider of private-school education in Southern African. They unfortunately reported quite a decrease in recurring headline earnings per share. That’s obviously got a lot to do with the school disruptions that happened during the peak of the pandemic.
PIET MOUTON: Curro has been slightly more affected by Covid than we would have hoped. Last year, especially, the pre-primary offering was something that you couldn’t do anything about on a digital basis. So it was difficult. And [with] the variance this year, still with the lockdown, you don’t get a normal level of ancillary income; this is where people do access sports and the ……2:42 that you make, and after-care. All of that is only a fraction of what it was pre-Covid. Obviously with that, the bad debts and discounts are higher than they were historically, but we’re making a lot of effort to turn that around and, as we go to lower lockdown levels, I do believe I’m quite excited about the prospects of the business going forward.
ROFHIWA MADZENA: The business has made a decision to hold on to the dividend. Perhaps paint a picture on some of the reasons around that.
PIET MOUTON: Last year when we unbundled Capitec we explained to shareholders that they were now going to hold Capitec shares directly, and [Capitec] is going to pay you a dividend. It’s going to be roughly equal to the dividend you would have got from PSG in any event. So from a cashflow perspective, if you hold on to your Capitecs, you shouldn’t really be out of pocket.
The problem is we are trading at a 30% discount to sum-of-the-parts, so we’ve got to be extra sure when we do invest the cash, because we’re not able to get it back from shareholders. If you trade at a discount investment holding company, we just wouldn’t be able to raise cash because [it would] immediately trade at 30% less the next day. So you’ve got to be little bit more circumspect in how you utilise your cash.
ROFHIWA MADZENA: Yeah. You’ve also indicated that there’s a lot of uncertainty in terms of economic growth in the country – that potentially having had some insight into the decision that you’ve made. But you are also imploring government to really put in place policies that will create a conducive environment for business. Your thoughts on the operating environment currently, and the idea that you’re uncertain about economic growth what with the IMF, for example, coming out two days ago saying that they are revising South Africa’s growth upwards – albeit a bit of a dead-cat bounce?
PIET MOUTON: Yeah, we’ve amended that provision. Remember, we’ve still got to come out with what ground we lost in terms of last year. So we will grow significantly more than that to any way get near recovery.
This is not a new thing – that a business would like a more business-friendly environment. This is definitely not the first time it’s said. It’s just too difficult in many instances to do business in South Africa. It takes so long for all regulatory approvals and there is significant red tape involved in all decision-making, and every deal has to go to the Competition Commission – and they sit on it for the maximum amount of time.
If you really want to attract foreign investment, we’ll conclude and give policy certainty about things like EWCB ……6:09 is going to be sorted out. It cannot change the playing field, cannot consistently change.
And labour legislation needs to be eased. And then you’ve got to sort out the state-owned enterprises, SOEs. So there are numerous things that government can do to make it easier for business to grow.
ROFHIWA MADZENA: One of the subsidiaries I’m particularly interested in, Piet, is PSG Alpha. It is an incubator that helps businesses in the country grow. The big call right now is for startups and medium businesses to get the kind of funding and resources they need to contribute to the economy, to create jobs. Is there any specific investment that’ll go into PSG Alpha? It has produced some solid contributions to the business, and I assume there’s lots more to come from that particular subsidiary, given the current times.
PIET MOUTON: It’s exactly what you said it is. I’ll tell you what the difficulty is. You have almost to read that in conjunction with our investment philosophy, which is fairly particular on how these investments need to to appear. It’s not easy to match the two. There are a lot of businesses out there with interesting concepts, but one is they have to operate in large markets. We don’t have big teams over here, so if you do find a success, you mustn’t be limited by the size of the niche. That’s why we play in places like financial services, education, energy, and retirement industry is a new one. These big, big industries. It’s it just won’t move the needle if the niche is too small. So it’s not your typical scenario where we go and make 100 investments and hope two of them make it. We’ve got a much higher conviction about investments we try and make.
ROFHIWA MADZENA: Right. Just a final thought from you, just an outlook on your operating environment and the businesses that PSG has interests in. There are concerns about another wave coming through in December after the elections. Just your thoughts on the short to medium term in terms of operations?
PIET MOUTON: I think we’ll continue to do okay. The businesses we believe are in the right sectors. A couple of weeks ago we did write a letter asking the country to do their part and get vaccinated, because unfortunately if go into a fourth wave during December, I think we will destroy our tourism and leisure; this would be final nail in the coffin for those guys. And lots more people are going to lose their jobs. So I firmly believe that we’re going to be okay, but we’ll do a lot better if we can get to an environment where at least we’ve got normal movement of people, and there aren’t any more restrictions or times of lockdown in the country.
We’ve been taken off the [UK] red list. At the moment this thing is with the UK in terms of flight, which is very important for South Africa’s business relationships, but also from a tourism perspective. The moment the wave comes I’m pretty sure they’re going to put us back on to the red list. Now again, the only way we’re going to get there permanently off the red list is if we get vaccinated.
ROFHIWA MADZENA: Brilliant. Piet Mouton, who’s PSG Group’s chief executive, was giving us some insights into the interim numbers that were released by the company today, highlighting what the short to medium term could look like. Thank you very much for your time this evening.